case study

9B20A088

VIRAL NATION: THE COVID-19 PANDEMIC AND THE ENTREPRENEURIAL VENTURE SALE DECISION Vania Sakelaris wrote this case under the supervision of Professor Simon C. Parker solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality. This publication may not be transmitted, photocopied, digitized, or otherwise reproduced in any form or by any means without the permission of the copyright holder. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Ivey Business School, Western University, London, Ontario, Canada, N6G 0N1; (t) 519.661.3208; (e) [email protected]; www.iveycases.com. Our goal is to publish materials of the highest quality; submit any errata to [email protected]. i1v2e5y5pubs Copyright © 2020, Ivey Business School Foundation Version: 2020-11-26

Joe Gagliese, a 28-year-old entrepreneur from Caledon, Ontario, had built the US$100 million1 company Viral Nation from scratch in 2014 with his business partner, Mathew Micheli. Now, in March 2020, he faced the decision of a lifetime: to sell or not to sell? The company, a great Canadian success story, had rapidly grown to become the largest social media influencer agency in North America and one of the largest globally. As the world was being affected by the global COVID-19 pandemic, Viral Nation was in the midst of delicate acquisition negotiations with three potential buyers. LEADER PROFILE As the son of an entrepreneur, Gagliese had entrepreneurship in his blood. As a teenager, he had started numerous innovative entrepreneurial ventures: selling paintballs, DVDs (digital versatile discs), and LED (light-emitting diode) dog collars, and launching an e-commerce cosmetics company. By the time he started university, Gagliese was making CA$20,000–$30,000 per month from his entrepreneurial endeavours. Unlike other entrepreneurs, who followed their passions, Gagliese cared more about creating scalable businesses from nothing; he remarked, “If I had to sell rubber gloves and could become the biggest rubber glove wholesaler in the world, I would do that. I don’t care what the opportunity is. It just has to be big, the scale needs to be there, and I need to find it.” In 2014, while pursuing entrepreneurship studies at Ryerson University in Toronto, Gagliese and his best friend, Micheli, observed that big brands such as Nike were increasingly sponsoring athletes to promote their goods, even though many of these celebrities had fewer followers than the leading non-celebrity social media stars. They wondered whether working with these social media stars could be more valuable to prominent brands than traditional forms of marketing. Building on their deep curiosity about social media, Gagliese and Micheli started up a new talent agency, Viral Nation. Their objective was to represent social media influencers and to broker deals with companies that would help them target their audiences through digital platforms. The pair elected to bootstrap their venture rather than seeking external financing. Within their first year, the founders signed agreements with 1 All currency amounts are in US dollars unless specified otherwise.

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Page 2 9B20A088 65 influencers; they doubled that number within two years and soon became experts on influencer marketing. Their innovative marketing concept quickly attracted the attention of millennials, who were the frequent users of new and emerging social media platforms including Instagram and Facebook. 2 The young entrepreneurs found themselves rapidly unleashing the power of influencer marketing in innovative ways. THE EMERGENCE OF SOCIAL MEDIA INFLUENCERS In contrast to the one-way communication of traditional advertising, where brands pushed out desired messages to consumers to stimulate interest and influence buying behaviour, online marketing enabled two- way communication between brands and consumers. The emergence and growth of online marketing allowed companies to push out brand messages that online consumers could then respond to with “likes,” comments, and network sharing. As more marketing moved online, brands began to use celebrities as brand ambassadors to promote their value offerings and increase their revenues. The pool of social media influencers rapidly expanded from an original base of celebrities to include non-celebrities who had numerous online followers. Influencer types proliferated and filled a variety of niches that attracted a wide range of target audiences. Influencers with 10,000–50,000 followers could earn up to a few thousand dollars per post, while those with 1 million followers or more could receive up to $10,000 per post.3 According to Business Insider, brands were expected to spend over $15 billion on influencer marketing by 2022, up from $8 billion in 2019.4 Several new marketing agencies emerged in response to the emergence of social media influencer marketing. However, unlike Viral Nation, many of these did not operate in compliance with US Federal Trade Commission (FTC) requirements. FTC guidelines helped to ensure that consumers were protected from fraud or unfair business practices, including those related to marketing and advertising on the Internet. 5 Key to the success of influencer marketing was consumer trust in the authenticity of influencers’ claims about the products or services they promoted online on behalf of brands. Viral Nation acknowledged that authenticity was essential. It specialized in product placement, and carefully selected and monitored its influencers by tracking influencer reviews and audience demographics in order to align the influencers with brands and their values. Gagliese and Micheli knew that influencer marketing was a fluid and changing activity that required agility and responsiveness to remain effective. The company was proud of its deep connection to the dynamic market and landscape and its ability to continually evolve its strategies to maximize value and return on investment (ROI) for its partners. COMPANY BACKGROUND From its inception, Viral Nation had grown at a rate of 100–300 per cent per year, and it had quickly established itself as the largest social media influencer talent agency in North America. This status in turn

