Written evidence from Creative England (SCA0013)

Executive Summary:

• Supporting creative industries businesses to scale-up will raise productivity and deliver economic growth across the UK, in an already high-performing, modern industrial sector.
• There is a finance market failure for IP-based creative businesses that is preventing further growth.
• Support and distribution of finance for the creative industries varies between regions, with businesses based in London and the South East receiving a disproportionate amount of overall UK investment.
•                                                                               Scale-Up Survey revealed creative industry businesses want easier access to public sector business support.

Creative England

1. Creative England was launched in 2011 with the aim of “helping small companies grow, helping new talent establish itself and mobilising public and private investment to grow England’s creative industries.” Over the last five years we’ve developed a highly successful investment programme and support package for creative, digital businesses - based outside London.

2. Given the nature of our organisation, we have a significant interest in the developments of interventions designed to help businesses grow and achieve scale. We are pleased to provide evidence for this inquiry, and have the opportunity to contribute our insight into the particular needs of creative businesses looking to grow and achieve scale.

The Creative Industries

3. As highlighted in the Government’s recent Industrial Strategy Green Paper, the creative industries are a hugely important contributor to the UK economy. They are an £87.4bn sector that continually outperform the wider economy in terms of growth,[1] providing more in GVA than automotive, aerospace and life sciences combined.[2][3][4] They employ 1.9m people – rising to 2.9m in the wider creative economy; and generate almost £20bn in exports – totalling 9% of all UK service exports.[5]

4. Estimated to be worth over $2trillion[6] and growing, the global creative content market will continue to provide excellent opportunities for the UK’s creative businesses to export their services. With almost half of creative industry exports reaching continents beyond Europe[7], creative businesses will play a crucial role as the UK reasserts its position on the world stage post-Brexit. It is vital they are given the right level of support to continue accessing those markets.

How effective have recent Government measures been in supporting scale-ups in the UK? What has been the impact of the Coutu review in overcoming barriers to scale-ups, particularly relating to accessing skilled talent, developing leadership and financing scale-ups?

5. As the OECD research highlighted in the recent Industrial Strategy Green Paper, ‘while we rank third among for start-ups, we rank only 13th for the number of businesses that scale up successfully’.[8] Government’s recognition of the need to improve support for scale-ups is highly commendable and vital for raising productivity across the UK.

Scaling-Up the Creative Industries

6. Supporting scale-ups in the creative industries is important for raising productivity in a sector largely made up of small and micro businesses – 90% have no more than five employees and 80% have no more than two.[9] Although the creative industries outperform the economy as a whole in terms of productivity per worker, evidence shows productivity in the creative industries increases with firm size ‘so the skew towards micro-businesses and SMEs brings down the average labour productivity of the Creative Industries’.[10] A labour market report by SQW found ‘that overall productivity in the sector has levelled off in absolute terms and declined relative to the UK economy as a whole since 2000’ and that ‘there is a deeper challenge for the sector in sustaining gains in productivity over time.’[11] Therefore, in order to drive up the productivity of the creative industries we need to enable and support creative businesses to grow and scale.

Creative Industries: Finance Market Failure

7. There is a need in the creative industries for a greater availability of growth finance, particularly outside London and the South East. Evidence suggests that the private investment market is not operating effectively for creative SMEs, with little bankable collateral, who are trying to access finance in order to scale up to the next level. A Warwick Business School study explained the reasons for this.[12] Creative content relies heavily on the talent of individuals for its success, but that talent is difficult to evaluate without an understanding of the field. Spotting the next creative hit is also inherently difficult, which creates uncertainty about potential product demand. Consequently, this creates a higher level of uncertainty around funding creative businesses for mainstream finance providers, who do not have a high degree of experience or expertise in the creative sector. This may lead lenders to require more collateral, which in itself is an issue for creative businesses whose greatest asset is intangible IP, or to offer terms, for example personal security, that creative entrepreneurs feel they cannot accept. As a contributor to the study summarised, ‘Banks don’t discriminate against the creative industries, but they do discriminate against people who they think can’t repay.’ 

