January 13th, 2006
Buzz Marketers Score Venture Dollars
By Suzanne Vranica
Wall Street Journal
Word-of-mouth marketing is all the rage on Madison Avenue. Now it is creating buzz among deep-pocketed venture capitalists.
BzzAgent, a Boston word-of-mouth specialist, is expected to announce today that it has raised about $14 million from venture-capital firms General Catalyst Partners and IDG Ventures Boston. The investment reflects intensifying interest among venture-capital firms in word-of-mouth marketing, which spreads word of a product the old-fashioned way—by getting people to talk to others about the product.
The precise method of buzz generation varies. BzzAgent, for instance, has identified and trained about 130,000 consumers to chatter to others about a product or service. It chooses ordinary people who like to be first to try out a new product. Participants don’t get cash for their efforts but are rewarded with points they can redeem for prizes. BzzAgent says it has about 120 clients, including such major marketers as Anheuser-Busch and Volkswagen.
Often used in conjunction with television or Web advertising, word-of-mouth campaigns can be done through email or in person. Some firms build community Web sites where consumers can chat about their product experiences. The technique has been used for decades in certain industries. But it has gained steam in recent years as marketers, conscious that consumers now have many media options, look for alternatives to traditional marketing methods such as TV ads.
Venture capitalists are attracted by the potential of word-of-mouth to grow in the evolving ad landscape. "Because of audience fragmentation, behavior changes and the decline of TV, we have been focused on new areas that are interesting to brands and advertisers," says John Simon, the managing general partner at General Catalyst Partners.
The BzzAgent investment isn’t the first venture-capital foray in the field. In July, Informative, a Brisbane, Calif., firm, raised $3 million from a group of venture capitalists including Levensohn Venture Partners. Other firms are scouting for similar deals in the sector, executives say.
Word-of-mouth outfits are "growing rapidly with [profit] margins that are very interesting," says David Carlic, a managing director at Vantage Point Venture Partners, who says his firm is in the hunt for a deal.
Still, venture-capital firms are jumping into the sector as competition is heating up. Dozens of small independent boutique firms have sprung up, while most Madison Avenue giants now offer the technique.
Some marketers, such as Procter & Gamble, have even formed their own word-of-mouth marketing units. Venture firms trolling for investments are also competing with some ad companies looking for acquisitions. Next week, London-based Aegis Group, a big media-buying company, is likely to announce a deal to acquire Ammo Marketing, a San Francisco word-of-mouth firm. Ammo confirmed it was in talks with Aegis.
"You can reach hundreds of thousands of people by tapping just one," says David Verklin, chief executive of Aegis Group’s Carat Americas unit. "This business is going to be the next big battleground."
The technique has at times proved controversial. Consumer groups have complained about marketers’ use of actors pretending to be ordinary consumers talking up a product to unsuspecting consumers. About a year ago, an industry trade group representing marketers and buzz firms put together a code of ethics. It requires people working for word-of-mouth firms to identify who they are working for when they talk up a product. They also have to offer an honest opinion.
Nevertheless, in October, Commercial Alert, a consumer advocacy group, petitioned the Federal Trade Commission to investigate the business.
An FTC spokeswoman confirmed the agency had received a letter from Commercial Alert but she declined to comment on the status of the complaint.