Start-ups need design but lack cash. Design groups love to work with them. The solution? Equity stakes, not fees, says Chris Tacy
Over the past three years, the value of design in driving business innovation and differentiation has become well understood.
In a recent study of Fortune 500 companies by research group Peer Insight, firms that focused on customer-experience design outperformed Standard & Poor’s S&P 500 stock market index by a margin of ten to one.
Companies like Apple and Procter & Gamble have become benchmark icons within their sectors, and take design as a core principle in building their businesses. This has translated into boom times for design groups worldwide.
A major challenge for consultancies, however, is that much of the innovation taking place in business doesn’t happen within top global companies – Apple and P&G are admired because they are the exceptions. Innovation occurs far more frequently in small, aggressive start-ups, with a risk-taking culture but rarely the capital required to work with a top design group.
As a result, many companies that need the expertise of top design groups to drive innovation and differentiation can’t afford them. And it’s precisely those clients – the ones with real problems – that consultancies find most interesting to work with. So how do we address this match-making problem?
Oddly enough, Method found the answer through the ‘back door’. We were looking to solve two different, and seemingly unrelated, problems. First, is there a way to fix the current funding situation for early-stage entrepreneurs? Second, how do we escape the trap of our own revenues being tied to head count?
In looking at the current funding options for early-stage entrepreneurs, we realised that traditional models and metrics aren’t always accurate. Start-up costs are lower than ever, liquidity through acquisition is the most likely exit and is occurring earlier in the corporate life cycle, with entrepreneurs looking for different value-added services from investors.
In particular, entrepreneurs are looking for a strategy that venture capital groups don’t offer: design thinking and brand strategy. Most venture capital groups come from technology, finance or product marketing backgrounds, so they can’t provide what these entrepreneurs are looking for.
We realised that we could create a venture practice that provided the sort of design services that create the innovation and differentiation needed for start-ups. And we could do so in a manner that met their needs, would be affordable and which enabled us to find revenue streams not tied directly to head count. And so Method Ventures was set up last year.
Method Ventures works with early-stage entrepreneurs to help them jump-start their businesses. We provide expertise, insight, advice and a full range of design, strategy and technology services to speed up their business growth and product development.
To do this, we take an equity stake in the client in exchange for our traditional services margin. Not only does this allow us to reduce our fees significantly – because cash is what start-ups have little of – but it also aligns our interests with those of our client, now part of our group’s portfolio.
Method Ventures started with the idea to test the market. Our concern was that corporate recognition of design as a key driver might be superficial. We quickly discovered that our fears were unjustified. Not only do entrepreneurs believe in the value of design, but private equity investors have also embraced it. Our challenge, in fact, quickly became managing the excitement around this offering.
It’s clear that focusing design thinking on the traditional investment process – not just with start-ups, but with all companies – is both viable and valuable. For design consultancies, this creates incredible opportunities, but there are some serious implications, and significant risks, too.
Consultancies can’t simply start offering these services with existing staff and processes, and expect instant success, especially if they lack legal and financial knowledge.
Standard processes need to be adapted and evolved. Connections and networks within the traditional venture and private equity eco-system need to be cultivated. For almost all design consultancies, this will start with the hiring of someone with a strong understanding of, and experience with, venture capital, entrepreneurship and design to run the practice.
If design consultancies don’t follow best practice taking advantage of this exciting opportunity, they will not only fail, they will also damage the reputation of the entire design services sector. And, worse than that, they will decrease the odds of success for their portfolio companies – a deeply unethical concept.
If, on the other hand, design consultancies can evolve, as we are doing, to build expertise in this area – and to commit to this practice, changing their cultures to enable it – our industry can change the world.
Chris Tacy is chief innovation officer at Method
Method has a roster of blue-chip, paying customers including Sony, Gucci, Nike, Yahoo, Samsung, Microsoft, Visa, Adobe Systems, Bertelsmann and Comcast.It has offices in San Francisco, New York and London