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Fast money or sustainable investment? How and when does venture capital pay off for creative industries companies? And if so, for which ones? Juliane Schulze is the director of ENTER EUROPE and has been researching these questions for years, also in the form of several studies that she has helped to publish. We talked to her about her results and the future of the investment.
CCB Magazine: Hello Mrs. Schulze, many creative companies are growing slowly. How do fast venture capital and moderate "sustainable" growth actually go together?
Juliane Schulze: Not very good! Most venture capitalists (VCs) are generally more interested in companies with high growth potential in which they invest. They are interested in exponential growth. This type of investor expects an enormously high return in a short period of time, which creative industries companies often cannot generate at all - even if they wanted to.
CCB Magazine: You yourself have published a study on VC capital entitled "Taking the Pulse of Investors, traditional and alternative Finance Sources in Financing the Creative Industries". What are its results?
Juliane Schulze:The most important key findings for creative professionals are that private and venture capital do indeed flow into the creative industries. However, the investment goals of the investors are very different: Private capital investors preferred software & computer services first of all, followed by video and online games and advertising in third place. Among lenders, such as banks, Software & Computer Services also ranked first, followed by the film industry and publishing. Preferences were somewhat different for crowdfinanciers, as donation, lending and investment platforms recognized the best investment prospects especially for video games and software companies. Basically, it can be said that new technologies are a key to investor interest in the creative industries.
New technologies are the key to investor interest in the creative industries
CCB Magazine: What do creative entrepreneurs have to consider when applying for VC capital?
Juliane Schulze:One of the most important questions that every entrepreneur should ask himself from the very beginning is which investor is the right one for him: Is it rather the crowd financiers through whom I finance my products through clever pre-sales and who I can bind to myself as fans or even as a community? Or are they more like business angels who tend to invest smaller sums out of their own pockets in young companies, but who then want to get involved and work with the management team? Or are they venture capital funds that collect money from other investors and place large sums of money in scalable companies from a purely capital investment perspective? These VCs generate enormous growth pressure through their profit expectations, which can also be problematic for companies.
CCB Magazine: What would you say: For which creative companies is VC capital suitable and for which not?
Juliane Schulze:Our study results confirm the practical experience that especially technology-driven companies with high growth potential are possible candidates for VCs. We are thus talking about companies that can grow hundreds of times in a few years and offer clear opportunities for a lucrative exit.
CCB Magazine: This means that VC capital is not the right thing for creative industry companies.
Juliane Schulze:Let's put it this way: VCs are always about blockbuster successes, about exceptional growth. But the bulk of the creative industries are self-employed and micro-entrepreneurs. Smaller companies with solid growth and a focus on core business are not really attractive for VCs. But these companies can be very exciting for business angels. Similarly, platform financing can be the best choice, especially in the important test phase of market introduction, to check the validity of products or projects and, if necessary, to develop them as close to the market as possible and through user feedback. Overall, it is a matter of finding investors that really fit your needs.
VCs are about blockbuster successes, they are about exceptional growth. Many companies from the creative industries are simply not suited for this
CCB Magazine: Where can you find venture capitalists that suit you?
Juliane Schulze:Our results show that Angel investors are mainly organized in local, national and also European associations. Every metropolis has its Business Angels Clubs, including Berlin. These clubs invite interesting companies to pitches where the entrepreneurs can introduce themselves and their companies. VCs have similarly organized themselves, both nationally and Europe-wide. So there is no way around thorough research. And in my opinion, the best way to find suitable investors is through recommendations, through researching comparable companies in which investments have been made in recent years - or of course at industry events such as trade fairs, markets and festivals.
CCB Magazine: Can you give an example where a company from the creative industries has successfully acquired VC capital?
