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Are VCs Interested in Funding a Services Agency?

Question: I have a startup concept for a services agency (not a software or online business). I have previously helped launch PR agencies, one of which was subsequently acquired by a national agency. Are there angels/VCs that would be interested in my services concept?

Typically not. While there are some VCs that like services businesses, especially consolidations or rollups of services companies, most VCs aren’t interested in funding services business, especially around PR or marketing.

While there was a rash of VC financings for web agencies in the late 1990′s, when the Internet bubble burst VCs were reminded that these are companies that – at best – end up being valued at 1x revenue based on the underlying economic characteristics of the businesses. This tends not to create risk / return investment dynamics that are interesting for most VCs.

Of course, what VCs fund cycles in and out of favor, so there might be a point in the future where there is a particular type of “next generation services agency” that appeals to so VCs. But for now, most of these companies will have to rely on bootstrapping or angel financings.

November 4th, 2011 by     Categories: Fundraising     Tags: , ,
  • http://about.me/adriansanders Adrian Sanders

    This seems to be a really general statement and maybe that’s all it’s intended to be.

    But at least in IT, companies like Cap Gemini or Cognizant would be awesome companies to get in on. 

    I think great service companies are able to use their collected knowledge bases and data to create interesting products like the way that Forrester does now. 

    Also, an agency / magazine like Stylecaster has so much BI around the verticals that they’re experts in, surely there’s some interesting and scalable revenue streams lurking there. 

    • http://www.feld.com bfeld

      It was intended to be a general statement, mostly aimed at marketing agencies. Again, there are some VCs that will fund services businesses, and Cognizant would be a good example, but it’s rare for an early stage marketing agency to be VC backed.

      • http://about.me/adriansanders Adrian Sanders

        Yeah that makes sense. 

        I guess, also, there could be an issue with accelerating growth – it takes quite a bit of time for a service to establish itself, and quite a few accounts / projects finished to get enough data that would serve as marketable product. 

  • http://spreecommerce.com Sean Schofield

    As the owner of a services company I don’t fault VC’s for not being interested in that.  Typically these types of companies can be bootstrapped anyways.

    In my case we had a services company based on a product.  We just created a new company focused exclusively on the product and we were able to get funding for that company.