Could an unusual venture-capital model be taking off?

Air for shares

Apr 7th 2012 | BERLIN | from the print edition

IN AMERICA, venture capital is plentiful. Not so elsewhere. In Europe, a handful of companies are helping struggling start-ups with an unusual model: investing advertising space in them instead of money.

Start-ups usually get their initial seed funding—a few tens or hundreds of thousands of dollars—from family or friends. A venture-capital firm won’t step in until the firm is ready to raise maybe ten times that amount. In America, intermediate sums tend to come from informal “angel investors”, typically entrepreneurs who have made a decent bit of money from their own start-ups and want to invest some in projects they like. But outside America’s technology hubs, such people are rare.

However, start-ups of that size are often making their first baby steps into the market and need publicity. Aggregate Media Funds, a Swedish firm started in 2002, pools excess advertising space provided by 15 Swedish media companies that are shareholders in the fund, and gives it to start-ups in return for an equity stake (it also plans their marketing for them). If the firms do well, they buy back the equity in cash, which goes to the shareholders, with a cut for the fund. Patrik Rosen, Aggregate’s boss, says it has made some 120 investments—in both start-ups and established firms that want to advertise a new product or a stock offering—and completed around 80 “exits”, though he won’t disclose how much money has been made.

Similar models have taken hold in Germany. ProSiebenSat.1, a television company, has been offering other firms advertising in return for equity or revenue shares since 2009, and reported making more than €40m ($56m) in the past year. A newer fund, German Media Pool, founded a year ago, combines a range of shareholders, as Aggregate does, so it can offer its start-ups ads anywhere from billboards to TV. Niko Waesche, the fund’s creator, aims to double his investors’ money.

So why is the model not more widespread? It may have a bad reputation. Media firms that negotiate barter deals directly don’t always do well: they tend to lack the expertise to invest in start-ups, and the deals may not be transparent. India’s largest media firm, the Times Group (aka Bennett, Coleman & Co), which publishes papers such as the Times of India, also owns a media-for-equity firm called Brand Capital, with stakes in around 400 companies. In 2009, under the name Times Private Treaties, it got embroiled in controversy after India’s stockmarket regulator censured a group of people for conspiring to bump up the share price of one of its portfolio companies, and a Times Group journalist for midwifing media coverage. Critics say it is still hard to tell when Indian papers have financial links to firms they write about.

Hence, Mr Rosen argues, the need for independent, diversified media funds to act as middlemen. Even then, not all start-ups need ads—some are happy with social media—and many others would rather have cash instead. Still, for some it is just what they need. And for the media firms, since the ads would otherwise go unfilled, any return is pure profit

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