We’re a month into 2023 and it looks like the turbulence of 2022 is still very much with us, so what does that mean for investment-seeking companies? In our latest monthly update, our Head of Investment Matt Browning shares his take on the current happenings affecting investment to bring you insights on:
1. The VC market: more transactions, lower valuations
In the venture space and the scaling space, we’re seeing more transactions; however we are also noticing lower valuations. The usual 15 times revenues method is no longer the model that VCs are going for as companies struggle to raise more than five to ten times their revenue returns.
It doesn’t mean that there’s necessarily less capital available, but it does mean that the revenue multipliers have reduced. Read on to question two (biggest challenges for creative companies) for my suggestions on combatting this.
2. The rise of AI
The rise of AI – most talked about in relation to ChatGPT – is presenting a bit of concern for some people in the Creative Industries. The Creative Industries are very much a content generating industry and something that rivals the authenticity of people-generated content is understandably making some professionals feel apprehensive. AI company, OpenAI has created two gamechangers in ChatGPT and DALL-E. The latter of the two, which is less discussed on Linkedin, is an image creation programme that essentially allows users to type in keywords in order to create images. This is quite disruptive for concept artists, especially those in the games, virtual production, film and television spaces. On the flipside of that competitive concern is the possibility that certain proof of concepts may start getting pushed through much more quickly and actually speeding up processes for artists.
3. Greenwashing of impact funds
Lastly I want to touch on ESG. There’s been a big rise in the number of impact funds over the last couple of years and with this comes an unfortunate uplift in greenwashing. In effect, what this means is that some events being labelled as impact are not truly focussed on ESG considerations. I think we need to see an adjustment in the way that impact is being measured and for the Creative Industries, it’s really about ensuring that companies think about what it is that they are impacting, rather than tailoring their business models retroactively.
The ongoing challenge for creative companies is access to finance, as investors continue to take a more conservative approach. As I said earlier, it’s not that there’s not money out there, but that there is a significant adjustment to valuations.
Investors are keen to look at businesses that can show exit potential and they want to see metrics that can indicate an expert position will be held in the next five or ten years. This is a particularly tough challenge for creative businesses who tend to rely on peaks and troughs. To become more attractive to investors, businesses should be thinking about their revenue generation and selecting models that make sense for them and for potential sources of finance. They should also be taking a step back to consider their capital requirements realistically. What kind of capital should they be raising right now? What capital is going to be the most appropriate for their business model? If VC options do dry up then there are alternatives out there, such as debt, grants and even partnerships.
In terms of grants there is currently a bit of a push in regional funding coming out of combined authorities and regional bodies. One such example is Warwickshire County Council which has recently launched the Warwickshire Digital Creative Recovery Co-Investment Fund. This type of financing looks for businesses that can show financial sustainability. So even with grants it’s going to be important for companies to think about their long-term plans and how they can show growth plans that go beyond a project-based model.
We’ve seen some interesting developments internationally with Copenhagen digital marketing agency Vertic having just been acquired by Globant. There’s also been the acquisition of Buildmedia – a longstanding leader of real-time solutions using Epic Games Unreal Engine tech – by Boundary. The latter is a great example of a company that’s scaled, survived the pandemic and shown recession-proof models, making it a very attractive proposition.
The real big mover to talk about is the development in Microsoft’s acquisition of Activision Blizzard, first announced around a year ago. There’s been some concern from the industry in both the American markets and the European ones about Microsoft’s intentions with this acquisition. It’s been insinuated by some that Microsoft, which owns Xbox, may intend to apply exclusivity to some of their platforms which could mean denying access of rivals to hugely popular content like Call of Duty, owned by Activision Blizzard. This has led the Federal Trade Commission to file a legal complaint about the proposed deal. While the investigation is underway, the games industry is essentially in limbo, so some games aren’t being released because developers are waiting to see what the outcome of the potential deal is.
This is huge for the games sector and while the stalling is ongoing, there is an opportunity for the indie players to keep releasing content and to take that competitive advantage while they can.
AI and its most prominent product, ChatGPT is disrupting everything. ChatGPT has shown to the average consumer what AI can do and it could be set to revolutionise the digital ecosphere, particularly Search. Microsoft is in the mix once again with its plans to invest billions into ChatGPT’s maker, OpenAI which will be a huge red flag for leading search engine provider, Google. Despite the fact that Google is a content creator and platform host, it still gets 60% of its revenues through the search bar. Now that Bing owner, Microsoft is to be heavily involved in OpenAI, we could be about to see a major shift in the Search space. For the smaller players in the Creative Industries, this really throws up the question of how content creators can prove their value and their authenticity if they are now to be in competition with the impressive capabilities of OpenAI and whoever is next in this space.
In terms of investment, VCs are seeing big opportunity. OpenAI themselves have launched a startup fund, while a number of VC firms are already starting to focus on making AI part of their mandate. The noise around ChatGPT has worked to accelerate these developments so we’re likely to see a lot more investment going into that sector.
Innovate UK EDGE – Getting Access to Finance and Funding Workshop, 9 February, Birmingham
SME Expo 25-26 April, London
If you’d like to learn more about the investment offerings available through Creative UK, visit our Investment web pages here.