Why Agency Owners Should Invest In Other Businesses

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1:13Hello and welcome to another episode of the Duct Tape Marketing Podcast. This is John Jance. My guest today is Ben Young. He's the founder of Nudge, an analytics company that was started as a commercial venture or product from his own agency. Nudge helps you measure the performance of your digital properties through the lens of what people are paying attention to. With the retirement of Google Analytics, we've talked a lot about that on the show. Many are reevaluating what options are out there. Prior to Nudge, he co-founded an agency, a marketing agency in New Zealand that was the eighth fastest growing business at the time.

1:48and it was in that that he started investing. And today, that's what we're going to talk about, how agency owners should invest in other businesses. So Ben, welcome to the show. Thank you. It's great to be here.

2:04So I guess we need to set the table first. You and I were talking off air a bit about this idea of investing in other businesses. And I think some agency owners, because it's a common model, might interpret that as you go to work for somebody for a piece of equity or profit sharing. And you're talking about something different. So maybe let's define what you mean by investing in other businesses. So I'm sure a lot of small business owners and agency owners have had those requests where they're like, can you do some work for some equity? And that's not what I'm talking about today. What I'm talking about today is for agency owners to take a little bit of their own capital, set it aside and invest it as a proper investment, as a, hey, here's some things I'm interested in.

2:48And to do that as a bit of personal development and to see how those investments grow and foster. So I think one of the obvious questions, somebody listening to this might say, well, I'm already like really invested in this business that I'm building, right? Shouldn't I take every dime that I have and put it in that? yeah it's funny i had this exact thing from a founder i was looking at investing in and they're like well ben you've got an agency you're just going to put all your money into that so i'm not even going to ask you for money i was like well okay you've made an assumption there but i think you're right as an agency owner you want to keep investing in your own business and you want to make sure it's growing but also the learnings that you're getting are only from your own business So if you're able to go, hey, look, if I kind of think about over the next three years, I'm going to do a bit of a personal development and learning and I'm going to take away a little bit of cash and invest it in other businesses as a way to learn from other founders.

3:46Because I think that's an amazing thing by investing in other companies. You're getting the collective intelligence and learnings from all these brilliant companies doing amazing things. And that's in addition to what you're already doing. So, of course, you should be investing in your own business first, but do consider kind of the bigger picture and how these investments can make you a better founder in your own business. Yeah. So it's not merely a, oh, 8 % return on investment, you know, kind of calculation. I mean, you're saying that in some ways, even if you don't have the money, the funds, you know, directly that go find them because in some ways it's an investment in your own business.

4:24Yeah, there's a few things to touch on there. So it doesn't have to be a lot of capital. So through websites like angellist.com, you can invest with as little as$1 ,000 per deal. And yes, investing$1 ,000 isn't as sexy as saying, I'm Mark Cuban investing on Shark Tank, right? But it's getting you into the deal and it's getting you learning. And so if you committed to five deals a year, that's$5 ,000 a year. and again that's not nothing but the point is that you can start with a small amount and then the other thing and this is how I actually did my first deal so my first deal kind of came about someone said hey Ben you know the internet I was like well yes I do and they said there's this funny company I don't really understand it can you have a look and would you consider investing and so I had a look at the business and I was I did understand it and I thought it had a lot of potential.

5:23And so this was the very first deal. So this is like big stakes for me personally. So I went home and spoke with my wife and she said, but what if we lose it? I was like, that's a very good question. What if we do lose it? And so I kind of sat and thought on it and I kind of went, hey, look, if I do this sort of investment and other investments, I think from the learnings that will make me a better founder and help me identify new opportunities faster for my own business. So even if these investments go to zero, I'm going to make that up through gains elsewhere. And I kind of detailed a few things where I thought it might help.

6:00So it was believable. I gave it to her and she said, okay, I get it. We can try it because worst case, you're just going to get the gains elsewhere. And I think that's a good lens to look at it, to go, hey, look, let's just start off and invest an amount we're comfortable with. But if I lose it, then I've made the gains or learnings elsewhere. And initially for my first investment… You know, you make a… You go. What I was going to say is you make a really good point though is that, you know, a lot of times people get pitched and they're like, okay, I've got, you know, and I think there'll be a decent return.

6:34But you really ought to go in with like, here's what I want to get out of this. Like be very, even if it's just access, right? I mean, that should be identified or you should know that, but then you should also communicate that, shouldn't you? yeah you should have a bit of a an objective with it of what you're wanting to do and i think the best objective really is going with from a point of curiosity and say i really want to learn like i've done about 70 deals over the past 11 years and the best deals are the ones where i've learned a lot and so it was something that i was innately interested in kind of curious and for founders they also really like having agency owners or small business owners as investors because they get it.

