‘Crowdfunding programs can be very risky for both investors and those looking for funding’
by FRANK UZUEGBUNAM
October 19, 2017 | 12:55 am| | | Start Conversation
PAUL BARKES is Senior Counsel, Hogan Lovells, a leading global law firm providing business-oriented legal advice and high-quality service across its exceptional breadth of practices to clients around the world. In an interview with FRANK UZUEGBUNAM, he talks about funding for Nigeria’s creative industry amongst other issues. Excerpts
What type of international capital, if any, can Nigeria tap into?
Outside of Nigeria, a significant portion of financing in the creative industry still comes from traditional banks. In terms of cost, banks probably provide the lowest cost option. For regulatory reasons, it is not easy for foreign banks to lend outside of their jurisdictions, so foreign banks are not a realistic option inside of Nigeria. In the past few years, private investment funds have been established that focus on the entertainment industry. These private funds do not face the same regulatory issues as banks so have more flexibility in where they invest their funds. They also have a higher risk tolerance than banks, but this flexibility and willingness to take a risk comes at a cost in the form of higher interest rates. For these reasons, these private funds are a more likely source of international capital for the Nigerian creative industry. But, even though these funds are willing to take a higher risk than banks, it does not mean they will take any risk, and it will take some time to get these funds comfortable with the risks involved when investing in Nigeria.
How is currency fluctuation impacting investments; and what are can be done to mitigate this perceived, and real, risk?
Unfortunately, currency fluctuation risk is a very real risk with any cross-border investments. This applies whether that investment is into Nigeria or any other country. Because of the higher risk, investors will want a higher return on their investment, which will reduce the amount of investment that will be made. There are ways of addressing these risks, but there are costs to do so. To compensate for these additional costs investors, again, will look for higher returns which will reduce the amount of investment to be made.
One way of addressing this risk for foreign investors is through currency exchange hedging agreements, which are used very regularly in cross-border transactions. These hedge agreements reduce the risk to the investor, but do not eliminate the risk. Instead the risk is shifted to the other party to the hedge agreement, who gets paid to take on that risk. These agreements involve a cost to the investor, which the investor will expect to recover through its investment, so the investor will want higher returns on its investment.
Another way of addressing the currency exchange risk, is to identify investors who are looking to invest in Nigeria for the long term. When funds are expected to be transferred out of Nigeria in a short-term, a minor fluctuation in currency exchange rate can have a dramatic effect on the investment, thereby requiring a higher return for the investor to compensate it for the increased risk. Longer term investments can minimize the risk of short term fluctuations in the currency exchange rate.
Certain investments in the creative industry, by their nature, are long-term investments, such as investments in constructing cinemas and other infrastructure projects. There is a need to also finance shorter term investments, such as production of a film or television content. If investors in these shorter-term investments structure the investments so that funds can be re-invested in Nigeria instead of being transferred out of the country then they would also be less likely affected by short-term fluctuations in the currency exchange rate.
What are the latest models in creative and intellectual property funding?
One of the more interesting recent developments in creative and intellectual property funding has been crowdfunding. With crowdfunding, instead of one person or a small group of people investing a relatively large amount of money in a project, a larger group of people, usually through a web-based platform such as Kickstarter, invest smaller amounts of money.
The crowdfunding programs can have a number of different structures. In some cases, there is no expectation of a profit return on the investment. Instead the “investors” will get certain gifts for particular levels of funding.
For example, for a small investment in a film, the investor will get a digital copy, or a DVD, of the film when it’s completed. For a larger investment, the investor may get an autographed copy of the script or a chance to visit the set. These types of funding can be particularly successful where there is a large fan-base or where the project addresses an issue of wide concern, where people want to be involved with the project for reasons other than making a profit. In other cases, investors are expecting a financial return on their investment if the project is profitable. It can be a bit more difficult to raise funds through crowdfunding for projects where the investors are looking for a financial return as the investors may look for more information as to the likely success of the project.
Crowdfunding programs can be very risky—for both investors and those looking for funding. For investors, the creative industry is inherently risky and there is no assurance that any project will do well. Additionally, the crowdfunding model can lend itself to fraud, so investors should do their diligence. For those looking for funding, there may be laws regulating their ability to raise funds through crowdfunding, so it is not something to try without proper legal and professional advice.
What is the best way for stakeholders in the creative industry to navigate the digital space?
The digital space is very exciting as it opens up tremendous opportunities for the creative industry. It provides a new means for content creators to deliver content to consumers, and also provides a means for all stakeholders in the creative industry to connect with their audience and engage their audience in ways not previously available. A simple way of looking at the digital space is that it is a new tool for doing the same thing that those in the creative industry have already been doing—it’s a new way of delivering content, but is still just delivering content, or it’s a new way of advertising to consumers, but is still just a way of advertising. In some ways this view is correct but if that’s how you look at the digital space you will miss the opportunity to really succeed in the digital space. To succeed in the digital space, you need to appreciate how the digital space is different.
As an example, let’s look at content delivery. Historically, content was delivered in theatres, or broadcast over television or radio, or delivered on fixed media. The digital space may be a new means to deliver content, but you cannot necessarily deliver the same content over this new medium. The differences between how the content is consumed needs to be taken into account, and the content adjusted accordingly.
Looking at YouTube as an example. The average length of a video on YouTube is around 4 to 4 ½ minutes. You cannot take what would have been a 90 minute film presented in a theatre or on broadcast television and expect it to succeed on a platform like YouTube. However, if you take the same story line and break it down into smaller 4-5 minute segments it may work. On the other side of the spectrum you have platforms like NetFlix and Amazon where multiple episodes of a program that would have been broadcast on television over a number of weeks are being made available at one time to allow consumers to “binge” watch the episodes. For those producing episodic content, they need to consider whether, if presenting in the digital space, it makes sense to make all episodes available at the same time.
Looking now at marketing and advertising. Traditional means of marketing and advertising are one-way. Commercials are broadcast to consumers over television or the radio, or signs and billboards are posted to deliver messages to consumers. You can move a traditional one-way marketing campaign to the digital space but, unless you appreciate how the digital space is different from traditional marketing and advertising tools, you miss all the value the digital space provides. The digital space allows for feedback from the consumer. With that feedback, marketing campaigns can be adjusted. The digital space allows for back-and-forth interaction and interaction among consumers, which allows consumers to become part of the marketing efforts and creating the “word of mouth” promotion that can be extremely valuable.
One other unique aspect of the digital space is the speed with which it changes. New Apps and platforms are being developed, or suddenly become popular. To succeed, you need to be flexible and able to adapt to these rapid changes. It does not work to do things a particular way because that is what worked last time. It is important to try to identify where the digital market is going and try to say with it.
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