The Role of Venture Capital in Promoting the Cultural And Creative Industry (CCI)

Overview

This paper examined relevant literature and documents to provide an overview of the role of venture capital in promoting the Cultural and Creative Industry (CCI). The CCI contributes substantially to the economy and has the potential to further contribute to social cohesion, job creation and socio-economic development. This research is undertaken in the context that globally (and this is of major issue in South Africa) there is a high reliance on public funding to support the CCI that raises sustainability concerns. The paper critically examines current scholarly literature and reports on the role of venture capital to promote and support the CCI sector. Specifically, venture capital financing needs and trends in relation to the CCI sector are identified, current sources and future opportunities of venture capital support for the CCI sector are assessed, the types of support provided by venture capital to the CCI sector are established, and implications and challenges associated with venture capital support are unpacked together with recommendations.

Venture capital funding exists on a continuum from top-down (direct government funding) to bottom-up (the private sector is the dominant funder) approaches. Venture capital efforts for the CCI has gained in prominence with the shift towards developing the ‘cultural economy’ and ‘cultural industry’ which denotes a focus on economic aspects. Venture capital is important for many sectors that rely on this funding to start and expand businesses. Venture capitalists are attracted to businesses, individuals and activities that are seen to be entrepreneurial and can generate substantial growth. The CCI has characteristics that are unappealing for venture capital investments compared to other sectors. These include lack of business training and management skills, limited access to tangible assets, reliance on public investments or funding, workforce profile that is contract-based/ freelance, fragmented and changing markets, and difficulties in assessing and protecting intellectual property assets. Key issues emanating from the research reveal that globally and in South Africa specifically, access to venture capital funding for the CCI is difficult with venture capitalists supporting a few commercially viable businesses because venture capital or private sector investors often look for high growth potential with lower risks. Differences were also noted in terms of venture capital support within the CCI. Specifically, the audio-visual sub-sector has more investments than other sub-sectors. Discriminatory practices in relation to gender and racial inequalities are also noted with venture capitalists and the beneficiaries thereof generally being white and male-dominated. Urban areas also benefit substantially more than rural areas.

In terms of venture capital funding for the CCI, public sources dominate. There are substantial differences in the magnitude of the contributions from the private sector. The main types of venture capital support and financial instruments discernible in the literature are public financing, venture philanthropy, tax incentives, loans, guarantee schemes, creative vouchers, equity finance, joint ventures and in-kind/ non-monetary support. In the digital era, crowdfunding is emerging as a major source of funding which poses opportunities (such as democratising the commercialisation of innovation and financing) and threats (such as the crowding out of smaller projects). Trademarks in the CCI have also increased. Venture capital investments in CCI infrastructural development are also noted together with the importance of hybridisation and public-private sector partnerships.

The main South African venture capital sources for funding for the CCI is the Arts and Culture Venture Capital Fund supported by the Department of Sports, Arts and Culture (DSAC). The fund is an important source of finance for start-up entities. Of concern is that the qualifying criteria to access the funding tends to support mainly events rather than businesses and there is preference for companies that have a track record rather than those that are start-ups. Additionally, Business and Arts South Africa (BASA) is a major organisation in providing business support to the arts and cultural sector. The private sector (especially banks) also provides venture capital funding.

Key recommendations are forwarded which include developing a monitoring and evaluation system to track venture capital investments and the impacts thereof, as well as maintain a database. Future research should also examine the rates of loan repayments. The focus of venture capital should be on business development rather than supporting specific events or activities. Sector specific tailor-made solutions for access to finance for businesses and entrepreneurs in CCI need to be developed to accommodate the diversity in the sector. The ‘ladder of growth’ approach should also be considered. Private-public partnership need to be strengthened and public financing reduced. Tax and other incentives should also be considered. Investments in training, especially focusing on business aspects and entrepreneurship is critical.