7:14They know how hard it is to start a business. And also the intelligence you can provide. In my case, it was marketing intelligence. So I could say, hey, look, here's some areas to focus on or here's how you can position the company or hire some talent. That's really valuable for them too. So they really like that, right? So let's say somebody's listening to this and they're like, well, I look at some of those things and I'm just not that sophisticated of an investor. I don't even know how to analyze whether this is something, I mean, I might be interested in what they're doing. I think it's pretty cool, but how do I analyze an investment if I really don't even know some of the terminology?

7:50Yeah, good question. So I think the first thing on how most deals are structured. So when you're a angel investor and you're investing a small amount of money, and typically you'll invest through a platform like AngelList or a local angel association, and they'll put together a SPV or a special purpose vehicle, which is like an entity to hold all the investments. And this makes it easier for the company to manage it. And also easier for you because you get the tax forms that you need each year and it just makes it easier to maintain. So technically that's how it's structured, but each deal is going to have some sort of terms associated with it.

8:30Often with angel investment, it's called something like a convertible note. so you are providing some capital that will convert into equity down the road and that might be in 12 24 months and there may be some discounts associated with that or other times that is on an equity basis and there's lots of terms you'll get like pre-money and post-money but basically if you read the fine print carefully you should understand it pre-money is the value of the company before the money goes in and post-money is after the money goes in and now let's hear from a sponsor. This episode is brought to you by Business Made Simple, hosted by Donald Miller, and brought to you by the HubSpot Podcast Network, the audio destination for business professionals.

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10:39Or do you think you should actually get outside completely of your zone of comfort? Yeah, so there's two approaches that I did initially. One was to do direct angel investments where I knew the founder or was introduced or I pitched. And then the other focus was to provide a little capital into funds where they would pick the investments. And so through that, I'll get into companies which I might not have selected. And that helped avoid my selection bias. So if we look at the first five years of investing, all of the companies I picked were marketing and advertising right and that was great because i had i had an edge there like well i felt like i had an edge like these are emerging trends in areas which i know brands will spend a bit more on and also it helped me with clients to go hey look the smartest founders that are starting companies today are investing in these things so i could kind of pass that intel back to clients to go hey look there's a lot of investment going into this space maybe next year or the following year consider putting more budget that way.

11:41And so between the two, I was initially mainly focused just in one sector. And then I got these learnings from other sectors. And some of the investments that came through the fund, I looked at, I was like, I would never invest in that company. And in hindsight, though, some of these companies perform really well. And that's where I've got some learnings. Whereas the initial investments in marketing and advertising, there were some benefits there but I wasn't learning as much so over time I've kind of broadened my focus to kind of fit this criteria of what's new and exciting and what's you know where can I really learn so like a couple of more recent examples invested in a fusion company so the idea of bringing fusion energy the energy demands for the US and around the world are set to double by 2050 and wind and solar and hydro fulfill some of those needs but there's still a place for fusion and so that like i had to read the investment documents a dozen times to go back to fully understand what fusion is and i'm still like 0.01 percent and then another was colossal which is the effort to bring back the woolly mammoth and so that's kind of an interesting investment because it's a big project to bring the woolly mammoth back to life and through that they're going to spin off other companies through the intellectual property they create and so these are two examples of things which are completely new and additive learnings but have exposed me to new things in the energy sector and as an agency owner you know being on top of what the energy sector is doing or gene editing and biotechnology.

13:19So it's just a nice way to improve your own learnings as well. Yeah, that's interesting. I hadn't really considered the industry research aspect that kind of forces on you that might be of some value in the sector in terms of attracting or serving a client. And one other thing that you mentioned is what sort of analysis do I do? So for the marketing and advertising, it was a little bit easier. But when you get into these other sectors, you're like, what? And it's a bit of a sense test of how curious you are. And so I will try and first up read all the documents that you're given. Then go do your own independent research to see, you know, is this supported or where are the weaknesses in it?

14:04And that's a part I really enjoy digging into to go, hey, look, if this is successful, how big could it be? Is what they've told me believable and forming my own opinion? Because answering those questions helps me really understand the investment. So we started at the outset talking about the idea, we're talking about agency owners investing in other companies. But I have to say, as an agency owner, one of the best investments I ever made was in a company that provided a core service that we could sell clients. Because it was such a great fit, there was a need for it in the market, made total sense.

14:38So have any of your investments fit into that category? yeah so i'll tell you about a couple so one one was a video advertising platform and i got sent the presentation i went through it and i just went nah i'm not sure about this and so six months later i'm chatting with our head of advertising he's like ben i've been using this new platform that helps with video advertising i was like oh how much are we spending on it he's like nearly million bucks a year and it was the exact platform i passed on so that was it was not not a good example but but others have been in the email and like analytics and video space and we have ended up using the solutions so yeah so i'm sure that you when you start i i know that when a lot of people invest in things you know the hope is that i'm going to make money off of this investment obviously, should there be a measurement or a criteria or like a window of time in which, you know, should say, I, you know, I need to see some sort of return or is it really, you know, you can't calculate all the benefits of return?

