New Engen Buys Donut Digital, Continues Agency M&A Rollup
RockWater Roundup
RockWater analysis to make you a better investor and operator. Today we discuss New Engen’s acquisition of Donut Digital, including the deal value prop, New Engen’s two other recent agency acquisitions, and shared history dynamics that drove the sale.
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New Engen bought Donut Digital, a creative-led performance marketing agency.
This is New Engen’s 3rd acquisition since 2022. Backed by Insignia Capital, New Engen is executing an agency M&A rollup strategy.
No purchase price or deal details were disclosed, so instead of a deep dive quant analysis, we discuss other deal dynamics that played a role in bringing these two companies together.
Let’s break it down…
💵SELLER: Donut Digital
- Creative-led performance marketing agency
- Based in Manhattan Beach, CA
- Founded 2021 by Alice Woo, Ari Jessel, Brian Kim
- Founders are former marketing leaders from Dollar Shave Club, Honey, PayPal, Venmo
- Produces social-first content for clients across numerous verticals
- Marketing channels incl Google, YouTube, Meta, TikTok, OTT
- Known for “highly differentiated creative-centric approach and efficient in-house production capabilities”
- Clients incl Caraway, Ritual, Prose, Spindrift, Dr. Squatch, Hu Kitchen
🤝BUYER: New Engen
- Large digital marketing agency
- Based in Seattle
- Manages ~$1B in annual ad spend
- Rapidly expanding services suite via digital agency rollup
- Founded 2016 by Justin Hiyashi, former Zulily marketer
- 2022 Google Premier Partner of the Year Award for driving online sales
- Raised $10.6M in pre seed and seed rounds in 2016-2017
- Raised “significant equity investment” from PE fund Insignia Capital in 2021…my guess is in the low 8 figures
🌟M&A HISTORY: New Engen
- Jan 2022 acquired Acorn Influence, an IM agency
- Jun 2023 acquired LT Partners, an affiliate marketing agency
🤝DEAL DETAILS
- Announced 9.26.24
- No deal details were disclosed
💎DEAL VALUE PROP
- Allows New Engen to create full-service content studio
- Content focus on short form video, UGC, premium CTV/OTT
- Meet client needs across all stages of customer journey
- Expand NE capabilities in social-native content
- Expand DD capabilities with media expertise and measurement
🤔WHAT ELSE I FIND INTERESTING & DEAL INSIGHTS
Since no financial or operational data was shared, I won’t do a deep-dive revenue or valuation estimate this week.
Instead, I’ll go deep on my insight below, and do a couple rapid fire points at the end…
The power of shared history and vision, and why price may not always be the key driver in agency M&A…
The LinkedIn post by Donut’s CEO Alice Woo has a quote that stands out…
“Not only did they build their [New Engen] agency from the ground up with the same “people-first” mentality that’s been core to Donut since day one, we also share similar roots as former brand-side marketers who wanted to build the agencies we wish had existed when we were in-house.”
Specifically, Alice is referencing that New Engen’s founder was a former marketing lead at Zulily, and that the Donut Digital cofounders were from Dollar Shave Club, Honey (sold to PayPal), and Venmo.
This shared founding story was likely a powerful dynamic in helping New Engen court the Donut Digital leadership team during the sell-side M&A process run by Donut’s advisors. I assume New Engen had a decently compelling and market-aligned financial offer, but from years of dealmaking experience and learnings, we’ve seen that the highest offer price doesn’t always guarantee winning a deal.
There are other key factors to consider when evaluating a bid for a company. These include speed (how fast can buyer move to get a deal done), certainty (do they have required governance approvals, financing, and regulatory approvals lined up), and combination logic / shared future vision (how they plan to keep building the growing the combined companies, and what values will guide how they build and collaborate under one roof).
This last factor carries particular weight for marketing and agency business, where the seller’s leadership and broader team typically join the buyer post sale to keep driving revenue and enterprise growth across the collective agencies.
This is particularly true for buy-side targets of “challenger agencies” like New Engen – these challenger agencies plan to disrupt the traditional agency ecosystem through a modern suite of digital services all under one roof, want to grow aggressively through M&A rollups, and have a plan to exit themselves to a larger agency holdco like Publicis or WPP, or even IPO, in the next few years.
(Of note, the exact exit period is driven by a few key factors, like the planned hold period by the PE backer, growth and performance of the underlying agency, macro industry growth drivers, and capital market conditions.)
The net of all the above, is that if the seller’s team will continue on after the deal and be expected to continue driving strong growth (no “quiet quitting” here), then the shared vision on market opportunity, how to build, and team and cultural values are critical in getting the seller to agree to the buyer’s proposal.
Of note, with Insignia’s “significant equity investment” in 2021, New Engen likely has the capital access be aggressive in dealmaking. But for Insignia, which targets growth-oriented lower middle market companies with $5-30M EBITDA, entry prices matter in driving good ROI.
It’s not like VC which can invest in high prices, and hope a category winner or major technology or consumer behavior shift drives a 10x or greater return (though looking at investor ROI in VC charts lately doesn’t paint a great picture except for very few vintages, and specific funds from those vintages).
So New Engen can be aggressive in other ways, like moving quickly, and with certainty, on the terms it proposes. It also allows New Engen to focus on collaborating with target leadership to figure out the best combination logic, and then sell-in an exciting growth plan (plus management incentive plan to align financial wins) to their M&A targets.
This is critical in a market where there are MANY active buyers of agencies right now (I write about many of them here), and who also have access to capital. The digital agency M&A competition is strong! Which makes the pitch by other agency buyers who only have capital “soft circled”, or who want to transact primarily in other consideration like equity or a seller’s note, much more challenging.
But again, we’re still seeing some of those deals get done where there’s critical alignment on other factors beyond price, and also where the seller is in some sort of distress (financial, founder burnout, etc).
Therefore, with New Engen having cash in hand, experience integrating past acquisitions (I bet the Donut team did reference checks with the recently acquired LT and Acorn teams), more back end support systems, and a mandate to get to a bigger outcome in the near to medium future, make challenger agencies like a New Engen a compelling proposition for small and medium-sized targets.
Of course, the devil’s in the details.
This challenger agency value prop looks good on paper, but this is where seller’s have to do proper diligence on their buyer prospects. Seller leadership needs to spend time with buyer leadership and supporting teams, investors, past acquisitions – including some blind references – to know the reality of what they’re signing up for.
Of course a seller can never know for sure, but proper diligence done on the buyer by seller will reduce combination risk, align expectations, and setup a better outcome for both parties.
Proprietary tech?…
In some of the press releases and coverage of the deal, I saw a note about Donut having some proprietary tech. No idea what it is or how it powers their business. Pls DM me if you have any insight here.
Always curious to what’s real here VS what looks good in a press release.
Quick intel on New Engen’s two previous agency acquisitions…
Acorn Influence
- Announced Jan 2022
- Influencer marketing agency
- Does influencer curation, to content development, media deployment and measurement
- CEO joined New Engen board post deal
- Attracted to New Engen due to client and employee satisfaction
- Acorn investor NewRoad Capital Partners continued on as investor in combined business
LT Partners
- Announced Jun 2023
- Affiliate marketing agency
- Based in Seattle (same as New Engen)
- Deal expanded performance offering to larger publisher network, and to owned and earned media
- Were growing 100% YoY at time of deal
Ok, that’s all for this week. See you next week with another deal or industry breakdown.
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I’m the founder of RockWater Industries. We do financial and strategy advisory for media, agencies, and creator economy. From M&A and fundraising to consumer research and go-to-market planning.
DM me on LinkedIn or email me chris @ wearerockwater dot com
