By: JDoyle,Peachtree Media Advisors, Inc. It is no secret that marketing dollars are slowly moving away from traditional media into alternative media channels, such as the Internet and Out-of-Home media. The question being asked by most out-of-home entrepreneurs is, “If the marketing dollars are moving toward alternative forms of “non-Tivo” media, then where is the capital to finance the early stage companies that are building the networks?”

Since most private equity firms use debt to leverage their equity investments, they do not invest in early stage companies. Venture capital companies have moved away from funding start-ups and prefer to invest in growth and expansion opportunities of established companies. Currently, angel and early stage investors are picking up the void left by venture capital firms by funding the stage between the friends and family round to the first institutional, Series A, round of venture capital. But these angel investors are hard to find, invest in small amounts and cannot be relied upon to make additional capital injections into a company.

Since marketing dollars are going to alternative media channels, there are two reasons why the lion’s share of venture capital is going to interactive marketing services versus out-of-home. First, with $16 billion in ad spending, the Internet is a larger market than the $7 billion out-of-home media sector. Many venture capitalists that I speak with want to make an out-of-home media investment, but feel that the overall market potential is still too small. Since traditional billboards dominate the ad spend in the out-of-home media sector, these sidelined venture capitalists feel that alternative out-of-home companies will not be able to scale substantially, i.e. generating revenues in excess of a billion dollars within ten years.

The second reason venture capital is not pouring into the out-of-home sector are that these risk managers seek to generated returns well in excess of ten times their investment. Merger, acquisition and public company valuations in the Internet sector are substantially higher than other media sectors, including out-of-home media. With the exception of Focus Media, most out-of-home media companies are being valued at three to four times trailing twelve months of revenue. Internet companies are being valued at five to ten times revenue. With significantly more valuation lift in the sector, venture capitalists are naturally drawn to the interactive sector. Growth expectations of the industry as a whole are the primary drivers of increased valuations.

If both sectors doubled in the next five years, then Internet would generate approximately $32 billion in ad spending and out-of-home $14 billion. Alternative out-of-home would still be a small part of the overall out-of-home market size, hypothetically totaling approximately $5 billion in ad spending (street furniture, transit and alternative outdoor) within the next five years.

Et Tu Venture Capital?

Now, let’s dissect a $20 million venture capital investment. The venture capitalists are “expert” risk managers who want to knock the ball out of the park. They are willing to make multiple investments in projects that they believe will become huge payouts. They are not steady growth investors. Therefore, they have a preference to fund twenty companies at $1 million a pop, rather than fund two out-of-home media companies that need $10 million each in order to build a national advertising network. One million dollars can fund three computer jocks in a small office and two sales and marketing professionals for a couple of years. On the other hand, out-of-home has significantly more capital expenditures than the Internet. Whether it’s digital signage or static, building a national network is going to take a significant amount of money to build and maintain the structures housing the place-based media. In addition, each structure may have rent associated with it and, at the minimum, a revenue share.

Subsequently, most venture capitalists have decided to sit on the sidelines instead of investing in out-of-home opportunities. Their primary fear is that entrepreneurs will chew through their cash while building structures across the United States with an “if you build it they will come” mentality. But these guys are not willing to take that leap of faith because there are other opportunities that take less start-up capital to begin generating significant revenues. Most entrepreneurs apply the chicken or the egg theory, which means that they have to have to build the structures in order to attract the advertisers. That is true in most cases and advertisers rarely fund network growth. (The operative word is rarely.) Advertisers have been burned in the past and they are typically not willing to put their jobs on the line to fund a network’s expansion.

Who Needs You Anyway! Early Stage Creativity

With venture capital money not being very venture-oriented and marketers wanting to buy established media before committing advertising dollars, entrepreneurs need to be creative in financing their opportunities at the early stage. Even if you don’t have any friends or family members willing to invest in your project, you may have some seed money saved up to install at least one structure in one location. With minimal capital, you should exercise the discipline to begin generating revenue at your current location before expanding into new venues. If your venue is shopping malls or elevator banks, you need to figure out how you’re going to generate revenue in that particular mall or that particular elevator bank, before moving to the next mall, hospital, jiffy lube or corporate elevator bank.

Developing a Media Mentality at a Local Level

At this early stage, entrepreneurs need to see themselves as being marketing solutions providers for brands as opposed to narrowcast, digital signage, back-lit poster, ambient or place-based media companies. With one location, Procter and God is most likely not knocking down your door to advertise on one location network. Therefore, you’re going to have to develop a media company mentality at a micro level. This means, you need to have to know which demographic groups are exposed to your media. Knowing the audience engaged with your media will help you target advertisers.

Direct Response Local and Regional Advertisers

Your next step should be to analyze your audience and figure out who would benefit most with access to your audience. By monitoring your traffic, you should be able to decipher the specific demographic group (moms, parents, senior citizens, kids, ethnics, etc.) or vertical lifestyle enthusiast (sports, shopping, night clubs, etc.) that is engaging with your media. This will allow for you to figure out who most wants to reach this particular person at a “micro” level. By micro, I mean that if the advertiser generates one sale from one person, then it was worth it for them to place the advertisement. In other words, entrepreneurs should target the local and regional advertisers that will support the out-of-home media structures at that particular venue.