Creative England’s Investment Programme

8. Creative England aims to address that market failure. Our investment programme, funded through the Regional Growth Fund, is an excellent example of the effectiveness that sector-specific, Government-supported intervention can have on achieving growth in businesses outside of London, and providing entrepreneurs with the tools and skills they need to prepare for, and achieve, scale. The programme has achieved impressive results, as illustrated below.

9. Since being established, Creative England has invested nearly £20 million in over 500 businesses, leveraging over £30 million in private sector investment and creating or safeguarding 1,290 jobs, all outside London. The recoupment rate on our loan programme currently stands at 95%. From early investments we’ve tracked over the longer term, we have seen company turnover rise by 170% in three years from an average of £500,000 at the time of investment to £1.2m. In the same period profits have increased by 150% from an average of £200,000 to £500,000. These results are from businesses that were struggling to access finance from mainstream lenders before they accessed Creative England’s services.

The British Business Bank

10. The establishment of the British Business Bank is a very positive initiative. However, the extent to which British Business Bank programmes – many of which existed prior to the bank’s establishment in 2013 – reach the creative industry businesses, appears to be mixed. Some are under-representative – for example, initial data provided by the British Business Bank suggests that creative industry businesses received only 5% of all Enterprise Finance Guarantee loans delivered through lenders, which is significantly below their proportionate share (creative industry businesses accounted for 12% of all UK firms in 2014). That is despite the programme’s objective to increase lending to businesses ‘that are viable but unable to obtain finance from their lender due to having insufficient security to meet the lender’s normal requirements’[13]. We are currently working with the British Business Bank to understand their data in greater detail and their impact on the creative sector.

11. Programmes such as the Northern Powerhouse and Midlands Engine Fund will provide much needed investment for SMEs in those regions. Yet both are in their infancy, and are ‘generic’ funds which may prove challenging for creative industry businesses to access in competition with non-creative industry businesses. They may also lack the specialist wrap around support that our experience has found to be so effective in helping businesses to grow.

The Scale-Up Institute and Scale-Up Taskforce

12. We welcome the work of the Scale-Up Institute and the Coutu review in assessing the needs of businesses and the barriers they experience to scaling-up. Creative England supported the review by distributing the Scale-Up Survey amongst the cohort of creative businesses we have worked with.[14] Evidence such as this can only deepen our understanding of our sector’s needs in terms of scaling businesses.

13. We are also pleased to see the establishment of the Scale-Up Taskforce and hope it can continue its important work following the General Election, and that its consultations will seek to identify the challenges experienced by creative industry businesses.

What more needs to be done to improve management and business skills necessary to support scale-ups? What are the barriers here?

14.                                                                                     Finance in isolation will struggle to deliver the growth and productivity gains businesses in the creative industries need. Transitioning from ‘successful creative’ to ‘successful entrepreneur’ can present challenges for leaders and they require advice, skills development and access to networks and markets to progress their business to the point of being scalable. A recent report by Frontier Economics[15] argued that to improve productivity creative business leaders need help to develop more ‘commercial mindset’, enabling them to fuse creative, technical and commercial skills as well as drawing upon expert advice and external support.

15. The Scale-Up Institute[16] have developed our understanding of those barriers to growth – talent and skills, leadership capacity, markets, finance and ‘infrastructure’ or fast-track programmes that ease the pain of hypergrowth. A breakdown of their 2016 survey results - by creative industry specific businesses[17] - identified the following points:

•                                                                               Business support was the most important area of Government that creative industry businesses wanted easier access to.
•                                                                               85% of creative industry businesses agreed they would be able to grow their company faster if it were easier to develop the leadership talent within their firm
•                                                                               84% of creative industry businesses agreed they would be able to grow their company faster if it were easier to find effective mentoring and professional support schemes near them.

Creative England: Business Support

16.                                                                                     Creative England’s business investment programme offers support alongside funding to help overcome these barriers to growth, and to develop skills vital for planning, and managing, scale-up. This is delivered through a wrap-around suite of formal and informal support, covering leadership capacity, management skills, access to networks and markets and more.

