British Council Creative Economy

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John Newbigin

New funding and business models

The creative economy is generating many new business and finance models, driven in part by the rapid development of the digital world but also because of its social and cultural significance and its ability to find innovative solutions to long-standing problems.

It’s no surprise that the creative economy is closely related to the start-up economy. Creativity, by definition, disrupts what went before; it’s about new ideas, new technologies, new products, new services, and new ways of doing things. Driven in large part by the digital revolution, many creative industries are not just creative in what they do; they are also creative in how they do it. It’s often said that all that’s needed to start a creative business is a good idea and a smartphone or tablet. For some budding entrepreneurs that may be true but, however easy it is to start a creative business, to grow it and sustain it is as difficult as growing a business in any other sector of the economy, perhaps even more difficult! 

Intellectual property, or ‘IP’, is at the heart of the creative economy

As many entrepreneurs discover, it is much easier to give away a good idea than to make a businesses out of it. But, equally, it is much easier to make a good idea better by sharing it with others than by attempting to develop and refine it in isolation. So, at the forefront of the issues confronting small creative content businesses is how can they build and retain control of the intellectual property they generate so that it is not ‘pirated’ by other people but, at the same time, how can they develop their business in collaboration with others, using opensource resources and creative commons or other managed licenses? In their essays, Avril O’Neil and Declan Cassidy explain how valuable it can be for people to share their ideas. For the big businesses that actually dominate much of the creative sector, the rights holders such as media companies, music publishers and brand-fashion, intellectual property is also at the core of all they do – but they have a different problem; the internet threatens their ability to control and manage access to much of the content they own or licence. They are trying to find new ways to build and retain control of their intellectual property in a business environment in which new tools and social media platforms can undermine them with devastating speed.

While the issue of rights management is being made ever more complex by the ingenuity of those who seek to undermine it, the rapid growth of ‘big data’ and our ability to identify and track content, wherever it is accessed and however much it may be re-versioned or re-fashioned, is opening up new possibilities for ensuring that creators can draw some financial or reputational benefit from their creativity. But whatever progress may be made in this area of rights management, an uneasy relationship between old and new ways of protecting intellectual property, or ‘IP’ as it is often known, is likely to continue for decades to come.

Creating, valuing, protecting and exploiting IP remains the foremost issue for the whole creative sector. Creative content businesses, many of them small start-ups with little or no capital, also have plenty of other significant issues to address. However creative the ideas behind their business, those difficulties are likely to include access to finance, access to markets and access to the skills necessary to build and manage a business.

The difficulty of getting access to finance

Raising finance may be difficult for a number of reasons. Banks and investors tend to be conservative; they like certainty. They are unlikely to be impressed by an enthusiastic entrepreneur who is convinced that an entirely new and untried idea, whether it is a design, a software tool, a fashion concept or a videogame, is going to be a commercial success. In addition, many creative entrepreneurs are motivated by social and cultural concerns as well as by commercial interest. In their essays, Caroline Norbury and Chris Morland write about these wider considerations of value that may be important to creators and to society at large but may be of no interest to banks and investors whose primary motivation is seeking a financial return on their investment. Furthermore, banks want collateral for their loans but many creative businesses have no capital assets to offer as surety. The 19th century writer Oscar Wilde, when asked by a New York customs officer if he had any goods to declare for import duty on arrival in America, famously replied, “I have nothing to declare but my genius”. Many creative entrepreneurs are in the same situation, but a bank is unlikely to find that any more amusing than the New York customs officer did.

Unlike a bank, investors specialising in the creative industries may indeed recognise the entrepreneur’s genius but, in return for their investment, they want some ownership of the idea and therefore some control of the way in which it is developed and marketed. This may not seem acceptable to the entrepreneur who prefers debt-finance in the form of a loan rather than equity-finance in the form of sharing ownership with the investor. One recent study in the UK discovered that a significant proportion of creative start-up businesses were being financed by the owner’s personal credit card, indicating an extraordinarily unsophisticated and unprofessional approach to building and running a business. This, in turn, points to the fact that many new entrepreneurs are simply unfamiliar with the language and processes necessary to raise finance. In fact banks and other financial institutions sometimes complain that far from rejecting investment requests from creative entrepreneurs, they have a lack of credible applications.

Whatever the situation, there is little doubt that much needs to be done to improve communication and understanding between the creative and finance sectors in most parts of the world. The United States is one of a small number of countries where it seems investors are not only more prepared to back new and untried ideas, but do not regard past failure on the part of the investee as a problem. Indeed, the success of the creative sector in the US is often attributed to the fact that entrepreneurs and investors are willing to see failure as a valuable and sometimes necessary learning experience, a form of R&D, rather than an indication that the entrepreneurs should not be trusted with investment.

The difficulty of accessing markets

A second issue for small creative content businesses is access to markets and networks. The internet means even a small sole trader can be running a business with global reach. That may be true, but it is more likely that a small business will be effectively invisible in the tsunami of content that flows across the internet. Identifying niche markets, accessing those markets and building a visible profile within them, understanding how business practice varies from country to country and building networks of potential collaborators, partners, suppliers and customers are all significant issues for small creative business. That is why the formal and informal networks that come from being connected to a hub or part of a cluster is so valuable.