For example, if an automotive dealer sells one car from your advertisement, then it would most likely be an extremely good return on investment for them. Whether it’s a restaurant, a barber shop, a shoe store or a lasik eye surgeon, there is some local business that wants your demographic group as a customer. You have to figure out the merchant that benefits most from being in front of your audience and then aggressively sell them your ad inventory.

Competitive Clustering Gets You Noticed!

One thing about businesses, advertisers and local merchants, in particular, is that they are set in their ways. Very few want to try new media at the risk of underperforming their sales from last year. If someone has always advertised in newspapers and radio, they will be less willing to use part of their limited marketing budget on an unproven new media format. You can pitch these guys until you’re blue in the face, but they won’t want to talk to you...until…they see their competitor up on your signage.

Jealousy and fear are strong motivators. The way to get merchants and advertisers to hear you is to cluster them into competitive groups. Let’s say there are three competitors, the Gorilla, the Mighty Horse and the Flea. Clearly the Flea doesn’t have the advertising budget to compete with the Gorilla and the Mighty Horse, but since these are private companies, no one really knows each other’s internal financials. First approach the Flea, and provide him or her with substantial ad inventory at production cost, if not for free. Since the Flea does not have an advertising budget, they will be keen to accept the charity for the sake of exposure. Once the Flea is up on the signage, with significant coverage at your venue, then approach the Mighty Horse.

The Mighty Horse is the middle-sized player and does not want to see the Flea catching up or gaining market share. The Might Horse will be willing to purchase some of the media, “just in case.” They will use their experimental marketing budget to purchase some of your media, to make sure they’re not overlooking anything that the Flea appears to clearly understand. With two creative pieces in hand, one from the Mighty Horse and the other from the Flea, it is now time to approach the Gorilla. When you approach the Gorilla, make sure to bring the creative of their competitors. The Gorilla will more than likely buy out a substantial majority of the media, because 1) they can afford it and 2) to lock out their competitors.

One of the greatest aspects of the out-of-home industry is a limit to the amount of ad inventory that is available in an area, which is why the sector experiences extremely high renewal rates. Large advertisers, such as McDonald’s, renew billboard purchases frequently because they want to keep their competitors off the billboard media. Alternative media entrepreneurs need to tap into that same competitive nature mentality when managing their ad inventories. Your goal should be to capitalize on the local/direct response nature of the medium by targeting advertisers in close proximity to your media that can benefit from advertising with instant sales.

One More Cash Flow Saving Tip – Avoid Monthly Rentals and Forced Growth

Entrepreneurs should realize that their client is the advertiser/brand marketer and not the venue. Try to avoid fixed rental payments for real estate at all costs. Present your media as value-added service with a high value proposition for the venue’s constituents (consumer information, engaging content, alleviating boredom and allowing the venue owner to communicate with their constituents). Start with trying to convince the venue operator to pay for the installation, which they will most likely reject, and then settle on installing it for free. The worst case should be a revenue share.

Again, the client is the advertiser and not the venue. If you do not have the cash to grow, then do not feel pressured to grow. Wait until the media is supported by local and regional revenue. Have the discipline to manage your growth and your cash flow. Many times entrepreneurs feel pressured to roll-out rapidly into markets without the revenue to support the new structures and ad inventory.

Valuation, Merger & Acquisition

Once you have figured out how to expand regionally or nationally and are generating a consistent revenue stream with repeat advertisers, then you are at the stage where you can command a premium when raising growth capital or selling to a strategic buyer. Your regional dominance and recurring revenue base will intrigue both higher caliber investment groups as well as interested buyers.

When taking on outside capital or selling your company, there has to be a value attached to the business. The value of your business is what someone is willing to pay for it at a single point in time. The way to maximize the value of your business is through a sale process or controlled auction. The Peachtree Media Advisors, Inc. capital raise and sale process brings multiple investors or strategic buyers to the table at the same time. Business owners are in a much better position to negotiate favorable deal terms with buyers or investors when other deals are on the table. This typically results in structuring the best deal possible at the highest valuation since bidders are likely to put their best foot forward when final bids are called in a private auction process.

Originally written by John Doyle, Managing Director, Peachtree Media Advisors, Inc., for the Great Outdoor Network and republished by Outdoor Magazine.

Peachtree Media Advisors, Inc.

Peachtree Media Advisors, Inc. is a mergers and acquisitions advisory firm dedicated to the serving the out-of-home and interactive marketing sectors of media. John Doyle has been a media investment banker for more than 12 years, closed and structured more than 20 deals, has a strong knowledge base of investors seeking to invest in out-of-home media companies and clearly knows the strategic buyers in the sector. If you are interested in learning more about valuation, positioning, preparedness or the merger and acquisition process, please go to www.PeachtreeMediaAdvisors.com or contact John Doyle at (212) 570-1009.

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