As readers of Co.Design know well, branding is an essential component of an organization’s success. We all take for granted that the companies with the strongest brands, as defined by Interbrand’s "Best Global Brands" study--Apple, Nike, Coca-Cola, Google, McDonald’s, etc.--also tend to be their market leaders. Yet the financial titans of the private equity and venture capital (PE/VC) worlds do not seem to concur, as evidenced by the fact that they do not give branding experts permanent positions on their teams. By failing to do so, these firms, whose sole purpose is to seek outsized financial returns on behalf of their investors, are actually leaving money on the table.
PE/VC firms would no doubt argue that they’re finely attuned to branding. For one, VC’s looking to invest early into technology and other cutting-edge sectors might say that today’s hottest brands such as Facebook and Twitter might never have existed if it hadn’t been for them. PE firms, who look to acquire partial or total stakes in a broader array of more established companies, might contend that they actively seek out the strongest brands to purchase. The fact is, though, that, while few would dispute the value of branding, in a business dominated by the bottom line, off-balance-sheet considerations are often treated as afterthoughts--secondary undertakings undertaken only after the critical initial decision to invest is made.
PE/VC firms have for some time been taking on full-time experts--from biochemists to tech specialists--to help them not only maximize their investment but also to identify potential targets. And it is to this inquiry that branding experts could add the most value.
Why, then, the continued reluctance to bringing a branding expert on board? For one thing, many PE/VC firms believe that they already give branding its due by bringing on agencies after the fact to address specific branding-related concerns. Which brings us to a separate but related issue: Many PE/VC firms think of branding as something to be attacked piecemeal--with a logo here and a brand campaign there--rather than as an investment in an integrated and comprehensive brand strategy and identity system that underlies and informs the whole. But perhaps the single-biggest obstacle to incorporating branding experts in the PE/VC process is the simple fact that, unlike biochemistry or the law, branding is a discipline everyone thinks him or herself an expert in, at least insofar as recognizing the good ones is concerned. To quote Supreme Court Justice Potter Stewart, the prevailing attitude of PE/VC investors toward identifying a brand with strong potential is "I know it when I see it."
The reality is not so simple. Fifteen years ago, who would have identified Target as not only a retailer in need of a rework, but a company with the potential to be driven almost entirely by branding? Companies with no brand to speak of may be overlooked due to a failure to recognize the impact of branding on their target market--Who gave the manufacturer of their garbage can a second thought before Simple Human came along?--or because too much focus is placed at the outset on issues such as build-out and financing to the exclusion of branding. Where would Google be today without its white splash page and singular logo? One word: AltaVista. As for those businesses whose branding is just plain lousy, there are too many to count, but a walk through the "portfolio companies" of the major PE/VC firms offers any number of examples of companies that would benefit significantly from a greater focus on their identity.
There are, however, glimmers of hope in having PE/VC firms incorporate brand experts onto their teams. Take for example what is arguably the top VC firm in Silicon Valley, A16Z, colloquially known as Andreessen Horowitz. Since Marc Andreessen (who founded Netscape) and Ben Horowitz started investing individually in 2005 and officially as a fund in 2009, A16Z has poured cash into Facebook, Twitter, Zynga, Groupon, and Foursquare, to name but a few. Semil Shah, a tech insider and Tech Crunch contributor, recently described Andreessen Horowitz on Quora: ”Organized more like a Hollywood talent agency than traditional venture firm . . . it has 4-5 general partners (GPs) who are established industry veterans and have the authority to write checks and participate on boards. Underneath the GPs are over 20 specialist partners (SPs) who take on traditional business development functions such as research, business development, talent management and recruiting, sales, and public relations, among others. These services are offered to A16Z portfolio companies and also help the firm build and establish its own history and networks." (Since Shah wrote this, the company has grown to include six general partners and 40 specialist partners.) A16Z’s success leaves little doubt that other firms will start to emulate its structure and that including branding specialists will not be far behind.
PE/VC firms that support a focus on branding from the outset are seeing tangible results. Take, for example, the innovative eyewear company Warby Parker. "When building the company, we prioritized branding and designing our first collection above everything else," says Warby Parker founder Neil Blumenthal. “We spent six months crafting our brand architecture in hopes of creating a brand that could one day transform an industry while resonating with customers. We’ve found it’s paying off--in two years, we’ve grown to 70 employees with little traditional marketing. More than 50% of our traffic and sales is driven through word of mouth." The decision to allocate a large percentage of the company’s resources was not only supported but fully encouraged by the company’s VC backers. The results speak for themselves. One of the more successful startups, Warby Parker is now transforming the way we shop for glasses. Their compelling brand initiatives, like the Holiday Spectacle Bazaar in Soho late last year, continue to drive sales and boost the company’s visibility.
Without a strong brand identity, everything suffers. Products don’t shine, communications falter, user interfaces end up looking like, well, user interfaces. Identifying companies with brand potential, however, is only half the battle. Let’s go back to the bottom line. No analysis of a potential takeover target can be complete without factoring in the upside of investing in the company’s brand. PE/VC firms may think they know where to go to find that answer, but they don’t always know the questions to ask. While the value of a brand may in many ways be inchoate, the expertise required to build that brand equity is anything but.
Perhaps the resistance to a union between PE/VC firms and branding is the fact that the idea is just too simple. But then, the best ideas always are.