Culture, Media and Sport CommitteeWritten evidence submitted by Demos

1. I am an external (ie part time) research associate of Demos, and I am replying in this capacity. In December 2011 I joined the Creative Industries Council’s Access to Finance Working Group and authored that group’s report back to the Council (delivered June 2012, has not yet been made public).

2. This submission addresses point two in the invitation:

Barriers to growth in the creative industries—such as difficulties in accessing private finance—and the ways in which Government policy should address them. Whether lack of co-ordination between government departments inhibits this sector;

And provides an overview of the Risky Business research project that I lead with Kitty Ussher for Demos and published in October 2011.1

3. The aim of the project was to explore the perceptions of “riskiness” and “difference” that surround the creative industries sector, to see what the data says (are they that different to other sectors of the economy? or riskier? if so how?) and then make recommendations based on what we found.

4. Overview

The data suggests the sector is not that different, or significantly riskier in terms of aggregate business outcomes, than other sectors of the economy. Rather, like other sectors of economy, there is a range of business risk in the sector, depending on the business model of individual enterprises.

Analysis suggests that the following are key drivers of difficulty in access to finance for the creative industries:

Poor coverage in official statistics such as the ONS (Office for National Statistics) and Blue Book series, which leads to this sector falling into a blind spot in both analysis and business support policy formulation, particularly in the Business Department;

A lack of understanding on of the sector by financiers (itself driven by a lack of data); and

A lack of understanding among creative businesses of different types of financing, particularly of the difference between credit and investment and the relevance of the risk profile of a businesses in its suitability for one or the other.

5. Chapter 1 (Defining and Mapping the Creative Industries)

6. Sets out our definitions of “business” and “creative” before exploring how the sector is defined by the government and in official economic data. We compare this with how parts of the sector would define themselves, pointing out a clear anomaly of the absence of the economic contribution that manufacturing, services and retail sales make to the size of the creative industries in the government’s approach.

7. We then present an overview of the structure of the sector by business size and contribution to the economy. We show that while the sector is dominated by sole traders and micro businesses (those with one to ten employees), this is no different from the rest of the economy and in this sense, the sector is not unusual or different. (Figures 4 and 5).

Figure 4

ENTERPRISES IN THE UK PRIVATE SECTOR AND CREATIVE INDUSTRIES, BY NUMBER OF EMPLOYEES, 2010

Figure 5

ENTERPRISES BY NUMBER OF EMPLOYEES BY SECTOR IN THE UK 2010

8. The chapter closes with a brief discussion of the resource the government puts behind policy making for the creative industries in comparison to its size and arrangement.

9. We highlight that BIS (Department for Business, Innovation and Skills), the government department that originates almost all the policy initiatives that might support small and medium enterprises (SMEs) in the sector, has little or no civil servant resource focused on the sector. We recommend that the Government reviews its definition of the creative industries, and boosts its capacity to advise relevant ministers appropriately.

10. Chapter 2 (The Creative Industries and the Risk Myth)

11. Drawing on new qualitative research to explore the attitudes of banks and equity investors, we discuss how creditors seek predictability of revenue, while investors seek opportunities for high growth.

12. Therefore we show that different creative businesses are more suited to different types of financial investment and support and that there are likely to be straightforward—and fixable—explanations for why any individual firm might find it hard to obtain finance.

13. The chapter presents new data on indicators of business risk, including survival trends of new business start-ups over the first five years (Figures 8 and 9) and business failure rates as a percentage of all businesses operating (Figure 16).

Figure 8

AVERAGE SURVIVAL RATE OVER FIVE YEARS OF CREATIVE INDUSTRY AND OTHER BUSINESSES IN THE UK, 2003–08

Figure 9

AVERAGE SURVIVAL RATE OVER FIVE YEARS BY INDUSTRY IN THE UK

Figure 16

COMPANY DEATHS AS A PERCENTAGE OF ALL ACTIVE COMPANIES, 2003–09 IN THE UK

14. We find that, contrary to expectation, the creative industries sector does not show notably higher failure rates by either indicator. We suggest that the reason for this might be the greater resilience of small creative companies; unlike other start-ups which have higher fixed costs, creative industries businesses can minimise their outgoings when times are tough. Indeed it can be argued that these businesses are outperforming other sectors of the economy in ability to cope with overall business risk, if it is the case that they are launching more products, of unpredictable potential, into the marketplace than most other businesses.

15. In contrast, another sector perceived as “high risk”—hotels and restaurants—shows notably higher failure rates than the average. This suggests that, in business terms, rumours of the riskiness of the creative industries have been exaggerated, a point corroborated by commercial credit ratings.