17.                                                                                     We broker partnerships between creative, digital micros and SMEs and big industry players, developing supply chains and creating new markets for the businesses we support. Large corporates are helped to access innovative, disruptive thinking from a cohort of SMEs, facilitated and ‘quality assured’ by Creative England. The SMEs gain exposure to major clients, through a process where their rights and interests are protected. For example, our Greenshoots programme with Microsoft enables early stage games developers to create new, innovative content for windows and Xbox while they access development support, workshops, pitching, showcasing and networking opportunities.

18.                                                                                     As a creative industries specialist investor, Creative England is linked into a wide network of contacts across the sector and the finance community. We use that network to benefit our businesses, introducing them to the partners and third parties they need to develop their business. For example, a games company we supported were struggling to find the capacity internally to finish a project. Our team linked them to a Birmingham University initiative placing games students in companies to experience working on ‘live’ projects. The company secured the short term talent they needed at limited cost while giving the student a valuable work placement.

19.                                                                                     The Creative England team maintains an ongoing dialogue with all the businesses we invest in over the life of the investment. This means we can be responsive to their needs – providing payment holidays to help manage cash flow issues - and offering continual coaching and feedback – advising businesses on issues from recruitment to IP retention.

20.                                                                                     Gaining visibility for their products or services can be a very significant challenge for creative businesses. Creative England creates a range of showcasing opportunities and events for the businesses we work with, including our annual CE Live flagship conference, which in February this year had a live audience of hundreds of key stakeholders, reached over 11 million people online and trended on Twitter. We also take companies to high profile industry events. For example, through our recommendation at a networking meeting at the Games Developer’s Conference in San Francisco, Apple asked a company we supported to appear on stage at the iPhone 6s showcase event to demo their game on the new device.

21.                                                                                     We run specific development and support programmes, in partnership with LEPs and growth hubs, such as Gameslab, First Bourne – both detailed below – and EPIC (E-health Productivity & Innovation Cornwall & Isles of Scilly).

Creative England: Games Lab Leeds

22.                                                                                     Our Gameslab programme provides funding and support to encourage the growth and development of digital and games start-ups. We have run it with partners in the South West, West Midlands and currently with Leeds City LEP.
23.                                                                                     Leeds has a thriving games industry, however the LEP recognised the independent games companies in their area had limited resources to invest in the R&D needed to develop new IP. We are currently delivering the programme with support from Leeds City LEP, local games developer network GameMakers, and business incubator and workspace Futurelabs.

24.                                                                                     The programmes includes investment alongside a suite of non-financial support initiatives, managed by Creative England, to help entrepreneurs develop their business model – in the form of masterclasses, mentoring, workshops and networking events. As part of Gameslab Leeds, Creative England has accompanied four companies to GDC San Francisco – the world’s biggest conference for games developers – leading to a number of networking and business opportunities with major publishers.

Creative England: First Bourne

25.                                                                                     We worked with local partners Silicon South to deliver the First Bourne Accelerator programme in Dorset, providing eight creative and digital start-ups with £25k funding, with potential for follow-on investment, as well as a three month business residency in Bournemouth with support from coaches, mentors and guest speakers, entrepreneurs and industry experts - with backgrounds in marketing, software development, publishing, and angel investment.

26.                                                                                     Support came through workshops and masterclasses focussing on specific points of business, including business strategy and planning; customer targeting; and sales and marketing. One masterclass was delivered by an experienced Director at Dell EMC who shared with the cohort his expertise in developing and launching new products and enterprises.

How accessible and joined-up is business support, for example between LEPs, Growth Hubs, the banks and others?

27.                                                                                     As the Public Accounts Committee observed in last year’s ‘Cities and Local Growth’[18] report: ‘There is varying capacity and capability across the LEPs, and a large number of them do not feel that they have sufficient resources to meet the government’s expectations or governance requirements’.

28.                                                                                     Availability and quality of business support services therefore is variable between different LEP regions and it is difficult to give a broad assessment of how joined-up the bodies cited are. Growth hubs, the primary business-support delivery agents for LEPs, vary in terms of size and capacity and thus the range of programmes they offer. Some are of considerable size, offering a full roster of support services and developmental events and workshops for local entrepreneurs. Whereas, others are more limited to web-based and telephone signposting services or are still developing their programme offering.

