Hello. I am doing a story for www.prmoment.in ( a weekly PR magazine -online) on whether the PR business can make a good canditate for investors and am looking for comments on this story from investors/ start ups experts . Any contact suggestions are welcome. YOu can mail me your contacts or point of view at my mail ID is paarul@prmoment.in or please ring me at 9811426392.
Overview
Do you think there is a business case for investing in PR firms for investors? The questions are given below :
Questions
1) What attributes would investors look while investing in PR firms?
2) Many investors prefer other sector such as tech for investment as the high dependency on the human factor and scalability are considered barriers to investment in the PR business. Would you agree and can this be addressed by PR businesses?
3) What makes the PR business a good candidate for investment?
4) Are investors shy of investing in service based businesses?
Pawan Deokule
Dear Paarul,
A service business generally cannot be funded as there are no real assets or valuations. It is only once a service company has done a couple of years of business and has an established brand it accumulates valuation via brand value and clientele. Once you have acquired a large client, they literally fund your business anyway!
Perhaps another way of looking at it is what are you getting funded for? What are you going to spend the money on? What you need is a working capital from a bank.
Trust this helps.
Paarul Chand
Thank you Pawan, this is most useful. Would you be able to share your preferred designation for your answer, I will be quoting your answe(for http://www.prmoment.in) , if that’s fine with you?
Some of the questions that PR agencies have about funding is that, can there be a funding model , where a group of communication businesses can be funded under one umbrella ( say a PR firm, a ad firm etc) , which might then allow for scalablity ? What is your opinion on that?
Pawan Deokule
Hey Paarul,
Sorry about the lengthy explanation, but if you are going to spread the message it should be complete in regard to the context.
My designation is Pawan Deokule, Managing Director at Digicat Digital Marketing Pvt Ltd. and what I have said on this forum- ‘Rodinhoods’ can be ‘quoted’ anywhere as this is as public as it gets. 🙂
Now, to answer your second question, lets look at history, have there been any VC funded success stories in ad firms or PR firms? There have been mergers and acquisitions but no VC funding. Today a few VCs are looking at funding PR resources as they are a valuable asset to founders but without the baggage of the firm itself!
Both PR firms and Ad firms are service based companies who run job work. If your client A gives you 60% of your business while client B,C and D give you 20%,10% and 10% respectively. It is clear that Client A is the reason for your existence. The day Client A decides to move to another agency, your business valuation reduces from 100 down to 40! This kind of risk is circumstantial and cannot be hedged. Investors base their investments on risk, hence ad and PR firms are too risky to invest in.
If you scale the firm as a group like for instance Group M has done, you probably do not need the funding! If you create a model where a group of communication companies are formed under a single umbrella then you could float an SPV (a new firm where all the business founders invest their money collectively) and raise money through a bank which will fund the expansion based on credibility and outstanding invoices of all the businesses put together.
It is important to understand the concepts of debt and equity here. The reason why I have been saying that banks are a better source for funding is that they provide debt whereas VC provides equity. A bank charges an interest for their money and that is where their involvement ends. A VC on the other hand, adds on equity that he has invested in and has become a part owner of your company.
A Venture Fund was born to invest in businesses with long gestation periods where the initial sales do not mark the business as feasible but release exponential growth once firms like yours and mine help them scale. A VC ideally invests in exponential growth that is the outcome of an inflection point in sales. Inflection points may be created by our industry, but are rare and probably only co-incidental in PR and Ad firms.
The only model that works to be invested in is if the umbrella firm has put together a product, like for instance an apple TV channel, digital outdoor network or a ‘globosport’. Most of such firms are funded by the fraternity itself.
On the other hand the risk for such firms is greater when they take funding, because the VC virtually owns the firm and will soon begin to dictate terms of how the firm should concentrate on cost cutting exercises and run their campaigns or the look of certain creative. Also you may not be able to take on clientele who are in competition to firms that have already been funded by the VC!
Trust this answers your questions.
Paarul Chand
Thank you Pawan, for taking the time to do this. Will share the links once the story is up. Can I describe Digicat as a start up? Are you also funded/seeking funds? Apologies if these questions are very basic, dont want to make a mistake in the story:)
Pawan Deokule
Hey Paarul,
Digicat is a startup and we are a non-funded company and will remain that way. Albeit, I am looking at funding another venture http://www.i2cook.com which is in the e-commerce segment.
Paarul Chand
Thank you Pawan:)
Paarul Chand
Hi Pawan,
Here is the story with your quotes. Thank you for your help with this 🙂
https://www.prmoment.in/1349/does-external-funding-help-pr-start-ups-grow.aspx#first
Pawan Deokule
Hey Paarul,
Thanks. The article looks good! Sharing it.
Warm Regards.
Paarul Chand
Thanks Pawan! Glad you liked it.
asha chaudhry
hey thanks for therodinhoods shout-out paarul!!! really appreciate it 🙂