There has been a lot of discussion in recent years around the creative and service industries being more willing to take a risk alongside their clients. Charging less, and being paid on results.
As the head of a digital product innovation agency I’m a firm believer in this. As consultants or as heads of an agency we need to create more value, in order to capture more value. But it isn’t always a simple decision. We work with some clients to build or promote their digital products on risk, but with the majority we don’t.
I always look to analyse 7 key factors before making the decision to give up cash for some skin in the game. If they tick these 7 boxes, it’s game on:
You must have executive management support from within the client company. When the project hits a stumbling block, it becomes critical that the senior team has your back and has the authority to support the project team.
I’m a numbers guy and as such I’ll analyse every scenario to the nth degree. But in reality the numbers can only provide you an insight into the financial risk and finance is only one part of a successful business. The founders and partners of the business will provide you with so much more insight. You need to ask yourself if you trust them implicitly. If the shit hits the fan, will they ethically make the same decision as you? Some of this is uncovered through due diligence but instinct is also critical.
You need to ensure passion exists on both sides. If the client is unable to bring the product idea to life for you, it’s going to be tough for them to also convince any investors for the capital they need or to get their staff to follow them.
Equally as important is the need for you to be passionate about the product you are creating for the client or marketing for them. You will in essence become a partner in the success or failure of their business and I truely believe success is more likely if you are passionate about their product. For example, I’m particularly fond of a marketing automation tool we use at the moment called SharpSpring. I truely believe in it, as such they would be someone I would consider undertaking a risk/reward partnership with them.
More often than not the reason for failure of a product partnership between the business and an agency is the lack of clarification around the scope of work to be undertaken. In my experience it leads to the most difficult conversations and adds complexity that can easily be avoided. My tip is to not only state what is being done, but where possible, state what isn’t included in the agreement.
It’s a partnership and as such communication needs to be treated in that way. A subservient client/agency relationship is a definite no no. Lay out some guidelines and rules before undertaking the project. Decide on ways in which mis-communication or under communication can be handled. So you have a process in place to deal with it. Doing this also gives you a good opportunity to feel out the other party in terms of alignment with your ways of working.
Clients also need to make concessions around control. Because the agency is accepting more risk they should be entitled to more of a voice at the table.
The risk/reward comes into play with the remuneration. It could be equity, profit share, revenue share, etc.
If you are getting equity you need to be sure what type you are getting. Are you getting common equity, preferred shares, or a convertible note? My advice, get a lawyer involved at this point. 2% equity could mean a whole different value, depending on what type it is.
If it is a startup you also need to look for the same protections that seed investors get, for example the ability to make follow-on investments.
Most importantly, clients have to put up enough cash to cover your operating costs during the engagement. We’re not asking for profit, just enough to keep the project team running. Without this the project runs the risk of falling by the wayside in order to get other clients paying work done.
Finally your success relies heavily on having the right amount of resources. Be careful not to underestimate the task at hand with all the excitement around the product. It’s a noisy world out there and standing out from the crowd is no mean feat.
Goodluck with your partnerships and remember if you go for it, make sure you commit. In the words of Yoda “Do, or do not… There is no try”.
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Exploring shared revenue and non-traditional payment structure in companies.