Briefing for the Capital Matters Consultation

Introduction

Mission Models Money’s (MMM) vision is to transform the way the arts use their resources
to support the creation and experience of great art.

Core to this vision of transformation is building financial resilience 1.

Since 2007 MMM’s research has established that thousands of arts and cultural
organisations in the UK, critical to both the historical and contemporary cultural canon, are
over-extended and under-capitalised. Typified by high fixed costs, inflexible business
models and weak balance sheets, many are overly dependent on annual public sector grants
in order to survive.

MMM’s current fourth phase of work, which has been running since 2008, comprises a n
umber of strands Each of these strands has sought to make a contribution towards helping
creative practitioners and organisations become more resilient in response to the primary
research findings which emerged in 2007.

For example, through one work stream called ‘expanding the financial toolbox’ MMM has
sought to help creative practitioners and organisations become more financially resilient by
encouraging:

• recognition of the concept of undercapitalisation and the importance of addressing

it;
• recognition of the range of financial mechanisms other than grants that can achieve
capitalisation e.g. provision of/use of loans and revenue (and risk) sharing
arrangements but additional to and not as a replacement for appropriate grant
funding;
• investment in building organisational capacity to support delivery of programmes
and associated services;
• encouraging new forms of revenue generation specifically through activities that
contribute directly to mission (rather than subsidiary trading);
• seeking recognition among funders of the importance of providing grant funding to
support research and development activity and assist the transition to new ways of
working aimed at achieving greater resilience.

While we are interested primarily in revenue generation through activities that contribute
directly to mission we are aware of the value of new revenue streams which constitute
subsidiary trading. For example Shetland Arts has purchased a trout fishery with hydro-
potential and Impact Arts runs a Christmas tree franchise.
1 MMM is using Mark Robinson’s definition of resilience “resilience is the capacity to remain productive and
true to core purpose and identity whilst absorbing disturbance and adapting with integrity in response to
changing circumstances”
You can read about the MMM work streams in more detail on our website at
www.missionmodelsmoney.org.uk, including in the resources section of the website and in
the provocations section of the website where you will find ‘The Art of Living’.

The Capital Matters project – what is it about?

The Capital Matters project is not simply about financing. However, our hypothesis is that
the arts and cultural sector could become stronger and more resilient in the future if
creative practitioners and organisations had access to appropriate financial capital and
support in building organisational capacity. This would underpin:

- development of broader and deeper public engagement;

- development of creative content;
- progress in the articulation of value;
- Developments in management and governance (including new approaches to income
generation like selling existing services online or expanding contract income) 2.

We therefore consider that positively influencing the policy and practice of both public and
private funders and financing organisations and encouraging them to adopt an appropriate
financing and investment approach is a key building block which needs to be in place if
organisations are to achieve greater resilience.

The fallout from the global financial collapse particularly confirmed reductions in the
availability of public sector grant income only increases the need to get to grips with these
issues as a matter of urgency. MMM believes that within this turbulence there is an
unprecedented opportunity to build the sector’s resilience by creating a forward looking,
national policy and infrastructure framework for the longer term. This will help accelerate
evolution of working practices and behaviours by both creative practitioners and
organisations and public and private funders and investors. The Capital Matters project has
been designed by MMM to respond to this opportunity.

Capital Matters is a programme with three main elements:

- Research to examine the approaches that creative practitioners and organisations are
already deploying to evolve current business models and/or develop new business
models which assist them to build financial and organisational resilience.

- Consultation with frontline creative practitioners and organisations to investigate

what changes to existing infrastructure support and/or what new kinds of support
including changes to public and private funding policy and practice would help to
build resilience.

2Innovation in Arts and Cultural Organisations, Bakhshi and Throsby, Nesta Interim Research Report,
(December 2009).
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 - Discussions with public and private funding and financing organisations about how
their practice supports or inhibits the building of resilience in the arts and cultural
sector and to encourage good practice.

Our overall goal is to encourage a funding/financing environment that invests in the

sector’s long-term health and vitality.

In MMM’s view this means providing access to an appropriate range of financial capital
including grants, loans, quasi equity, endowments, exchange and barter arrangements,
bond financing and contract income 3.

It also includes understanding non-financial support needs better. This is necessary to

enable creative practitioners and organisations to deploy their existing assets better and to
develop new assets – whether tangible or intangible in order to generate more of their own
income into the future4.

