Investing in Design Services

Hi, this is the first question of a few that we’ve been considering here in regards to investing in design firms. I’ll post the others shortly.

Is design practice a financially viable business model - ie. is it lucrative and stable enough a business for an investor to put money in it as a purely money making proposition? Are there specific models or examples that anyone can point to? Any success stories? Thoughts? Opinions?

in the last couple of years I’ve noticed several design consultancies attempting to put out their own products. I think RKS had a stake in the Guitars they designed, and Pentagram was going to produce an innovative grill. Im sure there are others

A successful product line for a consultancy seems like it could be profitable and make money for an investor. 2¢

I have to disagree on this point. If a design consultancy puts out their own products (especially under the company name) then they are inherently limiting their possible client base. A product may be sucessful or profitable, but by entering the product sales arena you will destroy your core business - design.

Afterall, if you sell you own guitars, why would any other guitar manufacturer (a competitor) come to you and expect you to fairly design a competitive/potentially better product for him. By designing guitars, you must give up your ability to produce products in that industry niche.

As a client, I would not be inclined to invest in your design services if there was even a doubt in my mind that you may become a possible competitor in the future. That just makes no sense.

Thats a good point

I was thinking that since design consultancies are focusing their skills at making products that sell better than competitors … if they put out their own products they would both sell high quantities of product (in theory) and this would be almost like advertising. Proff that they could creates designs for clients that would sell…

maybe it would dilute their focus on design services in the end

my take on the question:

For the pure ‘design consultancy’ business model, I see investment potential on a small scale, and only in specific points in the business cycle. A saavy investor could theoretically partner up with a designer, and with a bit of $$, hire some top notch designers, a PR firm etc. etc. and start up a design consultancy. Beyond the initial startup, investment potential seems limited unless the company needs capital to grow. ROI requires growth, or an increase in sales. For a design consultancy (assuming they have the correct number of designers for their work load) this means increased business (and hiring of more designers) to create some ROI. For large scale investing or an IPO, this seems like an impossible model, as it would require the potential growth of the company to be unlimited, and from what I’ve seen in consultancies thus far, this doesn’t happen. (the largest and most spread out firm that comes to mind is IDEO, and they seem to be having trouble living up to their past glory; indicative of the fact that you can’t make cookie cutter satalite studios based on one model).

IMO it is possible to create an investment model that WOULD work on a larger scale, but would stray from the pure consultancy model.
I believe the investments would in someway be linked to royalties, or licensed products. In other words, the investors money would basically ‘float’ the design consultancy, and allow it to focus on it’s own products or innovations. Once the products are developed, the investors, and design firm would decide how to turn the products into cash (royalties, licensing, enterprise, etc.)

There are two reasons why the latter model works;

a. development, protection and marketing (or pitching) of a product is quite costly. (this creates a need for investing)

b. The potential cash flow or ROI from the marketing of the products is unlimited. (creating the drool in investors)

to address the previous points by constantinople, the design firm might indeed limit its client base to clients that aren’t direct competitors. However, there are so many product categories out there that at any given time, the firm should still be able to land plenty of contracts. If the firm became completely investor funded, this wouldn’t matter anyways.This doesn’t dilute the core of the design firm. It still does what it does best : design. What it does change is where the design projects come from. (now, internally, vs externally)

are you talking about united states or in general?

In a way, accepting royalties for a design is a way of pure investment.

Consider such a case: doing some designs for an old friend-turned-client, with compensation to be purely on spec as a royalty percentage. If you believe your friend is a great manager, and has a good start-up business model, it could be worth it to slug out some free design work for a stake of a growing business.

I’m sure design principals sometimes agree to royalty-only deals when great opportunities come across their desk.

Not anonymous makes a compeling argument. the typical model of design consulting is not an investment model…yet. Even the slave ship mental ity winds up with profit for only a few. To date one rollup (gathering small firms into a large portfolio) of design firms has been accomplished (Lighthouse) but it is hard to say if it was a succes for more than a few who walked away enjoying the one time liquidity event.