Juliane Schulze:Perhaps one of the most famous success stories in Europe comes from Finland. "Angry Bird": This is a video games franchise that has made the Rovio company world famous. After three students of the Aalto University created "Angry Bird" in 2003, the company first succeeded in convincing a business angel after two years. In a second step, the company raised 42 million USD in venture capital after another six years. Various company acquisitions followed in order to better position itself in the market and to further develop the brand. In May of this year, "Angry Bird" made the leap to the big screen: by summer 2016, approx. 350 million USD had been earned worldwide at 73 million USD production costs. Another example is the Global Fashion Group (GFG), the online fashion retailer specializing in emerging markets, which includes five fashion mail order companies, Lamoda, Dafiti, Namshi, Zalora and The Iconic. In the third quarter of 2016, the startup of the Berlin-based company Rocket Internet was able to show that sales rose by 16 percent compared to the same period last year, reaching 250 million euros. This development was preceded in July 2016 by financing totaling €330 million, with €300 million coming from existing investors Kinnevik and Rocket and €30 million from other lenders, including Rocket Capital Partners funds. GFG currently offers more than 3000 international and local brands in 24 countries and employs more than 9,000 people.
CCB Magazine: Okay, but not everyone succeeds in such stories. At what point would you generally advise a company against VC capital?
Juliane Schulze:If the entrepreneur is not prepared to sell his company at some point, for example because you feel so connected to the company and you do not want to part with it. Then one should leave the fingers of VC capital.
CCB Magazine: To what extent does it make sense for the state or state governments to take remedial action on venture capital? Last year the state of Berlin invested100 million euros in venture capital provided by the IBB. This money will be used to provide targeted support for innovative Berlin start-ups from the technology and creative industries that are in the start-up and expansion phase. Quote: "The aim is to use both VC funds to provide initial financing for around 80 companies and to continue to support around 30 start-ups that have already received funding". Are these good approaches?
Juliane Schulze:Absolutely! With its regional funding objectives, VC Creative Industries is practically a somewhat 'softer' version of the usual VCs and has the necessary expertise to understand and evaluate the business models of creative industries companies. This is not necessarily the case in the classic VCs. Furthermore, the fund sees itself as an active partner of the entrepreneurs, for example in the necessary search for match financing by a second investor. This instrument in Berlin provides some start-ups with a valuable locational advantage and also leads to their entrepreneurs gaining important learning experiences that make them fit for the further development of their companies.
Many investors still believe that the creative industries are a high-risk zone
CCB Magazine: Let's talk about the other side, the investors. A title on one of their presentations recently read: "How do investors think about the creative industries?" What is your answer?
Juliane Schulze:Many investors still believe that the creative industries are a high-risk zone and that there are only lifestyle companies in the creative industries. At the same time, they assume that they are dealing with chaotic people and processes throughout. These are typical clichés. Even if it is true that many creative industries companies only show or strive for limited growth, they often act more entrepreneurially than they themselves believe. Investors simply lack the knowledge of the value and exploitation chains within the creative industries and thus miss out on interesting investment opportunities.
CCB Magazine: What would be the solution? How can VC venture capitalists be sensitized to the creative industries so that investors gain more insight into the structures of creative industries companies?
Juliane Schulze:Overall, we have to deal with the expectations of both sides, i.e. those of entrepreneurs and investors. Because on the creative industries side, we find micro-enterprises with a genuine interest in project financing. On the investor side, the dominant expectation is to acquire company shares that will be worth several times as much in a few years. At present, the desire for co-determination on the part of the investors and the fear of the creative person of losing control are opposed to each other.
Currently, the desire for co-determination on the part of investors and the fear of the creative person of losing control are opposed to each other. We can only make progress here in a joint discussion
CCB Magazine: You are director of ENTER EUROPE and a board member of Media Deals, a pan-European network that conducts research on key issues in venture financing. What solutions do you have in mind?
Juliane Schulze:With media deals we try to build solid bridges between the parties. This means creating trust between investors on the one hand, so that they can advise each other and co-invest. On the other hand, it means that we need to make the value creation processes more transparent so that we can compare the various risk and financing models with each other, so that it also becomes clear where investment opportunities lie dormant. Let us not forget that the policy of penalty interest rates leads to greater openness on the part of many donors. We must take advantage of this. The numerous success stories in the creative industries are still largely unknown to the sectors and investors. That is why we must finally collect reliable data material and make it available to everyone. We can only make progress in a joint discussion. We must build trust.
CCB Magazine: Juliane Schulze, thanks for this interview.
Category: Knowledge & Analysis
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