The project is being overseen by a task force chaired by Fiona Ellis (previously Director of
the Northern Rock Foundation and Chair of the NCVO Funding Commission). It is also
benefiting from the input of a specialist committee.

The methodology for the research includes collection of data and narrative information
from detailed financial surveys and in-depth face to face interviews with leaders from 3o
arts and cultural organisations operating across England, Wales and Scotland. This
material is also being contextualized through a survey of recent funding and finance trends
drawing on a wide range of data sources.

The result of the primary research will be a set of detailed insights into how arts and
cultural organisations are adapting or changing the way they operate and innovating in
order to make themselves more resilient in the future.

These insights have informed the questions we would like to share with you at the end of
this consultation paper.

The project is being financed and supported by The Gulbenkian Foundation’s Innovation
Fund, The Northern Rock Foundation, The Scottish Arts Council and Arts Council England.

3 See http://bit.ly/aADLnI for a longer introduction to this subject

4 Tangible assets include buildings, equipment, dance floors etc; intangible assets might include intellectual
property, brand strength or social capital generated by communities of interest including users, audiences,
donors, funders and partners.
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Why is there a need for Capital Matters? Our analysis to date.

Consultations with arts and cultural organisations carried out by MMM in 2007 strongly
suggested that creative practitioners and organisations are both under-capitalised and over-
extended.

People working across the arts sector reported to us that:

- Public sector and foundation grants were spread ever more thinly.
- There was pressure to do more with declining revenue funding.
- Funding was tied to artistic product so organisations lack resources to invest in the
development of their business model.

The research confirmed that the nub of the problem was as follows:

“Insufficient investment in the core of A&COs (arts and cultural organisations) –

the leadership, management and systems that help to ensure organisations run
efficiently and effectively. This lack of investment creates a vicious circle.
Organisations lack resources – skills, expertise and money – to invest in creative
ways of generating resources (for example for investment in research and
development and to exploit the intellectual capital generated).”5

Amongst our recommendations, designed to address the problem, was:

• The setting up of a new underwriting fund (where a sum of money is reserved and
called down only if needed) to provide creative practitioners and organisations with
the confidence to take artistic risks, develop new initiatives or simply to enable them
to weather cash flow difficulties

The 2007 MMM research also confirmed two other important issues:

• The need to provide advice and expertise to help creative practitioners and
organisations better understand their finances,

• The need to clarify and match the correct funding/financing options with the right
sorts of projects or activities in order to enable organisations to flourish.

Without such matching, investment may at best be unproductive and at worst

counterproductive. To quote Clara Miller, head of the Non Profit Finance Fund in the US:

“It’s no good accessing investment to enable you to make more widgets if you’re

5New and alternative financial instruments : final report for Mission Models Money, catalysing a more
sustainable arts and cultural sector, Margaret Bolton and David Carrington (2007).

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 making a loss on each one; it simply makes your situation worse”

She argues that there is a fixed relationship between mission (programmes), model
(organisational capacity) and money (capital structure) with any change in one inevitably
having an impact - planned or unplanned - on the others. Action is therefore needed on all
three fronts at the same time to enable non profit organisations, including those who work
in the arts and cultural sector, to flourish.

During 2008 and 2009 we have developed our analysis further concerning the difficulties
reported to us in 2007.

Through a consultancy project in the North East of England we have been able to work
closely with a group of building based arts and cultural organisations and funders to
develop a strategy aimed at achieving greater financial resilience.

The organisations we were working with found it difficult to raise funding for core operating
costs. As a result they did not have adequate reserves and they lacked resources to invest in
their organisation and their future artistic development. Typically this meant they could not
do one or more of the following:

• make provision for future spending needs in relation to building and plant;
• finance adequate rehearsal time;
• commission new work and support emerging talent;
• invest in improving existing methods of income generation - for example, employing
an additional fundraiser or events person;
• develop new income generating ideas;
• purchase an appropriate share in the IP produced by the artists they worked with;
• invest in their organisational capacity to support their work.

Interviews with the organisations suggested frustration and thwarted ambition:

“We do what we do but we aren’t able to grow content and content is all.”

And a drift towards a position where it was becoming more difficult to take artistic risks
because the imperative to cover significant fixed costs demanded conservatism in
programming.

Although these organisations were cash poor, they held significant assets in the form of
buildings or intellectual property they had helped develop and they also had access to
significant social capital through their pool of supporters and donors.