2 Joe Gagliese, “The New Playbook for Gen Z Marketing,” Forbes, October 22, 2019, accessed August 24, 2020, www.forbes.com/sites/theyec/2019/10/22/the-new-playbook-for-gen-z-marketing/. 3 Alyssa Lopez, “Devil’s Advocate: Instagram Should Prioritize Mental Health over Popularity,” Daily Titan, December 9, 2019, accessed July 15, 2020, https://dailytitan.com/2019/12/instagram-mental-health/. 4 Audrey Schomer, “Influencer Marketing: State of the Social Media Influencer Market in 2020,” Business Insider, December 17, 2019, accessed July 15, 2020, www.businessinsider.com/influencer-marketing-report. 5 United States Federal Trade Commission, “Advertising and Marketing on the Internet: Rules of the Road,” December 2000, accessed July 15, 2020, www.ftc.gov/tips-advice/business-center/guidance/advertising-marketing-internet-rules-road.

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Page 3 9B20A088 helped Viral Nation attract larger brands as clients and further fuelled its skyrocketing growth. The agency was soon running multiple large-scale campaigns. By March 2020, Viral Nation had expanded its team to nearly 100 employees to cope with surging market demand and had evolved from a talent agency to a full- service agency that supported companies in over 28 countries around the world. Viral Nation’s business model involved providing tailored performance-marketing solutions to optimize clients’ mobile and web campaigns (see Exhibit 1). The company specialized in integrating multiple marketing channels and functions into one cohesive strategy for each client, and this approach produced actionable results. Viral Nation’s offerings included bespoke influencer marketing campaigns, social experiential events, and creative content campaign support. It excelled in business-to-consumer influencer marketing while also leveraging its insights into business-to-business offerings. Viral Nation charged clients based on the specific services it provided, reflecting the human capital or labour margin required for each service. Viral Nation’s influencers’ repeated exposure to social media audiences and the consistency of the company’s messaging were critical success factors for the company’s marketing campaigns. In 2018, Viral Nation identified an opportunity to develop a proprietary technology platform, Influsoft, to support its social analytical capability. This platform enabled Viral Nation to collect and monitor information on demographic profiles, social media behaviour, and attribution (e.g., the number of clicks) to help support all phases of its marketing campaigns. The platform was designed to align with the ever-changing constellation of social media platforms and to reflect the diversity of the company’s clients. Influsoft had licensed application programming interface integrations with major platforms, including Facebook, Instagram, YouTube, LinkedIn, and Tik Tok,6 which gave clients and brands information that helped them track and assess the effectiveness of their campaigns and goals7 (see Exhibit 2). To Gagliese and Micheli’s surprise, the value of this analytic capability quickly overtook the value of the service aspect of their business. By 2020, Viral Nation was known for its captivating social media content and for the high ROI of its campaigns. The company worked closely with its team of influencers to develop appropriate, effective, and stimulating content. Tapping into this subject matter expertise helped keep the company’s content current and relevant and helped it maintain high sales conversion rates—i.e., rates at which influencers’ followers visited clients’ marketing and e-commerce sites. In early 2020, Viral Nation was working with over 14,000 influencers and serving 50–100 brands per week, providing a number of services: (1) turnkey marketing campaign services, (2) expansions of existing campaigns, (3) help with failing marketing efforts, and (4) support to existing media campaigns. The company’s influencers included contestants on the reality TV series The Bachelor and The Bachelorette, Raptors superfan Nav Bhatia, tennis star Bianca Andreescu, and professional basketball stars Isaiah Thomas and Giannis Antetokounmpo. 8 Viral Nation had switched from serving mainly small businesses to serving large businesses, since the average cost of its campaigns had grown to $50,000–$100,000; the average cost of its deals ranged from $500,000–$1 million. The company’s client roster spanned several industries and included organizations such as Microsoft Corporation, Scotiabank, Crayola LLC, and Victoria’s Secret. ACQUISITION OFFERS As a rapidly growing and reputable industry leader, Viral Nation quickly attracted the attention of major competitors. By the start of 2020, Gagliese and Micheli found themselves in receipt of three unsolicited 6 Viral Nation, “Tracking and Measurement with Influsoft,” July 15, 2020, accessed July 15, 2020, www.viralnation.com/services/tracking-measurement/. 7 Influsoft, “Plan: Say Goodbye to Spreadsheets,” accessed July 15, 2020, www.influsoft.com/platform. 8 Shorty Awards, “PUBG Mobile Team Up Superstar Showdown,” accessed July 15, 2020, https://shortyawards.com/12th/pubg-mobile-superstar-showdown.