The need to develop business skills

A third issue may be business skills. Studies into the creative sector in a number of countries demonstrate that many small businesses have no effective business plan. They are not systematic in assessing their future financial needs or in thinking about managing a growing team of workers if the business is successful. Bringing an appropriate level of professional expertise to the management of the business can easily make the difference between success and failure, no matter how creative or entrepreneurial its workforce is. For example, entrepreneurs whose real skill lies in their creativity and whose businesses begin to grow, may find themselves devoting more of their time to business management for which they have no skill, instead of focusing on their creative strengths and bringing in another partner whose primary skills do lie in business or finance or marketing.

Of course, none of these problems are unique to the creative industries and it is easy to make the mistake of assuming that the creative economy is in some way a sector unlike any other. However, it is also true that the creative sector is developing new ways of working that do not conform to what are seen as the traditional norms of the business world.

The creative economy has developed radically new ways of doing business

As already noted, the ‘capital’ of most creative content businesses is their people, unlike many traditional businesses in which equipment or buildings or land might represent a large part of the value of the business. In the creative sector, the ‘business’ is the people. This means that the way in which creative entrepreneurs use the formal structure of a company or a brand identity may be very different from a conventional business. For example, a filmmaker may establish a formally constituted company for the sole purpose of making a film. Such companies, known as ‘SPV’s or ‘Special Purpose Vehicles’ exist for the duration of the film or project and are then wound up. That does not mean the company is a failure, indeed it may have been hugely successful, but its purpose is complete and it is no longer needed. The permanent staff of a film production company may be as few as half a dozen people but, when they are actually making a film, they hire hundreds of short-term staff. The value of the company is its people. In a similar way, the most creative parts of the creative economy are typified by casual partnerships based around specific projects where partners may come together on a formal or informal basis to complete a specific project. The example quoted elsewhere of the videogames industry in Dundee, Scotland, illustrates the way in which the closure of one company may simply mean that its employees form themselves into new and different companies. What is a business failure for one company may not be to the disadvantage of the whole cluster or sector.

In other ways, too, the emerging patterns of growth in the creative sector can appear contradictory in terms of conventional business economics. As already mentioned, part of the success of the creative sector in the US lies in the recognition by US investors that early failure may provide important lessons that lead to longer-term success. This is especially true in an area where technology and consumer behaviour is constantly changing and the development of any product or service may have to be iterative. One internationally successful videogames developer describes failure simply as “work in progress.” Rovio, the company that created Angry Birds, one of the most successful videogames of all time, launched 51 relatively unsuccessful titles before achieving its billion dollar success. This is not to imply that failure is automatically good – it is simply to point out that it is not necessarily a disaster, either for the company or for the individual entrepreneurs who lie behind it.

Another apparent inversion of conventional business thinking is epitomised by the story of Google, one of the most successful and powerful companies in the world. The founders of Google attribute part of their success to the realisation that rather than persuading customers to trust their business, they would trust customers to shape the business in any way they wanted. In his book, ‘What would Google do?’ the American author Jeff Jarvis described this as “enabling customers to collaborate with you in creating, distributing, marketing and supporting products”. This approach has been replicated in many other creative sectors and is one aspect of the ‘crowdsourcing’ that has come to typify the world of social media. Constant inter-activity, the free exchange of opinions with different perspectives, comes to be seen as a more reliable source of market information than professional expertise. Crowd sourcing allows customers and potential customers to add value to a product or service and encourages businesses to see customers as individuals rather than an undifferentiated mass. This makes good commercial sense in an economy in which personalised products and services rather than mass production is becoming the norm.

This is yet another distinctive shift in business practice that has been substantially led by the creative sector. Where the 20th century economy depended on mass production of standardised goods or services as a way of achieving efficiencies, success in the new economy depends on creating niche products and personalised services designed for specific users or specific markets. For these businesses, differentiating their market is crucial – they must have a close understanding of their customers. 

A further unconventional element in the success of many creative businesses is their readiness to collaborate with apparent competitors. In her essay Avril O’Neil explains how beneficial open source creativity has been to the growth of her business. Brighton University, in England, has an incubator programme designed to help young entrepreneurs turn good ideas into effective and sustainable businesses. As its name Fusebox24 suggests, one of the principles on which the programme is run is that the entrepreneurs share their ideas with others and accept criticism and comment. In one of their reports they comment that the value of these “shared experiences” lay in the fact that they brought together groups of people “who are not defined by industry or sector but by a common curiosity about what fusion means.” This concept, that cross-disciplinary thinking enhances innovation is deeply ingrained in much of the best practice in the creative economy today. It is reflected in Charles Leadbeater's essay. A project at Harvard Business School in the US in 2008 brought together companies from entirely different sectors of the economy to focus on each other’s business challenges. They reported that “the greater the distance between the problem solver’s field of expertise and the problem, the more likely they were to solve it.”

