Marketcol/turner/23″/mike1st/mark2nd
L.A.’s high-tech industry has a well-publicized problem: There isn’t enough venture capital to provide the growth funding that its thousands of starving start-ups need to thrive. Jerry Skillett is here to do something about that.
The phrase “venture capitalist” doesn’t really describe Skillett. His concept is so new and relatively untried that we perhaps need a new phrase to describe it, like “marketing capitalist.” His profit-sharing approach worked brilliantly for operating parking lots. Whether it works for marketing software has yet to be determined, but his clients so far have no complaints.
Skillett’s M2 Software Equity LLC, based in Pasadena, invests in start-up software companies, not by providing cash, but free marketing services. That means everything from direct-mail campaigns and trade advertisements to public relations services (although the P.R. part is usually handled by a subcontractor).
For each of its three clients to date, M2 has invested between $500,000 and $600,000 in cash or marketing services. It has accepted no up-front compensation for its services. Instead, it takes a piece of the action an ownership stake ranging from 10 percent to 50 percent.
“The newer the company, probably the bigger the stake we’ll have, because it’s a higher risk,” Skillett said.
Risk indeed. How can Skillett, whose own company is itself a start-up, afford to pump such sums into its clients with no immediate payback? Partially because of a more profitable parent, and partially because of a silent partner with deep pockets.
Skillett’s backer is Tom Durwood, one of the six children of Stanley H. Durwood, chairman and chief executive of Kansas City-based cinema chain AMC Entertainment Inc.
AMC recently revamped its ownership structure, converting the illiquid Class B shares owned by the Durwood children into common shares that trade on the American Stock Exchange. That has made it easier for Tom and the other Durwoods to sell their AMC stock and diversify into other investments. Each Durwood child owns AMC stock worth about $22.2 million, based on last week’s trading price.
Tom Durwood also owns a San Diego company called First Run Marketing that creates promotional tie-ins between retailers and AMC theaters. First Run is a client of Skillett’s other business, Pasadena-based M/One Advertising Inc. Durwood was apparently so impressed with M/One that he decided to become a major investor in Skillett’s newer business, M2.
Skillett is a relative newcomer to the marketing game. He came to L.A. in 1987 to create a Western division for Nashville-based parking-lot operator Central Parking System. Eight years later, he had built a network of lots in six Western cities that had become Central Parking’s biggest income-generating division.
Skillett went to the owners of big parking lots in these cities and told them he could significantly increase their revenues if they would agree to cut Central Parking in on the winnings. He says he was able to increase revenues by an average of 30 percent at the lots he took over, with Central taking a cut of those extra sales.
Skillett aggressively marketed the empty space in those lots as parking for businesses in nearby buildings, and also changed rate structures to keep lots packed and profitable.
Three years ago he left the parking business to start M/One Advertising, which took Skillett’s profit-sharing concept to the ad business. M/One, which is projected to generate $1 million in revenues this year, launches ad campaigns and takes a percentage of any subsequent sales increases. But M/One doesn’t take a piece of the clients themselves.
That idea was realized with M2, which Skillett spun off from M/One earlier this year.
One of M2’s clients is Chatsworth-based Sonic Desktop, which makes software allowing people to create soundtracks for digital or video productions. President and CEO Kevin Klingler said the company was selling about 50 units a month before partnering with M2 earlier this year. Now it’s moving about 650 units a month.
“Finding venture capital money is actually very difficult. They were ready to come up with some financing, at least for the marketing,” Klingler said.
M2 client Digital Video Clips Direct in Culver City was a commercial and documentary production company that wanted to digitize its collection of stock footage and sell it to producers. Its partnership with M2 allowed it to proceed with the concept. Its first digital release came out in July.
“Coming from a film background, marketing is not my forte,” said co-owner Peter Haklar. “No matter how good your product is, without marketing you don’t have much.”
Skillett’s concept may be unusual, but it isn’t unique. Other P.R. and ad agencies have been known to accept an equity stake in start-up clients in lieu of compensation, although usually these agencies demand at least some cash up front.
One such shop is Niehaus Ryan Wong in South San Francisco, which struck gold by taking a stake in Internet search engine firm Yahoo! while it was still a start-up, in exchange for marketing services.
“You have to be a really good picker of companies to make this work,” said agency President Ed Niehaus. “(Yahoo!) was arguably the best investment we ever made.”
Marketing consultant Jerry Swerling agrees that “marketing capitalism” is a risky business with potentially big payoffs, but points out that not all the risk is on the side of the investor/marketer.
“I can see where this would be very alluring for a potential client,” Swerling said. “But the potential downside is, no matter how you pay them, they may not be the right agency for you. It’s important to be convinced that an agency is the right one first, then put together the partnership or compensation arrangement afterward.”
News Editor Dan Turner writes a weekly column on marketing for the Los Angeles Business Journal.