MMM concluded that they could become more financially resilient by better exploiting their
existing assets and developing new ones. We proposed a number of measures aimed at
assisting them to do so, including

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- Grants to support research and development work on collaborative income generating
ventures and

- The establishment of a revenue and risk sharing fund providing support for new income
generating projects and providing access to appropriate business support.

You can read more about this project in the Resources section called Money on our website.

During 2009/10 we reviewed a small action research project also in the North East of
England aimed at testing whether an injection of capital (in the form of a grant) coupled
with appropriate business support could help four different arts and cultural organisations
develop new projects which would enable them to generate more of their own income over
the medium to longer term.

All four projects are about digitisation. The approach taken is one of ‘asset based
development.’ Put simply this means building on existing skills and expertise and better
exploiting products and services that have already been developed. For example, bringing
popular off-line products and services online to reach a wider audience and using
techniques such as up selling and cross selling.

Although it is very early days and some of the projects are still in development, this
initiative suggests that relatively small capital investments may generate lasting value in a
range of ways including financially.

Benefits to this cohort have been:

• Access to effective and appropriate business diagnostic skills to identify and refine
market opportunities and a critical pathway;

• Development of new on-line products and services;

• Development of audiences through social media.

This piece of work suggests the potential of digitisation for some arts and cultural
organisations; it demonstrates that digital tools can be the corner stone or catalyst for some
strategies designed to support greater resilience.

The results of this review have helped us to understand better the key role that appropriate
business support plays in helping arts and cultural organisations develop successful new
income generating ventures and the challenge that organisations face in funding the
transition to more financially sustainable ways of working.

Key findings were:

• For the organisations involved the capital provided was contributing towards greater
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 public engagement; art form and content development; progress in the articulation
of value and development in management and governance.
•
• All the business ventures pursued were core to achieving organisational mission.
•
• All the ventures were helping the organisations involved to build new communities of
interest, extend reach into new markets, build their reputations and articulate their
value.

In summary the new research commissioned through Capital Matters reflects further on
these findings. In Capital Matters we are looking more deeply at how change is effected in
four dimensions:

- public engagement;
- art form/content development;
- articulation of value;
- development of management and governance (including developing new
approaches to income generation)6.

And what organisations identify as

- funding and financing options;

- attitudinal barriers they encounter and how they are being overcome;
- support needs and how these are currently met.

We will be presenting the emerging findings from this new research, which is still in
progress, at the consultation meeting.

Questions for the consultation

Ques 1: What do you think of our analysis – is it sound, does it chime with your
experience?

Do you lack resources to invest in your organisation for example, in training and skills
development for staff or in systems such as finance systems?

Do you lack resources to invest in research and development for new products and services
(that could help you generate more of your own income)?

Does the current policy and practice of funding/financing organisations help or hinder you
in developing your business model? If so, how?

Ques 2: How are you responding to this environment?

6Innovation in Arts and Cultural Organisations, Bakhshi and Throsby, Nesta Interim
Research Report, (December 2009).
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What are the biggest drivers of change for your organisation in the external environment?

Are you changing how you operate to cut costs? What effect is this having on the
organisation and your activities?

Are you trying to better articulate and measure what you deliver?

Are you trying to make better use of your existing assets/develop new assets (tangible and
intangible) and if so how?

Are you trying to generate more of your own income and if so how?

Did you need investment to undertake this work? If so where did you get it from - your
reserves, a special grant (if so from where), a loan or revenue sharing arrangement or other
source?

Did you access expert advice and guidance in undertaking this work? If so where did you
source it? How would you rate its quality?

Did you have to overcome attitudinal or cultural barriers? Has the culture of your
organisation changed as a result of this work?

Ques 3: How would you like to see the environment change?

How would you like to see funding and financing policy change? Are there things you need
to invest in which are difficult to fundraise for?

Would you like to have access to different forms of finance to help you become more
resilient for example, grants for research and development activities, underwriting or other
loans or revenue (and risk) sharing arrangements for new ventures?

What non financial support would you need to enable you to become more resilient? Is it
currently available?

Would you like to see more collaborations for example, fundraising for regional arts funds,
more collaborative work on public engagement opportunities?

Are there any other interventions you would like to see to make arts and cultural
organisations stronger and more resilient into the future?

Can you identify any examples of funding or investment mechanisms outside the UK (or
from other sectors) that you think could be introduced for arts and cultural organisations
here?