Investment in the Creative Industries

2021-22

Lecture 1
Introduction to the unit
Public & Private Funding

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Unit lecturers:
• Unit lecturers:
• Julian Sims: julian.sims@uca.ac.uk
• Elisabetta Lazzaro: elisabetta.lazzaro@uca.ac.uk
• Howard Monk: Howard.Monk@uca.ac.uk
• Katso Otukile: Katso.Otukile@uca.ac.uk
• Mike McNally: mike.mcnally@uca.ac.uk
• Ibrahim Kalaji Ibrahim.Kalaji@uca.ac.uk
• Unit Teaching Assistant:
• Tripti Kohli tripti.kohli@uca.ac.uk
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UNIT TITLE Investment in the Creative Industries

Unit Code EBSC7250

Location Epsom
Level Level 7
Duration 6 weeks
Credit Value 15
Total Learning Hours for Unit 150
Course(s) to which this unit Global Master of Business and Management
contributes (MBM)
Master of Business Administration (MBA)
MA / MSc Experience and Service Design
MA / MSc Fashion Business and Management
MA / MSc Luxury Business Management
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 Syllabus
Wednesday 29th June 2022 Public & Private Funding Julian Sims

Wednesday 6th July 2022 ‘Bootstrapping’ and patronage funding Ibrahim Kalaji

Wednesday 13th July 2022 Crowd funding, Bitcoin and Blockchain NFT Elisabetta Lazzaro
Brand partnerships and corporate
Wednesday 20th July 2022 sponsorships Mike McNally

Wednesday 27th July 2022 Financial modelling and forecasting Ibrahim Kalaji

Wednesday 3rd Aug 2020 New Business Models and Innovations Howard Monk

Wednesday
6/29/2022 3rd Aug 2021 New Business Models
J Sims and Innovations Katso Otukile 4
The aims of this unit are:
A1. To enhance your knowledge and understanding
of various industry funding and finance to inform development
of business start-ups and investment opportunities
A2. To analyse and evaluate investment models, risks and
opportunities pertaining to arts and creative industries related
projects, products and services
A3. To apply financial modelling and trend forecasting to arts
and creative industries sectors

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Learning Outcomes
• On successful completion of this unit, you will be able to:
• LO1. Demonstrate an understanding of the various industry funding, finance and
investment opportunities available to existing and potential business investors
and stakeholders
• LO2. Critically analyse and
evaluate current knowledge and methodological practices leading to a proposed
hypothesis
• LO3. Demonstrate comprehensive understanding of how investment strategies
are created and implemented in a ‘real world’ scenario
• LO4. Select and utilise a range of presentation skills to effectively communicate
findings and recommendations to a specified audience
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Indicative Teaching & Learning Methods
• No. of hours of scheduled activity 48 hours
• No. of hours of independent activity 102 hours
• No. of hours of placement activity N/A

This will comprise:

