When Designers Become Venture Capitalists

by High Alpha

— By Ulla Sommerfelt, CEO at EGGS Design

This post originally appeared on LinkedIn.

We have all heard it. All design agencies get approached by entrepreneurs with no cash and a question: ”I need you to design my product to make it sexy, but can we discuss an alternative payment model?”. This translates into:

“I need you to take some of the risk in my project, and when I get rich you´ll get some money, too.”

Many of us have tried it. It can be quite tempting to jump onto that wagon, as we get seduced by a passionate entrepreneur’s brilliant idea. And because we really want to help: They so need design! For some it can even feel like a good way of utilizing available resources in the studio.

All of us who have tried it have also learned some lessons — the hard way. The royalty model in particular is a common way of not paying the designers for their work. Until the product actually pays back — if it does — the designer sees no return on investment. I personally know of very few designers that have made decent money from royalties, and the same goes for other ”risk award” models.

So Why Do These Models Seldom Work?

As designers the bulk of our work is traditionally carried out at the very early stages of the product development process.

During the long months and years that followed after the design phase, we had absolutely no control over the process or the outcome. Taking all that risk and having no control is a bad combination. And as we say here in Norway:

“While the grass is growing, the cow is dying.”

As an agency or — forgive me — consultancy, our business model requires a constant cash flow in order to pay our largest creditors: the employees. Typically, the salaries account for 80–85% of the cost base, and this cost is due long before the income lands in the agency´s bank account. Therefore, unless the employees are willing to wait for their salaries until the passionate-but-oh-so-poor client entrepreneur has made his money and paid the agency, the agency could break its back.

In the past, designers have not given much thought to financing (of course!). In the past, designers have been happy as long as they got to design something meaningful.

I’m sure that there are a bunch of other reasons, but instead of trying to improve the past, I’d rather focus on designing the future.

Entrepreneurial Designers

We used to design for cash, now we want to design for equity.

Last week I had the pleasure of meeting with Kristian Andersen in High Alpha. After having tried out various risk award models as a design agency, Kristian and his partners cashed out of some successful start-ups and started High Alpha. High Alpha is an investment fund and a design agency in one. They start with the capital and create new start-ups based on their own ideas. What a brilliant model!

I recommend checking out his speech at the Transform 2016.

After Kristian’s speech we had a little debate at the Transform 2016

When the Designers Become the Investors

As design has become big business, designers are broadening their horizon. As we move into service design, designers are picking up on new fields of expertise. They learn new topics like management, HR, finance, marketing and so forth, and gradually become quite skilled in all aspects of running a business. And maybe most importantly, how to grow and scale a business — which is much harder than starting one.

But do design investors think differently than financial investors? I think so. All designers I know are driven by creating something, building something. Rarely are their motives to get filthy rich. Don’t get me wrong, money is fine, though there is little motivation in making other people rich — money is not the main driver for designers the way it is for the typical finance guys.

So when designers become the investors, what kind of companies will we see taking shape in the future? We have already seen successful design-led start-ups like AirBnB, Uber and Epleslang. Services that provide value at more than one level. Companies where the user focus is second nature to everyone working there, not just to the designers.

The EGGS Garage Model

At EGGS we are experimenting with new models in our daughter company, EGGS Garage. Designers and creative technologists at EGGS are bubbling new ideas all the time. Sometimes the agency/consulting model is not enough to fulfill the desire to create and build.

The projects that we assign to EGGS Garage always have at least two of three main drivers:

Tundra, our own whiskey tumbler, started as a PR-related project. The glass was originally designed and produced for the design exhibition “100serie”. Tundra turned out to be a hit, generating so much internal pride that we decided to go ahead and produce 1000 more units which are sold online.

Pic: The Tundra whiskey glass. Started out as a PR stunt, turned into an HR hit.

The Garage model can also be applied to projects where the idea originates at a client, or where we could form joint ventures with other companies.

Designing for Equity

In the EGGSTERNAL model we design for equity. This means that instead of the usual fee, we get shares in the company. There is no lack of start-ups that would want such a model, but we need to be picky. In order to succeed with this, these are the most important criteria that must be met:

  1. A Firesoul. The word “firesoul” is a direct translation of the Norwegian “ildsjel” — a passionate person; the entrepreneur that lives and breathes with the idea. We don’t believe a start-up will succeed without this person at the wheel, at least in the early years of the company’s lifetime.
  2. A skilled management team. We want to see the start-up having the ability to scale. The management team must have experience, be multi-disciplinary and have a good network.
  3. Capital. We will contribute with competence and help build a design driven culture, the company must have access to money to ensure growth.
  4. A board position. As a member of the board we contribute to the customer centric and design driven direction of the company. The board position, of course, is also a way to protect our interests.
  5. An integrated development process. The company must be design mature, and design must be at the heart of the development process. No “please make our product sexy”-attitude there. Preferably, we hold a Chief Design Officer role.

The same criteria go for the JOINT VENTURE model; except the Firesoul could be one of us. We could also play more roles on the management team, and could provide some of the capital. The main difference is the origin of the idea.

Designing the Future

Are these examples the future for the design industry? Entrepreneurial designers taking the reins and creating their own successful start-ups?

These days many design agencies are being acquired by management consultants or IT companies. Whereas this can give the smaller design agencies leverage in the international market and access to more strategic projects, I wonder: are they really selling out on their most important capital this way? Can we create new and better companies if we own the ideas and run the projects ourselves?

And what will happen when we start designing for equity, and when the designers become investors? Will we see design-led startups revolutionize health care? And if they do, what difference will it make? Can design led startups help transform industry that is becoming obsolete? Will a design led startup transform the oil industry into renewable, attractive and profitable energy services?

Or will designers become cold hearted capitalists instead?

This post originally appeared on LinkedIn by Ulla Sommerfelt, CEO at EGGS Design. Learn more about Ulla and EGGS here.