The Harvard research illustrates the way in which creative businesses are acting as pioneers for other sectors of the economy. The iterative approach to product development; the recognition that cross-sector collaboration is often the fastest and most productive way of developing new thinking; the growing importance of niche as opposed to mass production are all becoming normal business practice in many other parts of the economy. Of course these changes are partly attributable to other factors such as the universal impact of digital technology and the changes that has brought in production, distribution and consumer behaviour. Nevertheless it can be argued that the creative industries have been the harbingers of change in the economy and have an impact that goes well beyond their direct significance in the market. They not only show the way to other sectors, they interact and influence them in more direct ways. As noted elsewhere, the creative industries are of growing importance in ’B2B’ – ‘Business to Business’ markets such as advertising, design and architecture, as well as in ‘B2C’ – ‘Business to Consumer’ markets for such things as films, books, clothes and music. The skills and work methods of creative entrepreneurs in many fields, from software design and graphic visualisation to ‘gamification’ and the motivation and management of project teams, all have growing resonance and relevance in other parts of the economy.

How governments can help the growth of the creative economy and benefit from it

These characteristics of many creative businesses run counter to much of the accepted wisdom of the business world and are one of the reasons why governments and local authorities that wish to encourage their creative sectors often find it difficult to find the best way of doing so. They may turn to what seems to be the easiest and most obvious form of support: financial subsidy. Direct subsidies and grants may have a role to play in helping creative businesses to establish themselves, though such support is often more effective when it comes as a soft or interest-free loan that helps a business to get established or grow, but also requires the borrower to have the necessary financial discipline and planning to be able to repay the loan when it is due. Another form of financial support is through targeted fiscal measures that incentivise particular kinds of production or marketing or R&D. These may not only help local small businesses but can also encourage an inflow of foreign companies that help grow the whole sector. The Canadian government has pursued this approach with videogames, as has the UK government across a range of creative businesses including film, TV drama, children’s television and live music and theatre. The danger is that over generous incentives can quickly lead to inflationary pressures when the skills and facilities are not available to meet demand. Most significantly, subsidies and tax breaks can easily create the illusion that a business is financially successful and internationally competitive when, in fact, it is not. The result is a waste of public money and, in the long term, a disservice to the industry itself.

There are other, often more effective ways for governments to help their creative sectors grow, for example by supporting skills training, providing business advice and mentoring services, encouraging and incentivising apprenticeships, or by supporting universities and other higher education institutions to be aware of and work with the creative sector in developing new thinking, new products and new processes. Universities and research institutions also have a vital role to play in measuring, monitoring and analysing the successes and failures of the creative sector. A lack of reliable statistics and data makes it difficult for governments to plan, and for investors to invest with confidence. It also makes it difficult for the creative businesses themselves to detect trends and to assess how they are doing in terms of international competitiveness. New and changing dynamics require constant analysis.

Governments can help their creative sector by promoting national and international trade fairs and exhibitions, by promoting prizes and competitions or by assisting smaller businesses to develop the contacts and networks that will enable them to access new markets.

There are also indirect ways in which government policies can help foster the growth of new businesses or shape the market in such a way as to encourage new entrants. The global success of the UK’s music business is partly due to the fact that thousands of pubs and clubs offer new and unknown musicians the chance to play in front of an audience. So, how the government decides to licence pubs and clubs for live performances ultimately has an impact on the long-term future of the music industry. Another example would be the way in which the UK’s public service broadcaster, Channel 4, was established purely as a publishing house; it is obliged to buy all its TV programmes and online services from independent suppliers. Over 30 years this has been a central factor in seeing the UK’s independent TV production sector grow from a handful of small companies to become the biggest and most dynamic in the world, generating in excess of £1bn each year for the British economy. Such market interventions can be surprisingly successful at virtually no cost to government. For example, the UK government imposed a legal obligation on all pubs to sell at least one ‘guest’ beer, a beer that must be bought from an independent supplier rather than the brewery that owns the pub. The result of this simple initiative has been to stimulate the growth of hundreds of small independent brewers who, previously, were unable to compete successfully with the half dozen major companies that dominated the market.

Another significant way in which governments may be able to support and influence the growth of the creative sector is by using their own power in the market, ‘public procurement’ as it is usually known. All governments are major purchasers of goods and services and can therefore shape the way markets develop, as Ragnar Siils makes clear in his essay about the way Estonia’s government accelerated the growth of the country’s IT sector. This kind of approach can also save governments money by developing new and creative solutions to the rising costs and complexities of delivering the quality of services that the public expects. In 2005 a major review of the government’s approach to innovation in the UK, the Cox Review of Innovation in Business, argued “we should use the massive power of public procurement to encourage more innovative solutions from suppliers”. argued “we should use the massive power of public procurement to encourage more innovative solutions from suppliers”. The health solutions being explored by Chris Morland’s company Citrus Suite are a good example. In fact the question that many politicians and policythinkers ask, “What should the government be doing to help the creative sector?”, might be more useful if it was asked the other way around, “What can the creative sector by doing to help the government rethink public services?”

John Newbigin