Agency IP investments are growing-client frustrations are among the reasons why

While far from a new phenomenon, investment in intellectual property has been increasing over the last few years

Tired of losing an account every time a client appointed a new chief marketing officer, MichaelAaron Flicker spent 2018 building a plan to insulate his agency from the uncertain nature of client project relationships.

"I realized that our financial success was not our own," said the founder and president of XenoPsi Ventures, a full-service strategic marketing and advertising agency. "I really wanted to take control of our future."

So Flicker decided to market his own product: Compression socks, inspired by the swollen legs he and his wife experienced from flying for their bi-coastal, long-distance relationship. In 2021, he launched Wellow, a line of premium bamboo compression socks. First-year sales exceeded his $1 million goal by five times, Flicker said.

But most importantly, it accomplished his goal to make his agency less dependent on client revenue. XenoPsi's revenue from non-traditional agencies services, including intellectual property it licenses to companies, such as its Benchmark beverage industry insights tool, along with products like Wellow, accounted for almost 40% of topline revenue in 2022.

While far from a new phenomenon, agency investment in IP has been increasing over the last few years as agencies grow frustrated that they're not benefiting from the ideas they're creating for clients, according to Marla Kaplowitz, president-CEO of the 4A's.

"Agencies were recognizing opportunities to create different agreements with clients that could give them … some sort of incentive compensation tied to the success of a product or an idea," Kaplowitz said. "Every industry is seeking growth, and IP offers growth through diversification."

IP has always been a retention tool for agencies looking to give their talent new skills and as a way to prove to clients that agencies have walked in their shoes, said Kaplowitz. But in recent years, these products are becoming a more important revenue source for shops as recession threatens, layoffs surge, and clients pull their creative work in-house.

Stables or products

These IP ventures can range from a single product to many. Anomaly was founded with IP as one of its core pillars to differentiate it from competitors, and the agency often provides start-up capital to businesses in exchange for a stake in the business.

The Stagwell agency is behind a full stable of offerings, including skincare brand Eos, reproductive health coach app Obie, cannabis supplement company Dosist, a docuseries "Avec Eric" about chef Eric Ripert, and Lone River Ranch Water hard seltzer.

Independent Mother's Mother Ventures invests capital and creative services in exchange for equity in businesses. Mother has forged close to 20 partnerships, including with non-alcoholic beverage company Ceria, started by Blue Moon Founder Keith Villa, and software company ProQuo AI.

Although Mother did not disclose how much revenue these ventures have brought in, CEO Peter Ravailhe said the returns are "considerable" and "important for us to continue our independence."

The Martin Agency built upon its storytelling skills to launch Now Upon a Time, a series of children's books in which different agency staffers reimagine traditional fairy tales with modern, empowering messages.

Martin Chief Creative Officer Danny Robinson wrote "Lil' Ruby Riding Hood" about 12-year-old Ruby Brown, who takes a trip on public transit to visit her grandmother and uses her wit and intelligence to outsmart a scheming financial advisor trying to take advantage of her elder.

The series evolved into an accompanying podcast, a book deal in partnership with author Jelani Memory, who writes the "A Kids Book About" series, and a short film directed by Robinson, which will be released in the spring after receiving a grant from Fortnite-creator Epic Games.

"We looked at the animation space and the billions of dollars that it is now and how it's growing," said Tasha Dean, chief revenue officer of The Martin Agency. "That was an area where we felt comfortable developing some new muscle memory, but that we also had a little bit of experience so we decided to double down on that."

Inconsistent revenue generator

Other agencies are creating intellectual property for companies rather than consumers. In 2021, Curiosity created an immersive three-month TikTok pilot program called TokShop that it sells to startups and growing brands. The program is broken into six two-week content creation modules and offers real-time reporting insights. Curiosity sees close to 20% of its annual revenue come from IP projects like TokShop, according to Trey Harness, president and chief client officer.

But while some agencies are looking toward IP to become a consistent revenue generator, for the most part that is still elusive. Anomaly Founding Partner and Global CEO Carl Johnson said he would be happy if revenue from IP accounted for 10% of the agency's profits each year because the revenue stream "comes in lumps."

That said, Johnson won't walk away from IP because he said revenue isn't-and should never be-the main motivator for investing in it.

"We've learned again and again how hard it is, and you nearly always fail," he said, adding that he looks at IP as an entrepreneurial approach to marketing as opposed to the creation of a product. "But if your primary reason is to develop the culture and the talent and grow entrepreneurial behavior, then it's worth it."

Variable Founder and Chief Creative Officer Joe Parrish said that projects, such as its Sunshine energy drink, may not immediately generate profit. "We truly take a little bit of a venture capital point of view on [IP], in that [venture capitalists] expect one out of every seven or so investments to return revenue, but it usually returns so much that it pays for the other failures," he said.

The Winston-Salem, North Carolina based advertising agency sunk 5% of last year's earnings before interest, taxes, depreciation and amortization in its "VC Fund" to fund IP projects in 2023.

'Over our skis'

Then there's the question of how far an agency can take a product. Parrish said the shop was quickly overcome with production and logistics issues before it sold Sunshine to private equity in 2017.

"The problem with creating a drink or clothing lines and all this over kind of IP is you're just creating another business," he said. "It's fun at first, but then once it started to gain traction, we were out over our skis."

For that reason, Anomaly hands the reins over to companies who know how to run logistics and distribution after products move to the operations phase.

"What do we know about supply chains?" said Johnson. "It's part of the naivety of agencies because if they do operate it themselves, it's highly likely to be small and not really real."

Flicker, who has complete control over the operations of Wellow socks, spent the first year in production reordering shipments 14 times, quickly racking up shipping and import costs.

"In the beginning, we were super conservative on how much product to bring in because we had no idea what the demand would be," Flicker said. "Even in year two, we're learning about how to forecast demand, which ad agencies don't normally deal with. Normally, we just create the demand."

Mojo Supermarket only sees occasional revenue from its IP, focusing on out-of-the-box projects such as developing a hot sauce for Bleacher Report. But Mojo Supermarket Managing Director Nichelle Sanders says making money isn't really the point.

"It's definitely a conversation starter," Sanders said. "A lot of our clients appreciate the fact that we have skin in the game in certain ways and that we invest in our own ideas. It's not just us asking them to be on the hook for these audacious ideas, and we're not averse to investing in them."

Entrepreneurs in the making

In addition to making money, Mother has drawn clients through Mother Goods, its storefront that sells merchandise to make a statement about social issues. "It's been a little bit of a surprise, if we're honest, that clients do their homework and see these things pop up," Ravailhe said. "It has been a strong statement of our values, of taking initiative on certain subjects and making actual products to raise awareness or money for charities."

Other than drawing clients, investing in IP can attract and retain top creatives, according to Mother's Ravailhe.

"Instead of taking the money out of the business, we're going to invest in these great people," Ravailhe said, adding that agencies solve problems for a living through creativity, so it's only natural to find entrepreneurs in the making. "In the creative community, we take the ideas that came to us organically and say, 'We want to back this person's vision, dreams, hopes and ambitions that they have in this space.'"

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