The Evolution of Influencer Marketing & Empathetic Commerce

Ja Rule, 90’s rapper, and current defendant in the #FyreFestival lawsuit. It’s (social media) muuuurda.

Ja Rule, 90’s rapper, and current defendant in the #FyreFestival lawsuit. It’s (social media) muuuurda.

Influence marketing gets its fair share of criticism, especially now that is becoming more common: 86 percent of marketers ran an influencer campaign in 2016. But the roots of influencer marketing are sound: The idea that I'm influential online in some way and have the opportunity to bring a certain product into my life for entertainment, enjoyment, or utility makes sense. If I’m known for a particular skillset or industry niche, why wouldn’t a company want me to endorse their relevant product to my audience? (And why wouldn’t I?) It’s a natural pairing and, when well executed, a win-win for both parties.

How did we get here?

OpenSky and BeachMint were some of the first companies dedicated to influencer marketing, partnering with celebrities to curate and endorse items and drive e-commerce. Influencer marketing also rose up off the backs of multi-channel networks (MCNs) like Big Frame (one of my first VC investments) and Maker Studios, which recognized early on that there was an underrepresented source of talent (i.e., kids) and saw an opportunity to be smart about advertising, product placement and cross-promotion between talent.

In the years since, interest in influencer marketing has skyrocketed thanks to a number of contributing factors, such as the rise of ad-blocking; the pursuit for authentic ads; and the incessant pressure to woo millennials, the least-engaged generation of customers. Nearly half of marketers plan to dedicate more budget toward influencer campaigns in 2017, much of it on Instagram, which is expected to become a $2.4 billion market for influencer marketing by 2019.

But while spending is increasing, the influencer marketing system for user acquisition and product endorsement is changing, getting sandwiched from up top and down below. This, combined with younger generations of consumers who flock to, and trust, a new breed of influencers, is transforming the industry.

Striking the right balance

Youtube beauty guru Michelle Phan

Youtube beauty guru Michelle Phan

While influencer marketing takes many different forms, there always has to be a great product, a great story, and great storytelling for the magic to be unlocked. You can’t just attach an influencer to a brand and hope for sales takeoff. The chart below outlines a few of the many reasons brands and consumers embrace influencers and, simultaneously, shy away from them.

One of the greatest success stories in influencer marketing is Michelle Phan, who turned nearly 9 million subscribers to her YouTube makeup tutorial channel into 1.5 million paid subscribers of ipsy, her company that sends out monthly makeup products and is valued at $500 million. She is also a case study in the fine line influencers must walk with their audience. In 2013, Phan was accused of “selling out” by her fans when she launched her first L’Oreal cosmetics collaboration, which included some highly priced, $50 products — a lot more than her typical fan could afford. The incident showed a disconnect with her audience and (temporarily) disintegrated the empathetic link between star and fan that she had cultivated on YouTube.

The influencer sandwich

musical.ly   ’s most-followed creator, Baby Ariel

musical.ly’s most-followed creator, Baby Ariel

In an interview, Phan acknowledged that competition in the influencer space has increased significantly: “When I started there were probably fewer than five people [doing makeup videos], and now you probably have 50,000 or maybe more globally.”

Across beauty and virtually every other vertical, influencers have sprouted up. Sarah Penna, co-founder of Comcast owned, influencer multi-channel network Big Frame, thinks this makes it “a lot harder to become a star when everybody’s a star now.” She believes as star power has gotten diluted, brands get the most value from working with influencers who have niche expertise and speak to a targeted audience (e.g. moms, car enthusiasts, etc.) as opposed to horizontal, across the board celebrity.

As the industry has gained steam, influencers have been squeezed up top and down below. From the top, the biggest talent agencies (WME, CAA, UTA) have invested in digital talent divisions to sign up-and-comers and take advantage of the legitimate ad budgets at work as advertisers continue transitioning TV dollars to digital. Penna told me that traditional Hollywood agencies falling asleep at the switch allowed her to start Big Frame in 2011, which was later dubbed “CAA for the digital set.” But according to her, “they’ve woken up now.”