• Lectures, presentations, group feedback, independent study

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Assessment Criteria
CRITERION MAPS TO LEARNING OUTCOME
Knowledge of: LO1, LO2
Various industry funding, finance and
investment opportunities available to music
business investors
Understanding through the application of: LO2, LO3
Analysis, evaluation and synthesis of a range of
business data, research sources and
methodologies
Technical and applied skills through: LO4
Professional presentation skills through verbal
and visual communication to a specified target
audience
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Core reading
Before each week, please engage with the chapter for the upcoming week.
Key text week 1:
• Arnold, G., n.d. The Financial Times Guide To Investing: The Definitive
Companion To Investment and The Financial Markets. FT Publishing
International; 4 edition (20 Feb. 2020)
• Reading lists are indicative at the point of validation or periodic review.
Any subsequent amendments are approved and published on myUCA in
accordance with the Reading Lists policy as maintained by Academic
Services. This policy also forms part of Annex 5 of the Quality Assurance
Handbook.
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INDICATIVE READING LIST
• Burns, P. 2018, New venture creation: a framework for entrepreneurial start-ups, Second edn,
Palgrave, London.
• Cremades, A. & Corcoran, B. 2016, The Art of Startup Fundraising: Pitching Investors, Negotiating the
Deal, and Everything Else Entrepreneurs Need to Know, John Wiley & Sons, Incorporated, Hoboken.
• Méric, J., Brabet, J. & Maque, I. 2016, International Perspectives on Crowdfunding: Positive,
Normative and Critical Theory, Emerald Publishing Limited, Bingley.
• Preddy, S. 2011; 2017;, How to run a successful design business: the new professional practice, 1st
edn, Gower, Farnham.
• Weinstein, S. & Barden, P. 2017, The Complete Guide to Fundraising Management, John Wiley &
Sons, Incorporated, New York.
RECOMMENDED
• Choudhry, M., Bheenick, R., Fisher, P. & Lipton, A. 2018, The Moorad Choudhry Anthology: Past,
Present and Future Principles of Banking and Finance, John Wiley & Sons, Incorporated, Somerset.
• Curtis, J. (2020) Hustle Harder, Hustle Smarter Hardcover. Amistad (14 May 2020)
• Green, A. 2015, Xva: Credit, Funding and Capital Valuation Adjustments, John Wiley & Sons,
Incorporated, New York.
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Wider reading
• Many of the academic readings which are important to use are in the
key textbook and the reading list, but you should research others
independently.
• Another part of your brief is to participate in teaching sessions and
engage with readings and viewings: you demonstrate this by creating
lecture notes.
• By doing all of this you will be not only learning about the operations
and technology management topics for each week but you will also
learn to theorise yourself by the end of the unit.

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 Assessment: Your brief
A brief is an objective you aim to reach by the end of a project. The brief is set by the tutor, it’s a piece of work you
produce. The tutor has designed the brief so that you learn a lot through the activities you need to go through in
order to reach the objective by the deadline.
• Your brief (in bold are your assessment requirements which go into your portfolio):
• - You will use the teaching and academic readings and viewings provided to develop your understanding of the
finance in the arts and creative industries:
• you demonstrate this in your group of no more than 5 students by writing a group “proposal for funding a new
venture”:
• 1000 words and a video pitch (max 5 minutes) to funders.
• You will be required to ‘discuss potential funding strategies for a new venture’.
• The video can be made on a phone, PowerPoint video, or something more creative if you have the capability
(but it is content not technology that is being assessed).
• The proposed “new venture” can be a new product, event, or campaign.
• Each of the no more than 5 students in your group must contribute approximately 1 minute to your video and
identify that contribution in an accompanying slide.
• - Many of the academic readings which are important to use are in the key textbook and the reading list, but you
should research others independently.
• - Another part of your brief is to participate in teaching sessions and engage with readings and viewings: you
demonstrate this by creating lecture notes.
• - By doing all of this you will be not only learning about the finance in the arts and creative industries each week,
but you will also learn to theorise yourself by the end of
6/29/2022 the 6 weeks.
J Sims 12
Q&A
• Any questions?

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 The Financial Times Guide to Investing: The
definitive companion to investment and the
financial markets Fourth Edition

Chapter 1 & 7
What is investment?
Unusual share investment

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 Main features of limited companies

Legal nature

Perpetual life

Limited liability

Legal safeguards

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 Two main forms of limited company

Public limited company (plc)

Private limited company (Ltd)

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 Public and private limited companies
12 2007/08 2008/09 2009/10 2010/11 2011/12

Thousands
Public Limited
Companies

10.5
10.5

9.0 9.6
9.1

7.5 9.1 7.9 7.6

2,605.1
2600 Private Limited
Thousands

2,447.4 Companies
2,407.3
2,350.0
2400
2,255.5

2200

2000 9.1

0
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 The economic importance of public limited companies – an example
Market share of the four largest grocers: 12 weeks ending 20 Sept 2012

Other Tesco
23.6%
31.0%

17.5%
Asda

11.4%
16.5% Morrison
Sainsbury

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 Role of the Stock Exchange

Primary market

Secondary market

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 Types of share capital

Ordinary shares (equity)

Preference shares

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 Altering the nominal value of shares

