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.
CE: 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?
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.
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.
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.
"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.
PB: 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.