Influencer marketing, before known as word-of-mouth marketing, is now a primary marketing strategy for many businesses. It targets audiences using individuals who have established a relationship of trust with those audiences and who initiate high-impact conversations. Even the multimillionaire Shark Tank judges value their social-media influence more than their capital, and agree to promote partners as often as they offer to handle other aspects of their businesses.
Influencer marketing platforms have attracted interest from private equity investors. Summit Partners, Maverix Private Equity and Puma Private Equity have invested in influencer marketing platforms such as Mavrc, Viral Nation and Influencer. Lightspeed Ventures and the now-defunct Sequoia Capital put capital into streamed shopping parties and virtual influencer spaces.
Some influencer marketing platforms are B2B, enabling collaboration between companies and celebrity management agencies; others are B2C, connecting customers to influencers for events, birthday and anniversary wishes and other activities.
Although the influencer marketing industry is attractive, there are challenges investors should know. Influencer marketing platforms must comply with advertising law, consumer protection regulations, and data privacy law. This applies particularly to personal information collected from influencers and their audiences.
In India, celebrities and influencers engaged in marketing must carry out due diligence and ensure compliance with advertising law, such as the Consumer Protection Act, 1986 and its code, rules and regulations. In 2022, the Central Consumer Protection Authority introduced its Guidelines for Advertisements and Endorsements for Misleading Advertisements, which set out standards for acceptable advertisements and the responsibilities of advertisers. Advertisers include celebrities, other influencers, manufacturers and sellers. The guidelines were supplemented by the Department of Consumer Affairs’ January 2023 endorsement know-hows. The Advertising Standards Council of India also has a code of self-regulation for advertising content.
Investors should assess their target’s compliance with such laws to ensure its marketing practices are transparent and accurate. They should monitor potential issues related to false or misleading advertising claims.
The platform’s core asset is its contracts with influencers, defining their relationships and the nature of the engagements. Contracts must clearly set out the influencer’s obligations, the specific content to be created, the basis of remuneration, rights to intellectual property, liability and indemnity obligations and the consequences of failure to comply with applicable law. Exclusivity provisions should also be well negotiated.
Changes in agency ownership or management of the influencers may lead to modifications in existing influencer contracts. These should be handled carefully to maintain trust and avoid legal disputes. Balancing the interests of the influencers and the platform, particularly when it comes to restrictions on future business, requires careful negotiation to ensure compliance with applicable law and to safeguard the platform’s ability to operate effectively.
Contracts between influencer marketing platforms and clients looking for marketing assistance should include tightly drawn clauses specifying their purpose, consideration, liability and exclusivity. Requirements of applicable law should be kept in mind. Platforms may also need to conduct limited due diligence on the client to avoid breaches of advertising law and of agreements with other clients.
The platform needs to monitor its intellectual property closely to ensure that it has the right to use and sub-license influencer content. Inadequate documentation or unaddressed intellectual property issues could expose the platform and its investors to infringement claims, lawsuits and financial losses.
Although there is great potential for growth, there are serious challenges. Investors must stay abreast of the industry’s ever-evolving regulatory landscape and compliance requirements. They should have a thorough understanding of the industry, engage in strategic partnerships and establish a proactive risk management system. In this way, they will make the most of their investments while mitigating risk.
Vandana Pai is a partner and head of the investment funds practice, and Hardik Dave is an associate at Bharucha & Partners.
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