Royalty check for designers

As the economic climate remains tough, some consultancies are turning to joint ventures with clients as a way to win business, say Emily Pacey

Designers should be ‘like authors or actors’, according to branding guru Michael Peters. Not by doing panto in Swansea or sitting in quiet rooms watching their fingernails grow, but rather in letting royalty cheques roll in – as the rewards from their joint ventures with clients.

Peters has just announced his latest scheme, a £10m venture capital initiative that will see him invest in his design clients’ companies. Creative Capital Ventures is taking stakes in clients’ businesses in partial lieu of fees, and its first is Russian vodka brand Ivan the Terrible (News, DW 12 February).

The designer as venture capitalist is a rare, but not a new phenomenon. However, some believe the recession is hothousing this sort of deal, and that even designers without the benefit of £10m backing can get involved.

‘Now is the best time to be doing something like this – times are tough, clients are very down, they can’t afford to pay us lump-sums and they need our help’, said Peters, speaking at the launch of his new venture at a Designers’ Breakfast event last Thursday.

And Mandy Merron, partner in accountancy firm Kingston Smith W1, says that while a recession ‘is probably a riskier time’, for equity deal ventures, it is also better than boom times because ‘more clients are interested in doing it’.

Peters is not alone in setting up this sort of venture. Abrahams founder Mike Abrahams has just begun his first joint venture with furniture designer and retailer Chest of Drawers. His consultancy will deal with ‘all aspects’ of the company’s branding and retail design for its three outlets in London. ‘The difference we make to clients is immeasurable: designers can refresh entire organisations through the work they do. To only get a cheque at the end of that doesn’t seem fair,’ says Abrahams. He and Peters attest that there is no shortage of takers for this sort of deal, particularly among small businesses. ‘They would rather have 90 per cent of the profits from increased sales than not receive any increased sales at all,’ says Abrahams.

Merron is helping several design groups negotiate shared-risk joint ventures. She reports that consultancies tend to take modest stakes of 5 per cent or under, generally in early-stage ventures.

As The One Off managing director Adam Devey-Smith puts it, ‘If it works, you get a lot of money’.

The One Off is involved in two joint ventures: one with Shuropody, the therapeutic shoe shop chain that last year bought out the Scholl retail arm; and another with Chinese toy design and manufacturer Hape, for which it is designing a range of toys. ‘We have equity in the [Hape] business, and will be getting royalties out of our products over the next four or five years: it represents a mixed way of getting rewards,’ says Devey-Smith.

However, as the term ‘shared-risk’ implies, there are no guarantees in joint-venture deals. For one thing, says Merron, ‘You could argue that with start-ups the value of their shares is nothing,’ which would explain why such businesses cannot afford to pay designers’ fees.

Commenting on Peters’ venture, Fraser Black, from consultancy Firedog, says, ‘The shared risk model has been tried before, and if the client doesn’t deliver on pricing and distribution then you are going to be let down. You have to have total faith in a company’s business model, which in my experience happens about once every three years.’

There is an issue of trust here, admits Merron, for both parties. ‘Designers must trust the company and the company must be able to trust the designer with the confidential details of its financial forecasts,’ she says.

And without Peters’ £10m backing and his access to ‘a great lawyer and finance man’ – not to mention his industry contacts – what can a design group interested in this way of conducting business do?

First of all, don’t allow potential royalty deals to constitute more than 20 per cent of your business, advises Merron. ‘If one of these deals comes off, then you will make a huge amount of money, but it is very dangerous to make this 100 per cent of your business,’ she says. For one thing, it can take years for royalty cheques to start dropping through the letterbox. ‘This is a slow-burner’ says Merron.

Peters recommends always going straight to the top of a company, no matter how small your consultancy may be.

‘Your dialogue has to be with the boss,’ he says. ‘It is possible to meet with the head of BP but you have to ask. You can start with smaller businesses, but always go to the decision-makers.’

And once you have signed the deal, don’t get over-involved, advises Abrahams. ‘Designers suffer from giving too much,’ he says. ‘If you are looking after the retail design of a store, and one day you casually deadhead some flowers on the cash desk, they’ll ask you to do it every week. Don’t let it go that far.’

Building joint ventures

Companies are sensitive about sharing business plans with outside parties, but Kingston Smith W1 partner Mandy Merron advises designers to quiz potential partners with the following questions about viability:

• What funding does the company have in place?
• What is the likely take-up of a service that you are branding?
• What is the market for the product you are designing or creating branding or packaging for?
• What is the timescale for potential return on investment?

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