Creative UK Chief Investment Officer, Mehjabeen Patrick shares her insights.
2022 and indeed the past three years have not been normal for anyone and – as far as business communities go – those within Creative Industries and Investment have been some of the most affected.
The lasting impact of Covid-19, rising inflation and other macroeconomic factors continue to offer up challenges that must be met and for some of those who flourished during the pandemic, things are starting to change.
Venture capital activity is slowing down, risk appetites are becoming more restrictive and changes like rising gas bills and slowed-down tax credit pay-outs are negatively impacting SMEs. The good news is that nothing has come to a stop. Despite the challenging circumstances, overall equity deals were up 37% year-on-year for the first half of 2022 (Beauhurst, 2022) with the UK’s fintech, cleantech and AI sectors dominating. However, the mood cannot be ignored. Valuations are decreasing and deal volumes have dropped to their lowest level since Q2 2018. (Private Equity Wire, 2022). In this environment, scaling businesses face an uphill climb when it comes to gaining the right kind of investment.
The opportunity is still out there, but it’s harder to come by. According to Yahoo Finance, recent data indicates that there is plenty of capital still to be deployed. However, longer terms to completion and the downward trend in valuations mean many businesses are increasingly concerned about maintaining a healthy cashflow.
Like everybody else, the creative sectors are facing up to these challenges. How the afore-mentioned factors apply to businesses though, will vary depending on a number of considerations, from business model through to cash flow. And, of course, there can be no denying that some sectors are feeling the pinch more than others.
When we look at the Creative Industries as a whole, we see a story of businesses that have not only survived, but thrived through the pandemic. Data from the Department for Digital, Culture, Media & Sport (DCMS) indicates a sector that is bouncing back from the strictures of lockdowns. Overall GVA growth for the full range of DCMS sectors was 1.4% from Quarter 3 to Quarter 4 in 2021, compared to 0.9% for the entire UK industry. The video games industry, in particular, has been a success story with its in-home focussed products making gains from the effects of successive lockdowns.
The Creative Industries continue to be at the forefront of innovation. Research from the ScaleUp Institute identified more than 1500 UK-based scaling businesses from the Creative Industries of whom six in ten have invested in innovation. This statistic feels especially important when we consider that, as a country, the UK is under-investing in R&D. Figures from the ONS show that total UK investment in Research & Development was 1.7% of GDP in 2019, compared to 2.5% in the OECD average.
Despite the benefits for the UK economy of a sector that invests in innovation, government support for the Creative Industries is slipping. At the end of March 2022, tax relief paid out to Creative Industries companies decreased from £1.32 billion to £1.05 billion – a drop that was felt most sharply by the film industry.
A sting is also being felt by companies outside of London. Continuing a trend that is proving hard to break, a disproportionate amount of investment is directed towards companies in the capital. Beauhurst research shows that 52% of announced deals went to companies based in London in H1 2022, while DCMS data tells us 34% of Creative Industries businesses are located in the capital. Furthermore, 52% of economic output from the Creative Industries has been soured from London. There is no doubt as to the huge wealth of regional talent across the UK, but with risk appetites reduced, it may be harder for these companies to get the funding they need.
Creative UK’s Creative Growth Finance fund has a 75% non-London target for its investments and a number of region-specific offers, but this is not necessarily representative of the wider investing landscape. It is a key issue that we believe needs to be tackled.
As we drill down into some of the sub-sectors contained within the Creative Industries, we see diverging stories. The games industry is a clear outlier that is truly thriving here in the UK and it’s great to see. UKIE research has found that the UK games industry received £7.7bn of investment in the past five years and it is really leading the global pack. Already in 2022 the UK has attracted more than twice as many rounds as Germany – it’s closest competitor in terms of active investment.
The narrative for film & TV production is not quite as glowing, despite showcasing evidence of prolific and high quality output. According to BFI data, combined total UK spend on film and high-end TV in 2021 was at £5.64bn. This is an impressive, indeed a record-breaking figure, but the signals coming from streaming behemoths like Netflix and Amazon Prime are worrying. Streaming subscriptions have been dropping since 2021 in line with the cost-of-living crisis and Netflix’s stock keeps on falling. This is a significant consideration for those in the film & TV sector.
Another sub-sector that is interesting to consider is immersive tech. This is an industry that still has so much to offer and develop and with the right investment and resources it could completely change the face of mainstream media and business. But where is it now?
The PwC report ‘Seeing is believing’ posits that AR (Augmented Reality) and VR (Virtual Reality) could contribute $1.5tr to the global economy by the year 2030 and $69.3bn to the UK alone. However, this huge opportunity is somewhat stalled by the current challenge of raising venture capital (Immerse 2021).
A challenge is one thing, but I’m much more interested in what everyone involved can do to stay resilient and thrive. Fortunately, there are many avenues to investment and venture capital is not the only option.
While businesses face the challenges of increased cost-of-living and more risk-averse VCs, this could be a perfect opportunity to think a little differently and to maximise the efficiency of their operations. A key question that every investment-seeking business should be asking itself is ‘what is the requirement of this capital?’ You might be surprised to learn how many companies aren’t actually entirely sure. Any company seeking funding must be able to answer this question confidently and succinctly.
Next, businesses should be looking honestly and objectively at the way they operate. Stress testing is a great way of figuring out how resilient your business will be if pitted against possible future events and should provide the insights to enable future-proofing.
Once a business is clear on what it needs funding for and confident in the efficiency of its operations, it will have the best chance of obtaining funding. In the current environment, many businesses may find that diversifying forms of capital and moving away from equity could be the most effective way of meeting their goals. While equity is a little harder to come by, debt finance remains a valid option with its own pros (as well as cons, of course). Grants are also a great option, if available and for regional businesses it is well worth exploring region-specific options for finance by contacting local business networks, such as angels and local authorities.
At Creative UK, we offer debt finance to scaling businesses via our Creative Growth Finance fund and regional investment through our North of Tyne Culture and Creative Investment Programme. These are just two alternatives to VC finance and there are certainly many more to be found.
So, do the work – understand and articulate your specific capital needs; make your business as efficient as it can be and, finally, explore different options for finance. The money is out there, but companies may need to work harder to get it.