Share splits

Share consolidation

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 Types of reserves

Revenue reserves

Capital reserves

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 Reasons for bonus share issue

To lower the market value of each share

To provide the shareholders with a

‘feel-good factor’

To increase lender confidence

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 Sources of long-term finance for a typical limited company

Long-term finance

Share Retained Long-term

issues profits borrowings

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 Common share issue methods

Common
Rights Placing
issue
issue
methods

Bonus Offer for Public

issue sale issue

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 Availability for dividends of various parts of the
shareholders’ equity

Share capital Not

(at nominal available
or par value) for
withdrawal

Capital
reserves

Available
for
Revenue withdrawal
reserves

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 Da Silva plc: Income statement for the year ended 31 December 2012
£m
Revenue 840
Cost of sales (520)
Gross profit 320
Wages and salaries (98)
Heat and light (18)
Rent and rates (24)
Motor-vehicle expenses (20)
Insurance (4)
Printing and stationery (12)
Depreciation (45)
Audit fee (4)
Operating profit 95
Interest payable (10)
Profit before taxation 85
Taxation (24)
Profit for the year 61
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 Da Silva plc: Statement of financial position as at 31 December 2012

£m
ASSETS
Non-current assets
Property, plant and equipment 203
Intangible assets 100
303
Current assets
Inventories 65
Trade receivables 112
Cash 36
213
Total assets 516

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 Da Silva plc: Statement of financial position as at 31 December 2012
(Continued)
£m
EQUITY AND LIABILITIES
Equity
Ordinary shares of £0.50 each 200
Share premium account 30
Other reserves 50
Retained earnings 25
305
Non-current liabilities
Borrowings 100
Current liabilities
Trade payables 99
Taxation 12
111
Total equity and liabilities 516

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 Layout of the income statement for a limited company
Sales revenue

less
Cost of sales

equals
Gross profit

less
Operating expenses

equals
Operating profit

less
Interest payable

plus
Interest receivable

equals
Profit before taxation

less

Taxation

equals
Profit for the period
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 The relationship between the shareholders,
the directors and the auditors

Directors

review
account
elect

report

Shareholders elect Auditors

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 Segmental disclosure

Revenue – distinguishing between external

customers and other business segments

Interest revenue and interest expense

Depreciation and other material

non-cash items

Material items of income and expense

Profit (loss) from associates or

joint ventures

Income tax
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 Creative accounting methods

Creative
Misstating Inadequate
accounting
revenue disclosure
methods

Massaging Concealing Misstating

expenses bad news assets

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 Principles underpinning a framework of rules

Disclosure Framework
Fairness
of rules

Accountability

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 The UK Corporate Governance Code

Every listed company should have a board of directors

There should be a clear division of responsibilities

between the chairman and the chief executive officer

Non-executive directors should challenge and help

develop proposals on strategy

There should be a balance of skills, experience,

independence and knowledge

The board should receive timely information

Appointments to the board should be the subject of

rigorous, formal and transparent procedures
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 The UK Corporate Governance Code (Continued)

All directors should submit themselves to re-election at

regular intervals

Remuneration levels should be sufficient to attract, retain

and motivate directors of the appropriate quality

There should be formal and transparent procedures for

developing policy on directors’ remuneration

The board should present a balanced and understandable

assessment of the company’s position and prospects

The board should try to ensure that a satisfactory

dialogue with shareholders occurs

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 The UK Corporate Governance Code (Continued)

Boards should use the annual general meeting to

communicate with investors

The board should define the company’s risk appetite and

tolerance and maintain a sound risk management system

Formal and transparent arrangements for financial

reporting and internal control should be in place

The board should formally and rigorously examine its

own performance each year

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 Management Commentary

Directors report

Strategic report

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 Directors’ report
The names of those who were directors during the reporting period

Any recommended dividend

The acquisition of a public limited company of its own shares

The involvement of employees in the affairs of the company

The employment and training of disabled persons

Important events affecting the company since the year end

Likely future developments in the business

Research and development activities

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 The major sources of internal finance