29.                                                                                     The level of joined-up support specific to creative industry businesses again depends on the LEP and Growth Hub. The majority of LEPs positioned in creative cluster areas that feature in Nesta and Creative England’s report, ‘The Geography of Creativity in the UK’[19], have highlighted a strategic approach to the creative industries, but ambition and funding for creative industry initiatives vary.

30.                                                                                     Our experience suggests that LEPs value the sectoral expertise partner organisations can bring to match their ambition with insight and experience, as well as an ability to ‘connect the dots’ between businesses and wider networks. We have, and are, developing partnerships with a number of LEPs, matching our specialist, national perspective and networks to their local needs and ambition. One example is our work with the Manchester Growth Hub, where we are a delivery partner for an ERDF funded sector programme. The objective of the partnership is to ensure bespoke and specialist support is provided to SMEs working in (or in the supply chain to) the film and TV industry to drive employment and business growth. The programme is delivering a series of expert industry workshops, networking opportunities and one-to-one advice, guidance and mentoring for business owners and entrepreneurs.

What data should be collected and made available to better identify potential scale-ups, including businesses led by women?

31. The availability of platforms such as Beauhurst are helping to improve our resource for monitoring the business and investments environment throughout the country. Tools like this offer great potential in terms of capturing data on such businesses. As these monitoring systems develop, hopefully they will give greater insight in terms of the characteristics of businesses with the potential to scale.

What steps should the Government take, if any, to improve and incentivise the provision of patient capital? What distribution mechanisms are in place to ensure that businesses throughout the UK can access this capital?

A lack of equity is inhibiting creative industry growth

32. The 2016 Scale-Up Institute Survey found that 86% of creative businesses agreed they would be able to grow their company faster if they had better access to growth capital finance. Access to growth capital was the second most important challenge preventing faster growth to those businesses (cited by 53%), second only to access to talent (59%).  Furthermore, historic data suggests that ‘demand for equity finance is higher among creative industries businesses than non-creative industries businesses’.

33. Angel investors and Venture Capital Trusts, which provide funding for a third of all digital companies, make the vast majority of their investments in London-based businesses. In 2015, 76.9% of Angel investment into the digital media and content sector went to London-based companies, whilst two-thirds of all UK equity investments were also confined to the capital.  That’s despite 75% of digital tech businesses operating outside London. 

34. As Ian Livingstone the video games entrepreneur, makes clear: ‘The UK has a less enviable track record in turning creativity into sustainable and scalable businesses. The challenge for public policy is to address the shortage of risk capital in creative content companies and the dire consequences if ignored’.

35. Access to finance is an issue for many SMEs regardless of the sector they operate in - over half of the businesses surveyed in 2014 by the British Business Bank found it difficult to raise finance as did 40% of digital businesses. But because of uncertainty around creativity as a product, creative businesses can have a perception of high risk by the investment community, and so for them, the problem is even more acute. As the Warwick business school report concluded ‘creative content sectors…. are more likely to have their finance applications rejected by finance providers than non-CIBs with similar risk profiles.’

Are there other regulatory or economic interventions that the Government should make to achieve the objective of increasing the number of successful and high-growth businesses in the private sector?

36. We believe that Government has a clear role in deepening finance markets outside London. Action is needed now to ensure that latter stage growth funding is available to support the increasing number of start-ups that will seek to mature in the coming years. We welcome the British Business Bank’s aim to spread the flow of equity away from the concentrations of London and the South East, and the bank’s acknowledgement of its role ‘to raise awareness and increase understanding of alternative sources of finance, and specifically equity finance in regions where awareness is low’.

37. We support the Government’s commitment to a new Industrial Strategy and are pleased that the creative industries have been recognised as a sector with high growth potential.

38. We believe Government should take steps to deliver specialist business investment and support programmes that target the needs of potentially high growing creative SMEs. Such a fund would not only help those businesses manage growth and scale, but also leverage greater investment from private sector investors, and achieve the spread of equity throughout the regions outside London and the South East.

27 April 2017