From the bottom, the proliferation of platforms like Instagram, Snapchat and musical.ly is creating new pools of talent. For instance, musical.ly’s most-followed creator is a 15-year-old girl who goes by Baby Ariel. She recently locked down a multimillion dollar deal with CAA — just for lip-syncing on the karaoke platform! Topher Brophy, an Instagram influencer who wears matching outfits with his dog, starred in Sprint’s new commercial for the Samsung Galaxy S8, which touted his more than 150,000 followers on the social network (fairly small by comparison to other bankable social media influeners).

All this is threatening the middle of the sandwich — the MCNs. Chris Jacquemin, partner, head of digital media at WME, told me that while MCNs initially filled a gap for best practices in influencer marketing, they eventually became commoditized and diluted their overall impact. He notes Maker Studios - a leading digital influencer management company that sold to Disney for $500m+ - had over 100,000 influencers in its network at one time — a scale at which it is impossible to optimize across every channel.

What makes an influencer today?

The big change is that gatekeepers are now equating audience with talent, which is a dramatic shift from how influencers or stars were previously made. For traditional celebrities, the ways to validate star power were well established (e.g., Q Score, Nielsen ratings, award wins). Today, how do we determine who qualifies as an influencer and how the market should be segmented? The concept of an influencer is being redefined, largely by millennials and Gen Z, who consider YouTube the coolest brand. Furthermore, a quick Google search reveals the manifold methods to buy followers across all social channels. Therefore, digging deeper into established levels of engagement (comments, likes, retweets, etc.) becomes increasingly important - i.e. seeing beyond the top line follower count.

As a mobile-first audience of cord-cutters (or cord-nevers) who are growing up watching TV on their smartphones, most kids are likely not familiar with traditional network TV stars. In fact, 70 percent of teenage YouTube subscribers say they relate to YouTubers more than traditional celebrities. WME’s Jacquemin says these “digital native influencers” provide accessibility into their authentic lives, whereas traditional celebrities have sought to maintain a walled garden mystique. He cited social media star Cameron Dallas as an example, noting thousands of fans will pay big ticket prices to attend his MAGCON meet-up tours because they feel like they know him and have a direct connection with him.

While most adults likely have no idea who Dallas is, a Gen Z likely has no idea what a TV network is. They don’t necessarily know what CBS, ABC or NBC is — they just know shows and stars because they watch their favorite programs and personalities across a multitude of destinations.

There are also more screens for these younger generations to watch and stream influencer content. “While everyone wants to proclaim the TV dead, the reality is you’re not going to get rid of the living room TV. The plumbing might change as an incumbent like Comcast battles a newcomer like Apple, but you can still easily watch YouTubers on a big screen”, according to Jill Braff, head of the Ellen Show’s digital ventures group.

Wary of the road ahead

The recent farce that was #FyreFestival is a clear example of how influencer marketing can go wrong and even make endorsing Instagrammers legally liable for their peddled wares. A class action lawsuit against festival cofounder - 90’s rapper Ja Rule - and some of the festival’s endorsing influencers is currently underway given the disaster zone that festival-goers arrived to. Instead of the models, bottles, and yachts they were promised, they got this.

Moreover, the Federal Trade Commission has made it known that influencers must clearly publicize a paid endorsement on social media. Instagram, once just a creative haven, may run the risk of platform-sell-out, if too many of its exalted users’ photos become paid advertisements. For example, I don’t care how creative the particular social media post may be - Swiffer ads never belong Instagram!

It’s clear the influencer space is in a period of upheaval, but we can expect its ‘influence’ to only increase as fan preferences shift, the ecosystem expands and more dollars pour in. For now, the cash register keeps ringing.

Many thanks to Jill Braff @ the Ellen Show, Sarah Penna, and Chris Jacquemin @ WME for their input on this article!

Sunny Dhillon is a partner at Signia Ventures, an early stage VC fund in San Francisco. He was previously a corporate strategist at Warner Bros in LA, the first business development employee at a VC-backed spin-off of New Line Cinema, and a former entrepreneur, having launched one of the App Store's first social-local-mobile apps (named BarStool) in 2011. Follow him on Linkedin and on Twitter (@SigniaVC).

Sandeep Dhillon