When PR firms must act like VCs

Back in the crazy days of the dotcom boom from 1999-2001 there was such an overheating in the business market that many unsustainable practices became the norm, especially in the VC community, but also in PR.

Back in the crazy days of the dotcom boom from 1999-2001 there was such an overheating in the business market that many unsustainable practices became the norm, especially in the VC community, but also in PR.

Agencies were enticed into accepting equity stakes or heavily discounted hourly rates in the next “wonder dotcom” in place of fees and everyone thought they were buying into a never-ending gold rush. When the VCs saw the writing on the wall in 2001, they pulled their support and firms were left with debts they had no earthly chance of recouping.

A few, such as Andy Cunningham's  eponymous Cunningham Communication, built their businesses up on the back of the boom and cashed in before the bust by selling out themselves, in this case to Incepta Group for $45 million.

But Cunningham, now CEO of Next Fifteen agency Bite, was in the minority and the experience of being burned in the dotcom period still remains a painful memory for many PR agency folks, especially in San Francisco and Silicon Valley.

This has come into particular focus now because there is another start-up bubble in progress. Fueled by easy access to cheap money and angel investors such as Dave McClure's 500 Startups, which I discussed last week, the gold rush is on again.

This time around, however, agencies are being much smarter in the way they select which startups to work for. They are almost acting like VCs in deciding whether a new company is worth engaging with, and they are turning away as much business as they are taking on.

The factors determining their decisions sound like the factors McClure and his ilk are pondering. They might still take an element of equity instead of fees, but they are protecting themselves and vetting the companies very carefully, especially as they often have no real financial figures behind them yet. After all, only about three in 10 series A startups are going to make it to series B and beyond.

They assess the management team. Have they done a startup before and how long have they been in the entrepreneurial game? Even if they have failed once or twice that experience can still be invaluable in understanding the rules of the game and achieving third-time lucky. But young entrepreneurs should not automatically be discounted, as often they will understand more about a startup tech business than a 60-year-old multimillionaire serial entrepreneur.

The agency must also look at the basic economics of the startup products and businesses they are considering representing. Is there a genuine customer need for it? And does this venture apply a creative solution to meeting that need?

However, just like the VC firms, if the agency chooses correctly and ends up working with the next Twitter or Pinterest there can be a massive upside for them in the second part of the equation.

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