- Patrick Bradley, founder of Creative Industries Venture Capital firm Station 12 talks to Creative Entrepreneurs about investing in new creative companies.
With over 20 years' experience in media and entertainment, including prescient early investments in Simon Fuller’s XIX Entertainment, creator of 'Pop Idol', Lionhead Studios, and producer of videogame 'Fable', Patrick Bradley launched Station 12 in 2014. With an investment fund nearing £150m, it’s positioned to be a major player in providing expansion capital to disruptive creative companies spanning sectors from media and entertainment to publishing to design. Creative Entrepreneurs talked with Patrick Bradley about the challenges and payoffs involved in investing in one of the UK’s most dynamic areas.
You’ve been investing in the creative industries for a long time starting out at Ingenious Ventures, and now at your own firm, Station 12. What investment opportunities do you see in the creative industries?
We have focused on entertainment and technology with a content focus because our mantra really is "content is king." Content can break down into lots of different segments. It can be in more traditional areas like television or radio or music. It can be live events. But then it can be content that is being created or enhanced by new technology coming into the market like augmented and virtual reality, the whole games
Our mantra is ‘content is king.'
market, or marketing content driven by platforms like Facebook. New tech platforms like Netflix, for example, are going to establish themselves long term by attracting more users, more subscribers and the only way they can do that is by offering them compelling unique content. That is why you have a bit of a content war going on.
You have said that there is a lot of expansion capital available for technology and not so much for creative companies. How do you compare investing in the two sectors?
There are a lot of technology funds around. You are looking at a very broad sector including technology applied to other areas. But we focus on content that drives a different type of investment proposition. It is very heavily focused on the people involved. With technology, the idea is that if you create the technology then it should be able to operate without the founding humans being involved in it. The market is continually creating a new dynamic in technology so the value of any tech asset may diminish with time and be commoditized, whereas content can be evergreen; the great bands of the world, the great films, tend to be evergreen.
Technology has a defined life cycle and can continually be replaced. Content has a longer economic life cycle and can be continually licensed, remade, cross international borders and exported in terms of format.
Tech has a defined life cycle...the great bands of the world, the great films, tend to be evergreen.
One of the impacts of technology is to reinvent the way content is consumed or monetized. If we look at music, we’ve moved from a market heavily reliant on physical goods like CDs to streaming, enabling people to access content in a different way. Old films and library films are being remonetized by being available through streaming platforms like Netflix.
Why do investors famously avoid the creative industries? What draws you that scares other people away?
It’s very difficult for investors to get their arms around it. With tech there is a feeling that there is a physical product that they can understand. Many people view the content sector as a ‘hit business.’ They think that it is too subjective. But I think the name of the game here is finding the right platforms that have a track record of success in producing content.
So you think investing in content can sometimes be more predictable than investing in technology?
With technology investments, your likelihood of success is more limited in many ways because so many funds are chasing similar opportunities and most technology developed all over the world really does rely on scale. Content is an opaque market in the sense that it is difficult to enter. There are relatively few public companies that produce content. It’s about network. If you look at the format business in television, for example, for very low cost you can actually develop multiple streams of revenue because that format, which is basically a single piece of intellectual property, can be exported all around the world in different versions at low cost. You don’t have high capital investment for that. It’s really about an idea and setting up that idea and its execution in different territories. A good example is “Dancing with the Stars” in America which came from the BBC format “Strictly Ballroom.“ You don’t have to build a factory in America to produce that show, you only need to sell the rights to an American broadcaster. They will fund it and you then get the income stream back.
What is the X factor that makes you want to invest in a new venture?
There are some common rules to any form of investment. As a venture fund, you want to find something that has barriers to entry, a clear route to monetization and is
As a venture fund, you want to find something that has barriers to entry, a clear route to monetization and is scalable.
scalable. The UK is a small market, so everything we look at in this market has to have opportunity to be scaled outside in order to drive the size of the proposition. Then we want to verify the track record of the individuals who run the business. What have they done previously? How connected to other sources of capital are they? Will they get the distribution deals and other exploitation deals needed to scale the business? We look at their financial plans to ensure that they have a clear understanding of how they can do their proposed business and what the risks of that business are.