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Page 4 9B20A088 acquisition proposals, all in the CA$80 million–$120 million range, which appeared independently and almost simultaneously. 9 Proposal 1: Special Purpose Acquisition Company Bidder: a billion-dollar Asian marketing conglomerate with 26 agencies of its own. Viral Nation could help fill a gap in this bidder’s array of service offerings. The conglomerate proposed forming a special purpose acquisition company to raise investment capital for the acquisition through an initial public offering. Gagliese and Micheli had a good personal relationship with this bidder, who was open to reviewing various options regarding control rights. The buyer was agreeable to having Gagliese and Micheli remain in place to manage the company from within. Gagliese and Micheli acknowledged that this offer included access to funds from the parent company, which could help them realize their ambition to make Viral Nation part of the number one media influencer companies in the world. However, they wondered whether they would be happy reporting and being accountable to a board and having to wait for approvals rather than making speedy decisions, as they were accustomed to doing. Proposal 2: Public Relations Firm Bidder: a Los Angeles–based public relations firm, backed by wealthy investors, that created industry- specific influencer marketing companies and then sold them to brands. This firm was interested in discussing a strategic partnership that would help support its businesses. This bidder’s primary interest in Viral Nation and its key focus of the bid were the proprietary data analytics and technology tools that the company had developed through its Influsoft offering, which had received rave reviews. This bid was the highest of the three bids received. The potential buyer was also open to the option of retaining Gagliese, Micheli, and their team—giving them continuing roles in growing revenue while granting them some operational autonomy. These considerations were important to Gagliese and Micheli, who felt strongly that they would need to be richly rewarded in return for giving up control. Proposal 3: Global Advertising Agency Bidder: a New York City–based advertising agency, one of the largest in the world, with 600 of its own clients. This bidder was interested in a strategic acquisition that would allow it to service its own clients through Viral Nation’s offerings, folding Viral Nation into the larger company under the parent company’s name. Accepting this offer would provide cash in hand and promised rapid growth. However, it would also mean a complete loss of control over the company, and—although the bidder acknowledged that one of Viral Nation’s main assets was its investments in its people—it would potentially disrupt the team that had grown with Gagliese and Micheli. The pair had already turned down a previous offer from this company, which had then returned with an improved bid. Gagliese and Micheli were aware that accepting this offer would be an opportunity to cash out completely and would protect them from exposure to the uncertain future of social media marketing. As he reviewed the three offers with Micheli, Gagliese continued to reflect on the primary question: Was now the right time to sell? Viral Nation was expanding fast and was well positioned in a rapidly growing 9 For reasons of confidentiality, the names of all three bidders have been suppressed.

