I gave a talk about a month ago, as part of a closed door panel to advise the UK government on their policy towards funding the creative industries. I’ve just been given the transcript with permission to publish it (the collected talks will be published as a book later this year, some of my fellow speakers were a good deal more distinguished than me, and included my old thesis supervisor, John Bates; Hat Trick Managing Director Jimmy Mulville; Ingenious Chairman Patrick McKenna amongst others).
Here’s what I said. More or less.
“What Are Entrepreneurs Looking for?
Arvind David
CEO, Slingshot Studios
Introduction
I run a company called Slingshot and – I think this is accurate – Slingshot is 22 months old. I should probably say one or two words about it first. We are a small, vertically integrated film company.
We finance, produce and distribute our films. We have just produced our first; it is a thriller called Sugarhouse that stars Andy Serkis of Lord of the Rings fame. We are halfway through our second, a romantic comedy called French Film which, has a number of good actors in it, is attracting quite a lot of interest at the moment because it stars Eric Cantona.
There are two things we do slightly differently. The first is we do things at very low cost; we do deals with talent where we pay them not very much upfront in exchange for a piece at the back end.
Our movies cost around the $1 million mark instead of the more typical $5 million mark. Secondly, we try to use digital technology to maximise efficiencies throughout the business both in production and, more interestingly, in marketing and distribution.
That is the Slingshot spiel over.
Slingshot’s Financing
What I would like to talk about is our finance structure. The heading of this section, incidentally, for those who looked at it, is ‘What are entrepreneurs looking for?’ The short and easy answer is of course: money, but stretching that out to ten minutes might be a little bit of a challenge, so I thought I would talk about money in terms of ‘where from?’and ‘why?’.
Slingshot is odd in the film world because we are venture financed, but that isn’t the start and the end - we have several investors. In fact we have money from four different categories of investors.
We have two VC backers – Arts Alliance and the Creative Capital Fund. We have a chunk of public money from Skillset and from Regional Screen Agencies (RSAs). Thirdly, have some corporate finance in our individual productions, from broadcasters , and fourth and finally we have also just raised an EIS production fund from angel investors.
We have the menu; we have the package.
This is not the first time that I have pieced together this jigsaw. Despite the fact that I do occasionally wear my hair in what Mike charmingly refers to as a ‘pig‑tail’, Slingshot is in fact the fourth business that I have either funded or raised money for.
I totted it up. Over the last few years, across these four businesses – three of which are still going and doing quite well and the first is not – I have raised a little over £6 million in early‑stage finance. I was curious as to what the split was. It turns out it is about equal between the following four categories: angel investors; public funding; corporate or strategic investment; and VC or institutional financiers. Actually, public funding is slightly higher, but it is about a quarter of each.
Investor Matrix: Types of Money
So what I am going to offer is a personal perspective, about the different experiences of raising money from those sources and also then living with those sources as investors.
I have come up with a three dimensional matrix to distinguish and judge between the different sources of finance. There is of course generalisation in this and over‑simplification, but here is my matrix for the characteristics of money.
§ How expensive is it? What do investors want in terms of return, share of the business or revenues? What else might they demand as part of the deal – provisions, lock‑ins, claw‑backs, etc?
§ How value‑adding is the money? What do the investors give you other than money? What expertise, connections or strategic links?
§ How tedious is the money? How tedious is the process of raising it? How many hoops do you have to jump through? How tedious is the process of living with the people from whom you gain funding?
That is my matrix – how expensive, how value‑adding and how tedious? The first two are well known assessments, the third is perhaps my modest contribution to this field.
By and large, and there are generalisations here, and I will highlight the honourable exceptions, my experience of those four categories is as follows.
Venture Capital
Venture capital is generally the most expensive, normally by some distance. It is very value‑adding. I would not say it is the most, but it is very value‑adding.
Generally, it is not too tedious.
Strategic Finance
Strategic money is often the most value‑adding. Its tediousness is interesting because it divides. At a corporate equity level, trying to raise money to do business, strategic money is very tedious, because big companies are not generally set up to make investments in early‑stage start‑ups. There are exceptions to that: there are companies GE is an example – which have well set up investment arms – but on the whole, this is not what they are set up to do.
At deal level, it is quite easy, because they understand how to buy a product and how to license it.
It is reasonably expensive, but not as expensive as VC.
Public Money
Public money, and I say this with a minister to my left, is generally the cheapest in terms of what is asked for in return. It is also generally the least value‑adding and almost always the most tedious. I will attempt to back out and offer the honourable exceptions.
Angels
Angel money gets stuck in between the other categories. It is quite expensive, because angels like to get decent deals, although there is variability there between smart and dumb angels. It is less value‑adding, generally, than anything other than public money, although there is high variability there.