Why are creative industries an engine of growth for the UK?
The UK has a strong presence in the creative industries in terms of its ability to build creative businesses making great creative output. It could be people in live events, like electronic dance festivals. While I was at Ingenious, we sold Cream, the electronic dance festival organizer, to Live Nation in America. We invested in the company that created the videogame Fable and it was bought by Microsoft. All these different areas are producing intellectual property which conglomerates want to buy to secure their content pipeline. They need creative generators to allow them to scale their own businesses in the future and continue to make money.
The UK has a strong presence in the creative industries in terms of its ability to build creative businesses making great creative output.
The UK Government is also very supportive of creative industries growth and the European Union is introducing a Creative Europe Program which supports the creative economy in Europe because it's seen as growth area, spreading into many different sectors. For example, virtual reality is moving into several areas that produce content, not just entertainment, but all sorts of services where people with creative skills can be employed.
The Creative sector also encompasses, for example, design, fashion and marketing services to name a few segments. Do you have investments in those areas?
We do look at design companies but as yet have not really seen anything that has the profile we like in terms of scalability or the quality of revenues you need. A lot of design companies work on a single project basis like marketing service businesses. The beauty of finding say a live events operator is that you’re creating a long-term franchise with more predictable revenues driven by consumer spending. Or if you find a content company that has a format and a long-term franchise, X Factor for example, you have some predictability and also something a buyer wants to buy. Investors can see its value into the future and know they can license it. Design and fashion are more difficult areas in that regard.
Marketing services take a lot of time living on project income and there is no real forward visibility for revenues. That makes it difficult to attract investment. In many sectors, you may build a specific brand, which is then attractive to the trade because it attracts particular customers. But we are thinking about how scalable the business is. You always have to look at the quality of revenues being derived.
Expert Edge: Patrick Bradley’s Advice for Creative Entrepreneurs
1. Seek advice
Network through people who have a financial background like accountants and lawyers. Through incubators, accelerators and crowdfunding platforms, you can contact other founders who have had experience setting up businesses. Find out what the pitfalls are. Join trade associations where you can exchange ideas and information with other people in your particular field.
2. Have a timeline
Be clear on how long it’s going to be before you actually start deriving revenues. Some entrepreneurs are far too optimistic in terms of when they might get a first development deal or commission from a broadcaster and how long they will need funding. One of the key things for them to understand is that they have to keep overheads to a minimum in the beginning. Investors don’t like cash flowing to large numbers of staff in advance of revenue. You need to demonstrate to investors you understand what the defined path to monetisation is.
3. Know where the money is both for investment & revenue
Know what sources of investment might be available to build your business. ‘Friends and Family,’ tax-driven angel investing, where angel investors get a tax break, and crowdfunding may all be sources of funds you can tap first before talking to venture funds or professional investors.
Equally, be realistic about the revenue potential of your chosen business as that is key for investors. Take the example of a TV production company. If you are producing single hour documentaries or news content, it is very difficult to attract investors, because that content is difficult to scale and may not have international distribution potential. The business could be hard to monetise.
4. Demonstrate your commitment
From an investor’s point of view, it’s important you have some skin in the game. When a founder team comes along and says ‘here’s our proposition but we don’t want to put our own money into it’ that’s not particularly attractive to investors because they don’t want to take 100% of the risk and, perhaps more importantly, they want concrete demonstration of your commitment.
5. Don’t give too much equity [shares in your company] away
Entrepreneurs should understand that when they raise money in exchange for equity in their company, they are actually giving part of their business away - and they are selling it early at a low valuation, which investors agree to despite lack of track record, but in expectation that the business will grow and those investors will make some money out of it.
Entrepreneurs should try to hang on to as much equity as they can. Starting out can be tough and immediate cash may seem very attractive, but you really do need to think, ‘How much equity am I actually going to sell and how much capital am I going to get from investors?’ Again, try to get some advice about what deals people have cut previously.
6. Consider non-equity funding
Instead of giving away shares, explore whether there is soft money available like grants or whether you can fund your business by doing other business activities complementary to your company’s activity like consulting or other types of service work. This is a good strategy for the interim while you are building expertise and increasing the value of your company.