16. In the light of these findings we then provide a brief assessment of the policy implications and recommend that the Government routinely publishes economic data on the creative sector in a satellite account as part of the ONS Blue Book cycle. We also recommend that the Government and the sector work together to champion the business success of the sector and to facilitate the bringing together of different types of funders with businesses seeking support and to improve understanding on both sides.

17. Chapter 3 (How to Succeed)

18. We draw on detailed interviews with some of the most successful companies in fashion, television, video games and music to understand the story of their success. We find there are the following “ingredients of success” in common among the most successful businesses:

a clear intention to make a profit;

a strong performance in businesses planning;

a clear understanding of the risks that face their businesses, how to assess, manage and mitigate against them;

in-depth experience in the business of the sector;

financial and numerical experts working in mutually respectful partnership with creatives;

an understanding of the importance of good relationships to spot and manage creative talent, and to do deals;

an ability to innovated and adapt to changing business environments; and

an ownership stake in the intellectual property (IP) the business is creating.

19. We examine the suitability of the Enterprise Finance Guarantee Scheme and the Enterprise Investment Scheme, recommending that the Government, sector trade bodies, and those who administer the schemes should work together to enable and improve their utilisation by the sector. Taking into account the success of the codes of practice and window of creative competition in stimulating growth in television production (Figure 21), we recommend that the Government should consider how best to increase competition and intellectual property ownership among companies elsewhere in the creative industries that contract with public sector broadcasters and other public bodies.

Figure 21

CUMULATIVE GROWTH OF COMPANIES BY SECTOR IN THE UK, 2002–10

20. We discuss whether creative businesses are uniquely different from other businesses in different sectors, and show that while one group of businesses in this sector is engaged in bringing a constant stream of new and unpredictable creative products to market (which we term SNUCP businesses), there are also many others that have predictable revenues and trajectories. We provide an overview of these different business models, sector by sector, and discuss in each case to what type of financing options they are best suited.

21. We highlight that there may be a funding gap for this stream of new and unpredictable creative product businesses, especially when they are small or new, as their revenues are too unpredictable for creditors while their growth trajectory is not sufficiently exponential to attract investors. We suggest the Government should review its plans for a patent box and extend it (perhaps to a broader copyright box) to cover these highly innovative businesses, as well as offering a possible solution based on the Prince’s Trust Enterprise Scheme.

22. Chapter 4 (The Map)

23. The thorny issue of the Government’s Standard Industrial Classification codes system, the mechanism for collecting and presenting official economic data, on which all other macroeconomic analysis is based.

24. We show how little the current Standard Industrial Classification (SIC) code structure has changed since it was first introduced in the 1940s (in response to the Great Depression) and how this system operates as a map that frames our understanding of the economy. Unfortunately is a nineteenth century map, failing our 21st century economy.

25. Even in the most recent update, SIC 2007, there are 281 detailed manufacturing codes and 114 retail codes, but only 36 codes covering information and communications and 40 covering financial services.

26. We show how the invisibility of the creative industries in the top line sector distinctions creates the perception that the sector is marginal. Moreover, this top line invisibility, combined with a lack of clarity and detail offered by four and five-digit codes, contributes to the paucity of data driven analysis of the sector.

27. Finally we highlight problems with the Government’s own SIC based definition of the creative industries, which although ground breaking at its introduction by DCMS in 1998 (the year that Google was founded) has barely changed since then. For example being unable to separate music from other performing arts like theatre and dance, and under-reporting the economic contribution of companies as large and diverse as ASOS, Festival Republic, Lulu Guinness, Netaporter, Spotify and Topshop.

28. We recommend that in addition to publishing creative industries’ satellite accounts in the Blue Book, the Government should automatically group the creative industries in all its data sets, public and confidential, to enable its own and external researchers to better understand the sector.

29. In line with the discussion in chapter 1, we recommend that the Government re-examines its definition of the sector, and makes it easier for ONS and external researchers to aggregate data on the sector to improve the knowledge base, as well as lobbying in the EU and UN for international reform that supports the reality of the UK economy.

30. Overview of the Paper’s Recommendations and Conclusion

1. Renew and improve the Government definition of the sector, and the sector’s visibility in official economic data.

2. Introduce and expand civil service resource and expertise in the sector in the departments that matter, especially the Treasury and BIS, so that policies and initiatives designed to support (small) businesses such as UKTI (UK Trade and Investment), EFG (Enterprise Finance Guarantee), EIS (Enterprise Investment Scheme), R&D (Research and Development) tax credit, and currently under review patent box, are designed to work for this sector as well as others from the outset.

3. Prioritise enabling of IP ownership whenever possible to stimulate sustainable growth.

4. Champion and celebrate business success as much as creative success, in particular for the sector to re-consider how it presents itself. Nurture business skills, and create and build links between the sector and lenders and investors.

November 2012