15:53Yeah, good question. So I think you do want to be seeing the benefits after you've made the investment through your own professional work and through your own learning. So you want to see that and see that you're getting that value and if you're not you might need to change the types of investments that you're doing but this is a long game um like it can take 10 years to get your money back so you do need to invest in a manner that you're comfortable with so like some of my oldest investments are on that 11 12 year mark and they're still going they're great companies but i just haven't got my money back but in other companies i've had things sell as soon as 12 to 24 months and a few more at five years but so it's not a fast-paced return you should kind of plan depending on how many investments you're doing but maybe after five years you might get your money back and then you'll have a whole lot of other value tied up in these companies where you're like oh will you sell please or exit and that also is part of the excitement you don't know when these things are going to happen you just wake up one morning you get an email and say we're excited that later today there will be a press release announcing our acquisition through this company or you get sent an email saying we're going to pay a dividend soon and you're like dividend so yeah it was a long term there's one company we're involved in the same thing they have 10x the business i think now is the time to sell but the founders are like oh we know we can do 100x but you know it's their baby yeah and and that's the thing like you got to support the founders like the other ones that that know the business best and the other ones one of the other ones that got it there and i think fortunately these days there are more opportunities to to sell down along the way as companies get big enough later stage investors will come in and offer to buy a small chunk off earlier investors so there are more opportunities whereas in the past it used to truly just be, put the money in and throw away the key, you're not going to see it.

17:56So do you, you've talked about a couple of examples, but you know, maybe give a, let's see how to position this, give a example of what turned out to be a great big win. Yeah. And then maybe an example of, and you can use this for either, and maybe an example of one that, that was a disappointment, but maybe you learned something in both of those instances. Yeah. so i'll start with the disappointment and this was a disappointment because i was convinced i was like this is good and for all of my investments i do chat with my wife to make sure i'm not drinking the kool-aid too much and and i explained this one to her and the idea was that if you're selling something online you could just drop it off at their depot and they would take the photos listed on ebay or wherever else and cut you a check once it's sold and i was like this is great i've got all the stuff I want to sell on eBay but never do my wife was like that's not going anywhere and so we did invest and after a year the founders and this is a case of really good management they they went hey look we've spent some of the investors money we've tested it we just don't have the confidence that there's a big business here so we're closing it down and they returned some of the capital back to the investors and so that was one where I was like no I think this is big and it was in the it was in the time where we were getting all these apps where you could press a button and someone could help you with something and i thought this is another app that sits in there like we're kind of three or four years after uber but it just i think there were too many moving pieces so the learning on the learning on that one was that your wife's really smart is that yeah yeah she should do all the investment right but in fairness of the other investments she has kind of said yes so like maybe my performance returns are really associated to her and yeah so what's been the success that you learned from so the the first early success was a company called screen hero and it wasn't a direct investment it was through a fund so it was one that um someone had selected and they did screen screen recording and screen sharing software and then a company called slack acquired them and said hey look can you enable phone calling and screen sharing in our app and so through that ended up with some slack stock and then of course they later ipo'd so that there was a nice one where it was like okay we've good team good product executed really well another company said hey look, I want that.

20:35They acquired it, paid with stock. And then I'll forget, but I think it might have been seven years all up or something like that. Like it was still a long time to hold, but it was pretty nice. Like when Slack IPO'd, I went down to Wall Street and saw the banner up there and it was kind of cool. Like you've got a fraction of like a participation in the journey, but so that one was pretty cool. Yeah. But to get to say that you had a 1 ,247 % return is not bad. Yes, on some of those deals, right? Yeah, there's a good question around performance. And there's a lot of analysis on venture capital as a sector.

21:14And usually, like, it's between 15 % and 27 % return year over year. But those numbers are always reported before fees. And if you're investing through a fund, they take their fees, of course. And so they should. And there are administration fees, even if you're doing the deals yourself. so i kind of guide people like 17 to 19 percent is not unreasonable if you know if you're kind of spreading out through a few different companies and you're being smart about it my own returns have been a bit higher but the problem is when you're looking at your returns there's how much cash you got back and how much is on paper because the stuff on paper can still go away so until it's you know until it's all said and done that's yeah it doesn't count well Well, Ben, I appreciate you taking a few moments to come by and talk about an interesting, thought-provoking topic.

22:03Obviously, there's lots to learn in this topic, but you want to tell people where they might connect with you or find out about the work you're doing there at Nudge? Thanks. The best place is on Twitter or Threads, and we can say Threads now. And my handle is my initials. It's at Waggy, at B-W-A-G-Y. And that'll have links through to Nudge, my blog, and ways to get in contact. And if you see any good deals, do send them my way. Awesome. Again, I appreciate you taking a few moments to stop by and hopefully we'll run into you one of these days out there on the road. Thanks, John. Hey, and one final thing before you go.

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