Does external funding help PR start-ups grow?

 13th November 2013    PR Insight 

In October this year, Nucleus PR was invited to appear on CNBC Awaaz’s “Masterprenuer India”. This show for the SME sector offers small businesses a chance to showcase their company, meet a variety of VCs and receive handholding advice on taking their firm to the next level. Nucleus PR was among the 12 south zone finalists on the show and could still make it via a wild card entry.

For a PR agency to appear on a show like this was unusual, as strong service based businesses usually do not receive much attention from VCs or private equity funds.

While the PR industry in India is currently poised at a tipping point for growth, pushed by the rising demand for reputational PR services, PR budgets are not rising along with that growth and retaining good people means paying more for the same staff. Could external funding come in and help to grow the PR business?

For most agencies, it’s at the point where it has to grow by about 10-15 people to make the leap and expand. External funding can come in at this point, especially when the pressure to hire senior staff sets in.

Tarunjeet Rattan, Managing Partner at Nucleus PR, says: “The PR industry in India is booming! Not only are international agencies setting up offices there are a lot of international partnerships happening. Along with it we have seen individual investments coming in for a few companies."

"India is just waking up to the power of PR and the untapped potential is phenomenal. Add to this the fact that clients are moving towards tighter budgets. Over the last couple of years we have seen advertising big wigs split off into creative agencies dividing the marketing spends of a brand, I strongly feel this pie will be further divided with a huge chunk moving to PR. And credible visibility is something every brand needs. That is never going to go out of fashion. So when you have a classic vertical (with however many versions or edits) like PR in your branding kitty, tell me why would you NOT want to invest in it?"

Commenting on whether the PR business makes a good candidate for investing, Sunjay Kapur, Vice Chairman and MD, Sona Koyo Steering Systems Limited (The Sona Group is a key sponsor of Masterprenuer India) says that: “If we were to look at investing from an angel investor perspective alone, yes, it might be possible. The business has to be sustainable and scalable. These two factors would also help to decide on investments among others. This, however would need serious consideration and deliberation with the given entities. PR as a business is not nascent anymore in India and at the rate it is growing, we see this has a huge potential in the long run. As a cost effective and credible means to brand building, PR is a powerful tool if used wisely. “

Nitin Mantri, CEO and Business Partner at Avian Media said: “Investors will look at the quality of business (clients), people and the transparency the firm exhibits in its books. Reputation and ethics are the other things investors will look at. This is of course apart from the ability of the firm to make decent and growing margins consistently!”

Nurturing people, the main asset for PR firms

Most investors outline the strong nature of dependency on people for success as the biggest barrier to investing in PR. However, HR practitioners believe this is a problem that can be addressed.

Rinnku Ganeasha, Director, Rightwaay Talent Consulting says that each of us like to be communicated to, managed and motivated in distinct ways. This means that: “Each of us have our own psychological needs, act differently under stress and have different emotional triggers. It takes time, effort and regular practice, but if you are conscious of it, then you can take immediate steps to enhance your ability to deal with people and motivate them for maximum productivity, efficiency and to increase their own happiness quotient.”

Rinnku believes that: “When you discover how each style reacts in different situations, what makes them do what they do and why they do it, then you can make quantum leaps in rapport building, sales, management, even personal relationships – any area of your life that involves interacting with another person. And PR is all about enhancing people relationships! Hence, it would work wonders if PR agencies understood people and their inner psychological motivations so as to have happy productive internal and external clients.”

Tarunjeet believes that by utilising such HR practices, the reservation of investors about the high dependency on people can be overcome: “With that argument, no business that has a human component should look at scalability, which is ridiculous. Attrition happens with every company. Priorities change and people move. Once you accept that as a fact of running a business, you will run a more healthy business. What one needs to do is be prepared for it. There are a lot of service companies who are dependent on people and run fantastic world class businesses. What’s stopping a PR company from studying these business models and adopting best practices? Talent / People are a PR company’s real strength. So, first step is to address the attrition rate. And there are companies who have done it. Nucleus included. You cannot judge the entire industry based on one experience.”

But Nitin Mantri points out that: “Our business is about people and the dependency on people is very high which I doubt will go down in the near term."

Sunjay adds that: “Like many other industries in the services sector, the human factor certainly plays an important role in the mix of decision making. However, one cannot control a market reality such as churn or attrition.”

Why investors turn away from PR businesses

Many experts believe there are many reasons why the PR business is a tough business for investors. Pawan Deokule, Managing Director at Digicat Digital Marketing Pvt Ltd., is part of Rodinhoods.com an online community for entrepreneurs. Deokule himself is an investor who is looking at funding www.i2cook.com in the e-commerce segment.

Pawan believes: “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.”

Pawan adds that: “Let’s 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!”

Borrow from banks to scale up and grow

Pawan advises that PR firms who want to grow are better off borrowing from banks to scale up. Lack of scalability in PR is another barrier for investors: “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 set 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.”

Nitin Mantri agrees that: “Aligning with a larger group or another agency is better as you can learn best practices and also get access to new business. A PE is largely investment driven and benefits will only accrue if they have a large portfolio to offer, as clients and other similar investments to learn from. Currently I don’t see many PE investments in the PR business.”

Sunjay Kapur adds: “If there is PR for the MNCs, then there is also a PR requirement for the MSME’s as well. Here is where smaller agencies and firms that have mushroomed, serve the needs of these organisations’. This is purely market driven requirements. But, these investments are way too small for PE investors given that they have to also justify their disbursements. This is not a subjective but very astutely driven business. Any PE investor per se would not like to have capital blocked for a long time unless it is about large scale and a proper return. It is only fair that if one PE investor is making an investment, s/he would need to astutely take a decision based on the business case presented.”

However, while many experts suggest borrowing as an option, funding can ease the pressure that debt can create and spread the risk across a group of experts who want to grow.

Understanding Debt and Equity

Pawan advises that it is important to understand the concepts of debt and equity here. He says: “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.”

Pawan feels ownership of equity can actually create operational issues for PR firms: “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 a 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!”