The chronic credit shortage threatening London's creative industries

Who will save the capital’s creative sector?

Despite being one of our greatest economic strengths, London’s creative industries are chronically under-funded. In among the endless debates about the lack of funding for tech start-ups, the money worries of small businesses, and the need to resuscitate our manufacturing sector, it seems the government is neglecting this vibrant sector.

So yesterday, a panel of industry experts met with culture minister Ed Vaizey to address the funding shortage that risks crippling creative industries (and, with them, all the businesses that are dependent on marketing, advertising, branding, innovation, design and so on).

Why the creative industries deserve financial support

There are an estimated 435,000 people working in the creative sector in London. The creative industries contribute roughly £59bn to the UK economy, or 5.6 per cent of GDP. This figure is more than double the average contribution made to GDP across the rest of Europe.

Yet the UK’s creative sector suffers from a persistent and harmful prejudice within the investing community, which tends to believe creative companies are inherently risky.

“Banks are withdrawing credit and venture capitalists are concentrating on later stage companies to invest in,” said Tom Adeyoola, CEO and founder of Me_tail the virtual fitting room, at the panel discussion yesterday.

“If I wanted to get any money I had to do the donkey work myself. I had to get out there, network, and kiss some frogs before I could raise the capital. Going to the banks was not an option.”

A recent Demos report described creative industries as the “Cinderella” sector: fated for a future of endless hard work in return for little reward.

Will the creative industries continue to sweep up the ashes of potential investment or can investors be persuaded that the idea that it is a risky area be dispelled?

“Creative industries are seen as being different from other sectors, but we have never actually seen any evidence of this” explained Helen Burrows, one of the authors of the Demos report and former adviser to Vaizey, at the panel discussion yesterday.

Burrows found that, contrary to the perception of creative companies as risky, the survival rate in the creative industries was actually better than for many other sectors. After five years the creative industries had a 49.7 per cent survival rate, better then manufacturing (48.5 per cent), wholesale and retail (44.4 per cent) and hotels and restaurants (34.7 per cent), according to figures from the government’s Office of National Statistics.

So why isn’t there more investment from the private sector? When outlining the risky nature of investment in the arts, Burrows found that investors felt that a high portion of businesses in the sector are small and that this is a deterrent. When ONS figures are examined however it is found that there are no more small businesses in the creative sector than any other sector. She also pointed to VCs appetite for high returns, rather than the slower burn and lower returns creative industry companies usually offer.

What can be done to support the creative sector?

Demos recently argued that a first step for government should be to develop a better understanding of the creative industries, to encourage investment and allow these businesses to realise their potential and make their maximum contribution to the UK’s economy.

“The government needs to lubricate the wheels of investment,” argues Adeyoola. “They must match businesses with the people with the money. There is no way for investors to meet small and interesting companies.

“Now is the right time, other means of investment are not strong at the moment, people don’t want to put their money into property or the markets. The government can help without putting up any cash by matching companies and investors.”

Silicon Roundabout has a number of different events at which investors can meet with start-ups. Tech Hub runs a monthly event called Demo Night which does just that but many would argue that these events are few and far between.

Entrepreneur Simon Walker believes that the government needs to go one step further than simply understanding and facilitating investment.

“We are letting the government off the hook,” he insists. “Can we not encourage the government to get involved and use investment banking to plug the gap? The government should set up a fund to act as a giant business angel.”

Is it true? Could the government use their new advantage over certain banks to create an investment fund of their own? Not according to the culture minister:

“The government has never said it wanted to run the banks but we have set targets for lending,” said Vaizey. “We need to be clear about what we want them to do. I don’t think it would be right to ask the banks to invest in a certain way. We are investing in the banks not running them.

“People have spoken about the creation of a creative industries investment fund but I prefer to do it through tax incentives.”

With the government reluctant to create an investment fund for the creative sector, it looks like plugging the funding shortage will be down to the changing of assumptions. Burrows is quick to point out that the attitude make-over must come from both investors and business leaders.

“Creative businesses need to have clear intent to make profit,” she says. “It sounds quite simple but there is a perception that people in the creative industries aren’t interested in making money. Many of the creatives I interviewed claimed that success is accidental.

“People in the creative industries are finding out that to be successful you need to have business knowledge too. We need to start talking about business success as well as creative success.”

So with better understanding on both sides, we could see both the creative juices and their revenues will be flowing a little easier.

 

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