The tedium level can vary. We have just raised a Enterprise Investment Scheme (EIS) fund. It was the simplest fundraising I have ever done. We pitched; we gave them the document; they said ‘yes’ or ‘no’; and they signed. I had to do about a hundred pitches, got about fifteen yeses, and we raised our fund. I have had much more tedious experiences.
Angels who are not set up efficiently, if they are not professional, can be quite tedious. Thankfully many are not, and many are made more professional by being part of syndicates.
Examples and Exceptions
I am going to give some examples, and cite some honourable exceptions, of public money being the most tedious. The first example is an EU example, so you will not mind too much!
MEDIA development funding (from Brussels) is extremely tedious to get. The levels of form‑filling, levels of accounting required and the reporting procedure, are all astonishing. In my four businesses, three businesses qualified for it, of which two decided not to go for it, despite the fact that it is effectively free money, because the transactional and administration costs were too high. That is an example of extremely tedious public money.
For “good” public money, in my current company, Slingshot, we have a major grant from Skillset, which involved a sensible and thoughtful application procedure that allowed us to write a document rather than fill out a form. Six months into the process, they have been sensible about reporting and accountancy. So, it does range but, by and large, I stand by my generalisation.
Venture capital money varies. It is expensive. The structures are more complicated with preference shares, claw‑backs and all sorts of terms. Once you understand the language and - because I come from a family of seventeen lawyers and was taught by John Bates at business school I do vaguely understand the language - you can navigate your way through it. With a trusted advisor I think VC money is sensible to navigate. Because they are professional about what they do, it tends not to be too tedious. That is my experience.
How to Make it Better?
The easy answer is I want VC money to be less expensive, public money to be less tedious, etc and to keep all the upsides. Actually, I do not want that. Yes, I would like VC money to be less expensive and all angels to be equally educated and sensible.
But, since part of the purpose of this forum to advise the government, let me say what might seem to be a counter-intuitive thing: I am not sure I want public money to be more value‑adding. I am not sure I want a public investor to act like a commercial investor. Why? Because public money serves a different function and objective from commercial money. Part of it is about return, but there are other objectives.
The overall objectives are not just about me in my business; they are about the industry as a whole, education and cultural objectives.
Let me speak to that which I know, the film and television industries. Something odd happens when the holders of large sums of public money are told to act commercially.
In brief, I think what happens is that bureaucrats start to act like Studio Chiefs, which is a mistake. This is not to cast aspersions on individuals; there are many good individuals who work for institutions like the Film Council and the BBC, but there is a reason why heads of studios are amongst the highest paid executives ever invented – it’s a hard job..
If you are trying to serve public objectives as well as commercial ones, you get a little crossed and find yourself inevitably going, ‘I sit on this large sum of largesse and I dispense for projects that are creative, and commercial and serve the public interest – so how do I do that’. It gets quite complicated.
Let us not delude ourselves – this is a significant problem for our industry. The largest funders of development in the film and television industries are all publicly funded. Public funding is essential; it accounts for well over 50% of the total between the Film Council, BBC and Channel 4.
I am nervous about asking the people who dispense that money to act more commercially. I am more of the view that they should act more structurally. I think the best thing public money does is to make structural decisions. The single best thing the Film Council has ever done is the digital cinema initiative, because it is a structural innovation that only public money could do. It broke a prisoner’s dilemma of who was going to pay for the damn thing, to promote the public good and benefit the industry as a whole.
Some of the work the New Cinema Fund does in developing new writers is to promote an important public good – again, a structural – in this case educational - initiative.
When it comes to the individual film bets that production funds make, whether or not one agrees with those decisions, there is a bigger question – and I am not sure that that is what public money should be doing.
Structural financial innovations are also good, like the tax credit or the EIS - these will enable us to raise money in more efficient ways.
Conclusion: a Funding Jigsaw
I started with Slingshot. I will end with Slingshot to describe how our different bits of funding fit together. It slices as follows: the venture capitalists invest in the company; they are shareholders in the company. Our interests are aligned with building a large, scaleable distribution business – all the buzzwords one hears.
We are the media business bit of John’s three part typology. As management we want to build value; as venture capitalists, we want to see capital growth. Our interests are aligned.
Public money goes into training and development, because we are trying to build up new talent and build up product. That is high risk, but it also benefits more than one person going into the industry. That is where public money should go. To some extent it also goes into production, where it encourages regional production.
We raised angel money into the EIS production fund, which backs a slate of films, giving us exposure to a range of product, but raising the question of our management structure. As it has a tax wrapper, it makes it a little more appealing. To us, it is trying to piece together that jigsaw in a way that makes sense to our investors and aligns their interests with ours.
Twenty two months in; so far, so good!
