The aim is to bet on new ventures to replace revenue the agencies have lost since the writers strike
CAA made a lot of money off of a single deal late last year, but it wasn’t from landing one of its stars a big role or packaging the next film franchise.
Instead, the agency sold jeans — $300 million worth of them — when it unloaded its stake in J Brand, a high-end denim label the tenpercentery has invested in and helped grow since 2010.
And on May 1, UTA scored some bragging rights of its own, selling teen-targeted YouTube network AwesomenessTV to DreamWorks Animation for $33 million, with the chance of earning $117 million from earnings and performance bonuses. The deal marks the first time an agency has sold a digital channel it incubated internally with a client.
They’re unusual businesses to be in for companies that rep the likes of Tom Cruise, Will Smith, Johnny Depp and Will Ferrell. But CAA and UTA not alone, as Hollywood’s talent agencies increasingly turn to startups as new sources of revenue.
Nearly every one of the major talent agencies has an investment group focused on backing everything from producers of online videos to health food and fashion brands. That activity has especially picked up over the past three years. The latest entrant is ICM Partners, which hired new-media veteran Keyvan Peymani nine months ago to oversee its mostly digital portfolio.
The aim is to bet on new ventures to replace revenue the agencies have lost since the writers strike, the recession that quickly followed and rounds of cost cutting at studios and TV networks that have reduced release slates, production budgets, overhead and overall fees for clients.
But in venturing into the investment game, agencies are gambling on companies that are far from sure things. Though details on payouts and exits are scarce, insiders say the returns so far have been limited.
An ownership stake represents a fundamental shift from the agencies’ traditional percentage-based business. But if they manage to get in on the ground floor of the Next Big Thing, it’s a far more lucrative opportunity — one that could even presage a wholesale shift in their business models.
Brent Weinstein, who heads United Talent Agency’s investments in startups, isn’t under any pressure to play the role as a venture capitalist. “The talent agency business is still a great business,” he said. “But it is absolutely inherent in our mandate to look for interesting ways to grow our business and service our clients.”
The majority of ventures landing agency coin are the kinds of digital startups Silicon Valley typically embraces — app makers, social networks, online production companies and game creators — driven mostly by the growth of mobile platforms and the rapid rise of YouTube stars.
Even the agents tapped to identify which companies to back are sounding more and more like their tech brethren up north. They are quick to talk up the newbies’ entrepreneurial spirit, finding opportunities where they can be “impactful,” “add value” and “scale the business.” That’s not expected to stop anytime soon, especially with WME now partly owned by Silicon Valley-based private equity firm Silver Lake Partners (which also has stakes in Go Daddy, Groupon and Zynga).
“I came out of the startup world,” said Peymani, who also worked for Disney, Netflix and Warner Bros.’ digital divisions. “That’s the universe I cut my teeth in.”
To date, the agencies’ stakes tend to be fairly small, consisting of a mix of strategic investments, advisory fees and money used to incubate companies inhouse. In lieu of an investment, an agency may receive equity in exchange for its connections. The goal is an exit strategy that involves a sale, an IPO or ongoing revenue from fees or a percentage of sales. All of this activity raises the potential for conflicts of interests — something agency insiders say requires careful consideration.
“We invest enough money to have a meaningful ownership of a company for (its) size and scale, or enough sweat to earn equity,” Weinstein says. “There are different ways we can have an equity stake, and it’s not always through capital.”
Not every investment needs to have an exit, noted Jeremy Zimmer, CEO and founding partner at UTA. “A lot of businesses are successful as operating companies,” he said. “You build them to scale, and they create a lot of revenue for their owners.”
Like AwesomenessTV. “There’s an ongoing earnout from Awesomeness that we’ll continue to participate in,” Zimmer said. And with the agency continuing to rep producer, Brian Robbins, the Awesomeness creator just became more valuable to UTA.
In most cases, agencies aren’t the sole investor in a property; they’re not frantically throwing their money at just any idea that sounds like the next Netflix, Instagram or Zynga.
Three years ago, CAA paired with Irving Place Capital to launch Star Avenue Capital as a private equity firm to invest in consumer products and retail companies like J Brand, through a $500 million fund.
With its own half-billion-dollar fund, WME is the largest outside shareholder of investment firm the Raine Group, through which it has backed Vice Media, Jagex Games Studio and Zumba Fitness.
And UTA, venture capital firm Kleiner Perkins Caufield & Byers, and the University of Southern California, in March, launched the Viterbi Startup Garage, a technology accelerator that will provide financial grants, strategic guidance and mentorship to an initial round of 10 companies, of which the partners will own 4%. CAA and WME have also partnered with Qualcomm, Amazon and Comcast.
It’s still too early to tell if the investment biz is a good one for the agencies. There have been some disappointments.
WME stumbled with Sean Parker and Shawn Fanning’s video chat network Airtime, which raised $33 million and fizzled quickly despite receiving celebrity endorsements from agency clients Jim Carrey, Olivia Munn and Joel McHale. UTA invested in Double Fusion, a broker of advertising deals in videogames, that closed its doors in 2012, due to shifts in the industry. The agency launched 60Frames as a digital content and distribution studio during the recession of 2008; it also wound up shuttering.
Timing and luck are always keys to success as much as a sound business strategy, agents caution.
“No amount of planning or sophisticated investor could have foreseen the outcome” of those companies, Weinstein said.
Because of that uncertainty, observers have suggested agencies would be better off investing their money in regular cash-bearing financial opportunities like annuities rather than looking for one-time capital pops. After all, agencies don’t need to be in the risky investment arena.
But there’s always J Brand to turn to as an example why they should. Japan’s Fast Retailing Co., parent of the popular chain of Uniqlo clothing stores, paid $290 million for J Brand, as well as another $10 million in advisory fees.
Not bad for a company that isn’t tailor-made for the agency world.