In 1998 NESTA (National Endowment for Science, Technology and the Arts) was set up with an endowment of £200 million [raised in 2003 to £250 million] from the National Lottery. The income received from this is to be used to invest in ‘people who challenge received wisdom and think beyond the confines of existing disciplines’. And needless to say ‘these projects are difficult to pigeon-hole and often defy subject categorisation.’
Last Tuesday February 10th, NESTA released a telling report, New solutions to old problems: investing in the creative industries. Yet there was barely a flicker of media reaction. And while the drawback of the report is clear – it could be accused of being slow off the mark (it deals with figures spanning from 1997 to 2001 and makes no comment on the probable impact of the rise and fall of the dot.com industry) – the overall message is important. Traditional British investors have no confidence in the Creative Industries, a sector that includes computer games, design, architecture, arts, music and fashion. This lack in investment confidence translates into a serious economic hit for the UK, as innovative and exciting developments are either lost to other countries, or never fully realised through under funding.
The fact that venture capitalists and other traditional investors are reluctant to invest in the creative industries is not new. The risks involved in these less tangible types of investments are understandably seen to be high. This is partly due to the fact that each industry, under the umbrella of ‘Creative Industries’, has unique needs and difficulties and that these are often complex and hard to quantify. This makes any investment both more overtly risky and also more complicated to create a solution for. Very rarely does the potential business – whose specialisation might be in intellectual property, information or in new markets – fulfil the traditional investment criteria. However, the rewards for getting investment in this sector right, are arguably vast. By not nurturing competitive investment strategies, we ignore a strong UK growth market and run the risk of being overtaken by countries – such as Taiwan – who are prepared to develop their Creative Industries aggressively.
According to independently commissioned research by NESTA, over 64 per cent of investors questioned believe that the UK has the potential to be a world leader in this field, but only 22 per cent would consider investing in it. Over half also recognised that the creative industries had grown faster than the UK economy as a whole. However, they all still thought that pharmaceuticals, insurance and pensions, construction and renting property contributed more to the UK economy than the creative industries.
This is not necessarily correct. Between 1997 and 2001 the creative sector grew by 8%, compared to an average of 2.6% for the whole economy, and contributed £11.4 billion to the UK balance of trade in 2001, employing approximately two million people. It is estimated to account for 7.9% of UK GDP, far more than the any of the preferred industries and well ahead of figures recorded by other countries. The misperception that creative businesses are not economically significant, and the inability of both investors and the creative industry to communicate effectively is undermining a valuable market right in our own backyard.
In the NESTA report Tom Fleming sums it up, ‘Investors and creative businesses need better to recognise each other’s needs and capabilities and move toward a common middle ground.’ It is valuable that he highlights that both sectors need to take responsibility for discovering this middle ground.
This lack of understanding between the creative and financial sectors is a widely recognised problem and one that needs urgent attention rather than the usual apportioning of blame. In 2002 The Sunday Times lamented that ‘£8 billion worth of British Inventions are lost to Britain every year.’ And on February 10th 2004 The Financial Times quoted David Carratt, partner at Kennett Ventures, as saying: ‘Creative industries are often seen as having black arts at their centre. They have something that private equity professionals just don’t understand and that it’s difficult to replicate.’ However, there is no need to lose heart entirely, because as Louise Jury from The Independent points out, ‘this is not always the case and there have been some high-profile instances of venture capitalist interest. Kleinwort, for instance, bought a 45 per cent stake in Hat Trick Productions, the company behind Have I Got News For You, last year, for £23m.’ Therefore, while the chasm of understanding between investor and the invested in is clear, with revised thinking from both sectors and a clear financial incentive, there is no reason why we should continue down this path.
In their report NESTA pinpoint four areas where immediate action is required to sustain development within the creative industries. They are, and I quote:
-The development of a ‘Creative Gateway’ – a trade association for the sector to improve sector intelligence and identity.
-Bespoke financial tools and support for creative industry businesses, most of which are innovative SMEs.
-Encouragement of creative clusters, areas where creative businesses group together and spark the regeneration of communities, such as Hoxton in London and the Northern Quarter in Manchester.
-Improved business and financial skills for people in the creative industries, aimed at graduates, who make up the majority of the workforce in the sector.
The above are clearly important, although the concept of encouraging ‘creative clusters’ is an interesting one. How does one convince people to move to a ‘bad’ area simply to regenerate it, and would that work? What seems to happen is much simpler: the dirt poor ‘creatives’ move to an area because it’s cheap, the more trendy follow because it has become ‘cutting edge’ and then big business is never far behind. Is it therefore necessary to spend yet more money on a ‘Creative Gateway’ association? In our attempts to create a bridge between creative and business communities, it is all too easy to keep falling into the gap – spending significant amounts of available money on more reports, more research, rather than moving towards actual results.
However none of this is as important as the mental shift which needs to happen to make investing in Creative Industries both more attractive and a priority. For this to be successfully accomplished creative businesses need to learn to be able convince investors of the viability and potential success of their product, and to gain better access the available finance. In turn, the investment sector needs to become more creative in how they think about such investments and the ways in which they measure risk and success. And the current labour government has, to some extent, recognised this.
In the recent DTI Innovation Report (17.12.03), the Prime Minister acknowledged in his foreword that ‘the creativity and inventiveness of our people is our country’s greatest asset…’. Organisations such as, the government-helped NESTA, are providing a vital service – as much in rethinking concepts of investment as in actual funding – but it is not nearly enough. Traditional investment needs to come to the party. Until this happens we shall continue to damage our long-term economic development by undermining a vital asset.
For more information on NESTA’s report visit www.nesta.org.uk.
