WPP-Spot Runner fallout shows perils of an investment portfolio strategy for innovation
In its 24-page legal complaint filed this month, WPP paints Spot Runner and its founders in a very unflattering light. The suit accuses them of luring WPP into a "pump and dump" investment scheme that enriched the founders and a few select insiders at WPP's expense.
The lawsuit, which seeks $13 million in damages, is an ugly turn to a relationship that was a cornerstone of WPP's aggressive effort to reshape its business by dabbling in venture capital deals. WPP put $10 million into Spot Runner in August 2006, part of a string of investments in tech firms culminating in its $650 million purchase of 24/7 Real Media. (Most investments have been $2 million to $5 million, according to sources.) The highly unusual dispute calls into question whether a company like WPP should get involved in the high-risk, high-reward nature of venture investing as a way to spur innovation.
WPP's competitors have mostly shied away from such deals, remembering ill-fated investments from the dot-com era. WPP was different. Founder and CEO Martin Sorrell built the company through corporate wheeling and dealing. He set up WPP Digital to manage its portfolio, which now includes 15 investments headed by former Booz Allen Hamilton exec Mark Read. The idea was by taking a stake in several emerging media and tech companies, WPP would have an edge on knowing what's around the corner and so adjust more quickly than its rivals to the digital world.
Spot Runner was seemingly an ideal plank in this strategy. The brainchild of serial entrepreneur Nick Grouf, the Los Angeles company was generating buzz with its ambitions to take on Google by seeking to bring automation to the spot-TV buying market. The idea, sold expertly by the polished Grouf, was enticing: If the process of creating and running a TV commercial could be streamlined, TV could be "democratized" like search; tens of thousands of small businesses could run small-bore, highly targeted TV campaigns. Spot Runner was billed as the "Google of TV advertising" at a time when Sorrell regularly ruminated in public about Google as a "frenemy."
Spot Runner never delivered. It found small businesses loathe to use a self-service platform, leading it to rely on national franchise businesses. It made ill-considered corporate moves, such as one into the local search business by purchasing Weblistic in March 2008. It hired former Microsoft sales chief Joanne Bradford to lead national sales, only to see her leave after six months.
In the past two years, according to the WPP suit, Spot Runner has lost a total of $80 million while taking in just $14 million. Last year, it zagged again in its business model and pinned its future on Project Malibu, a media buying and planning platform.
WPP declined to comment. However, an exec at the firm speaking on background said the situation was not an indictment of WPP's investment strategy. The lawsuit alleges Spot Runner withheld information from WPP when it raised further money from private equity and other investors. What's more, according to the lawsuit, Grouf personally sold over $16 million in shares as WPP was buying more shares to maintain its stake.
"We're people who weren't told the full story," said the exec.
One startup founder who has dealt with WPP as a potential investor said its corporate development team is small but good. The problem, he said, is managing investments involves "putting out little fires" and it appeared WPP missed a big one at Spot Runner. "They probably weren't digging through every document with Spot Runner," the source said. "It probably wouldn't happen with a venture firm because their only business is making investments."
Spot Runner execs, in an e-mail sent to employees last week, claim they sold their shares to avoid diluting the ownership stake of investors. It pinned the dispute on WPP not knowing its right to participate in the sales. "WPP signed various documents acknowledging this opportunity," the e-mail notes.
For execs at other holding companies, the lawsuit reaffirms their decision to stay out of the venture investing business. As one rival put it, "There's a lot of sophisticated, savvy guys who do this for a living." Another noted, "We're not in the business of taking the cash we generate and making bets."
Tim Hanlon, managing director at VivaKi, the digital ad unit of Publicis Groupe, said direct investment often fails if it's not strategically aligned with a company's objectives. This is difficult in the structure of a holding company, which is in many ways a financial construct.
But a WPP exec points out losses are to be expected in any portfolio. So far, it has seen a smattering of exits, which this source claims made the company money.
ComScore in May 2008 bought M:Metrics, a mobile measurement firm WPP took a small stake in three years earlier. In the short term, other WPP bets appear in good shape: VideoEgg, a video ad net, is gaining traction with its engagement-based pricing model and innovative ad units, and Visible Technologies, a social-media monitoring service, derives 40 percent of its business from WPP shops.
Analytics firm Omniture is the biggest bet left in WPP's portfolio. WPP inked a deal to invest $25 million into the Utah company in January. Since then, Omniture's stock has defied the market trend and actually gone up 30 percent. The deal is showing signs of paying off with tangible rewards for WPP's business. Omniture has linked up with WPP's 24/7 Real Media, a company that is battling Google and Microsoft in ad serving.
"I'll give WPP credit for jumping into the deep end instead of putting in token amounts," said Rich LeFurgy, a longtime investor in Internet companies. "It speaks to a strong commitment."