30 May 2023
Tech valuations are dropping and skills shortages are a real challenge, but there are positives for the creative sectors too. With exciting investments into the UK film industry and regional schemes to support skills growth, we’ll delve into what’s good as well as bad. Read on to get the take from our Investment team here at Creative UK. This month I cover:
1. Tech sector valuations are lower than previously thought
Tech sector valuations have been reported by the Financial Times to be lower than previously indicated, with major implications for the valuations of start-ups. Back in 2021-2022, the industry saw extremely elevated valuations, sometimes as high as 10 times ARR (Annual Recurring Revenue), but the last six months or so has seen a significant adjustment with valuations returning back down to pre-Covid levels.
Muddying the water was the exclusion of internal rounds, a lot of capital being bridged and unclear reports, but with time and space behind us, clarity is now coming through.
Now that it has been possible to conduct more detailed analysis of the situation, even further decreases in valuations have been seen. The outcome of this is that it’s more difficult for companies to raise capital. It reduces the confidence for limited partners and makes it harder to attract new investment. It also means that a lot of businesses are going to be seeking alternative ways to boost valuations. If they can’t bring in investments, they have to seek sustainability through pushing up their profits and reducing their overhead costs, the likely result of which is for costs to be pushed onto consumers and suppliers.
This has a big impact on the creative sector because Creative Industries are very reliant on creative tech products and platforms. And it’s not just the creative sectors that will be affected, this is going to be systemic to the whole investment space.
2. The UK at odds with the EU over Microsoft’s Activision Blizzard deal
We’ve talked about Microsoft’s ongoing acquisition of Activision Blizzard before and here we are again – it’s a saga that just keeps on going. With Microsoft acquiring Call of Duty maker, Activision Blizzard and a whole number of developer publishers and IPs there’s always been this worry about monopolization. There was a raft of measures back at the start of this year with Microsoft signing licensing agreements to other platforms, which mitigated some of the concerns of this monopolization. But last month UK anti-trust regulator, the CMA (Competition Markets Authority) blocked the deal, causing a ripple effect not just in into games, but across other sectors as well.
We saw a lot of backlash from the UK in the game space at this point (plus an appeal from Microsoft) and a lot of concern about this affecting not just to the games sector but also Microsoft and its other applications in the UK.
So this was a very bold move from the UK who are now at odds with countries including Saudi Arabia, Brazil, Serbia, Chile, Japan, South Africa and Ukraine, as well as the EU whose European Commission has now approved the deal.
This adds yet another dimension to this strange saga as we await the result of the US FTC’s (Federal Trade Commission) attempt to block the Microsoft deal and that’s before even mentioning that China has now approved the deal. I had previously thought that the conclusion of this deal would help to rebuild and re-energise the UK games sector, but it seems like we’re still midway on the rollercoaster.
3. Inflation is still here
My third pick for this month is inflation as it’s a continuing concern for everybody and is becoming harder and harder to keep up with. Despite the fact that it is now declining, the drop is just not as steep as people had hoped and, what’s more, food prices continue to rise. With inflation rates that are eclipsing those of other countries, there are worries that the UK is starting to look like the ‘sick man of Europe’ as it was formerly described in the 1970s.
The recently coined term, greedflation underlines much of this. It relates to the fact that companies have increased their profit margins during a cost of living crisis – taking advantage of the economic situation to justify higher costs. But despite this and stark figures showing that 1 in 5 Brits have skipped meals due to cost, ministers and many others are loathe to admit that this is the case.
The impact of this may be felt most keenly by those on lower wages, but creative businesses are certainly not immune from feeling the pinch. Stubborn food and oil prices, supplier costs and general bills affect all businesses, and smaller ones are certainly likely to be more heavily impacted.
A big challenge currently being faced is staff motivation and lack of skills in the creative sectors. The Creative Industries are reliant on its people and there’s a huge amount of demotivation in general right now because much of the workforce hasn’t got the training or the skills that are needed in these sectors.
What’s more is that it’s becoming harder and harder to acquire those skills. So, this is a big challenge that naturally leads to struggles with staff retention, an issue that is being seen more widely post-pandemic. Lots of people have been flipping around, hopping from job to job and the question of how to motivate the new generation has got to be tackled. In terms of specific sector issues, TIGA which represents the games industry, has called for the Shortage Occupation list to be expanded due to a shortage of skilled workers here in the UK. It wants to be able to attract skilled professionals from across the globe to ensure the continued success of the games industry in this country.
The positive side of this is that the government is recognizing the need for education and skills, having recently promised extra support for the Creative Industries. The government is to unveil a plan for these sectors before the summer which we hope will have meaningful and wide-ranging impact. In the private sector companies like Northcoders (a Manchester-based CGF investment client) that runs coding bootcamps are training more graduates than ever before. We are also seeing lots of smaller initiatives like the Bristol Creative Industries Internship Programme being run to help people aged 18-24 from underrepresented backgrounds gain real experience in industry.
So, although it is a huge challenge there are some positive developments and I hope people will be excited to have the opportunity to upskill.
Liverpool-based games studio, Milky Tea has partnered with the Swedish gaming group, Aonic which has recently purchased a majority stake in the studio. Milky Tea, which is best known for HyperBrawl Tournament will further develop its IP and retain the previous majority shareholder, Jonathan Holmes as CEO. This is a pretty cool story for Liverpool and an interesting step for the studio who have made positive statements about their future collaboration with Aonic.
Further north in Sunderland there have been some big moves with significant investments to develop a new film studio called Crown Works. The studio is a huge undertaking and is hoped to create over 8,000 jobs in the next decade as well as providing a boost for film and high end TV production in the north east.
Last but not least, the UK’s Pinewood Group has acquired full ownership of Pinewood Toronto Studios which houses one of the largest purpose-built soundstages in North America. It’s nice to see a UK-North America acquisition in which the buyer is not from the other side of Atlantic and this is certainly a major investment.
Continuing on a theme, I’m going to talk about the film industry for this month’s insights. Of course May is the month of Cannes Film Festival so there are a lot of eyes on the industry and it’s a pretty exciting time for developments in the UK.
Netflix is continuing to show its support for UK’s film talent by investing the sum of £4.8bn into UK-based operations, including production studio, actors and crew.
Then at home, the BFI is funding a project to help train film and TV production crew in Berkshire. The scheme is being run by Resource Productions CIC, Shinfield Studios and the University of Reading and will offer opportunities for people from under-represented backgrounds – this is also an answer to the challenge of skills shortages within the industry, so hopefully we will see this issue reduce over the coming years.
Despite a recent narrative that content is being reduced, it seems that there is certainly plenty of appetite for original content and the investment that’s going into this industry is very supportive. I’ve talked previously about the investment into Gateshead’s TV and film industry from Innovate UK. And more recent news has now come of a £140m Creative Industries complex planned for Cornwall which is very exciting. So, while there are certainly major issues with skills shortages, it’s fantastic to see that investments are moving in the right direction.
If you’d like to learn more about the investment offerings available through Creative UK, visit our Investment web pages here.