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Page 5 9B20A088 sector. Given persistent uncertainty about the value of media influencer firms, Gagliese was aware that there was an “option value to waiting”10 if the company’s value had substantial upside potential. However, he did not know what that future value would be, and so he needed to decide whether or not to open negotiations based on limited information. Gagliese and Micheli had forecast that the company would grow in revenue within the next five years, but they knew there was a risk of some radical, unforeseen change in the influencer marketing space, and of an impending recession, which could see client demand dry up. Gagliese knew that if they waited, they would risk missing out on an opportunity to forge a strategic partnership that could quickly move Viral Nation from one of the top five influencer marketing companies in the world to the number one position. He wondered whether Viral Nation could get to the number one spot on its own, and what that might take. From a personal perspective, both partners wanted to retain some control over the company—at least for the next three to five years—to develop the brand through continued, accelerated growth. Gagliese acknowledged that they could achieve this goal by selling the company in return for cash, equity, and an ongoing leadership position in the acquiring company. He did however, acknowledge that simply taking $25 million cash and retiring to spend more time with his family did not interest him. Becoming a billionaire had been his vision from the start of his career as an entrepreneur. Gagliese was motivated by cash, control, and growth. Was Viral Nation the ticket to his billionaire dream? As Gagliese and Micheli discussed and considered their options, one of the interested buyers initiated the primary due diligence process. The letter of intent stipulated an intention to acquire both equity interest and assets of Viral Nation, valuing the company in the high eight figures. This valuation was based on a multiple of Viral Nation’s adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) for 2020. The due diligence checklist included company financials for three years, internal compensation structures, profit and loss, expenses, and revenue. This information would help the prospective buyers to do some preliminary financial modelling in advance of a full due diligence process in the next four to eight weeks. Only one of the potential buyers knew that there were competing offers on the table; the others did not. CONCLUSION As Gagliese and Micheli considered their choices in March 2020, the COVID-19 global pandemic struck, placing the economy into lockdown and endangering the possibility of acquisition. The world as they knew it was quickly changing, and the opportunities in front of them were also subject to change, as the macroeconomic environment was shifting at an almost unprecedented pace. The partners realized that time was of the essence and that they faced possibly the biggest decision of their lives: to sell or not to sell. Should they agree to being acquired or start looking to organically acquire other companies themselves?

10 In finance, holders of options had the freedom to exercise options at a time of their choosing. For example, if the value of a stock was low but might well rise later, investors could choose to wait before exercising a call option, illustrating the option value of waiting.

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Page 6 9B20A088

EXHIBIT 1: VIRAL NATION BUSINESS MODEL OVERVIEW

Note: VN = Viral Nation; ROI = return on investment Source: Created by the case authors.

EXHIBIT 2: INFLUSOFT VALUE OFFERINGS

Viral Nation developed this proprietary software to help provide its clients with enhanced information and transparency regarding its social media marketing campaigns. Features included the following: Brand Analysis and Social Listening ● Brand sentiment analysis and competitor comparison ● Cross-platform campaign comparisons ● UGC social listening and analysis ● In-depth hashtag and RSS feed analysis End-to-End Influencer Campaign Management ● Cross-platform API-grade campaign analytics tracking ● Visual goal and performance tracking ● Live, 24/7 intuitive dashboard ● Customizable API integrations AI-Powered Authenticity Analyzer and Fraud Detection ● Proprietary influencer authenticity score ● Brand safety assurance ● Fraud detection reports

Notes: UGC = user-generated content; RSS = really simple syndication; API = application programming interface; AI = artificial intelligence Source: Adapted from Viral Nation, “Tracking & Measurement with Influsoft,” accessed October 21, 2020, www.viralnation.com/services/tracking-measurement/.

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