Short-term Long-term

Reduced
Retained
inventories
profits
levels

Delayed Total
payment to internal
trade payables finance

Tighter
credit control

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 The major external sources of finance

Ordinary Finance
shares leases

Preference Long- Hire purchase

shares term agreements

Securitisation
Borrowings
of assets

Total finance

Debt
factoring
Bank Short-
overdrafts term Invoice
discounting
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 The risk/return characteristics of long-term funds

Return

Ordinary
shares
Preference
shares
Borrowing
Risk

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 Loan capital and risk

Lenders may reduce the risk of lending by

Requiring security
(fixed or floating charge on assets)

Including covenants in the loan contract

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 Loan covenants

May deal with such matters as:

Financial statements

Other borrowings

Dividend payments

Liquidity

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 Types of loan capital

Term loans

Loan notes

Eurobonds

Deep discount bonds

Convertible loans

Mortgages

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 Finance leases

Ease of
borrowing

Cost
Main Improved
benefits cash flows

Flexibility

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 Asset finance provided by FLA* members, 2007 to 2011
30

£ billion
25

20

15

10

0
2007 2008 2009 2010 2011

*Finance & Leasing Association High value Other asset finance

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 The hire-purchase process

Customer
Regular
Asset payments
Initial
delivered made over
deposit
(4) HP time (5)
(2)
agreement
(1)

Supplier Financial
institution
Asset purchased and
paid for immediately (3)

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 The securitisation process

Assets Asset–backed
transferred bonds issued

SPV
Income from Interest paid
assets on bonds

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Invoice discounting and invoice factoring
• Invoice factoring: a businesses sells outstanding invoices (accounts
receivable) to a 3rd party commercial finance company (a factor).
• Invoice discounting is short-term borrowing against outstanding
invoices – sell unpaid invoices to a lender, who then provides a cash
advance based on the percentage of the invoice’s value.
✓In invoice factoring, the customer pays the factor-company directly.
✓In invoice discounting, the customer pays the company as normal.
✓In invoice factoring, services like full sales ledger and collections
service are available.
✓In invoice discounting, these services are not included.

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 The debt-factoring process

Goods supplied on
credit
Client (1) Credit
business customer

Factor Factor
pays 80% invoices Customer
Factor pays 20%
to client credit pays
balance to
immediately customer amount
client (less fees)
(3) (2) owing
when credit
customer pays to factor
amount owing (4)
(5)

Factor

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 Invoice discounting and factoring, 2007 to 2011
Invoice discounting
200 Factoring

203,800
Sales revenue £m
175

178,683
175,019

163,407
150

159,526
125

100

75
20,311

19,378

18,483
17,933
50

16,394
25

0
2007 2008 2009 2010 2011
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 Long-term versus short-term borrowing

Issues that should be taken

into account include:

Matching

Flexibility

Refunding risk

Interest rates

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 Short-term and long-term financing requirements

Total
funds Fluctuating Short-term
(£) current assets finance

Long-term
Permanent finance
current assets

Non-current
assets

Time

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 The ‘trade-off’ theory of financial gearing

Moderate levels of gearing Excessive levels of gearing

Cost of capital (%)

(%) (%)

Cost of borrowing (after tax)

0
Level of gearing (%)
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 Common methods of share issue

Common
Rights
issue Placing
issue
methods

Bonus Offer for Public

issue sale issue

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 Reasons for a rights share issue

There is no dilution of control

Costs are lower when offering shares to

existing shareholders

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 The Stock Exchange

Two important roles

Primary market

Secondary market

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 Stock Exchange listing
Advantages for a business

Easier to raise funds

Funds acquired at lower cost

Raises profile

Shares valued in an efficient manner

Broadens investor base

Enables other businesses to be acquired by

shares rather than cash

Can help attract and retain employees

(share incentives)
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 Stock Exchange listing

Disadvantages for a business

Cost (including management time)

Increased regulatory burden

Close monitoring of actions and decisions

Increased vulnerability to takeover

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6/29/2022
Percentage of UK stock market owned by

5
40

10
15
30

25
35

20
value

Rest of the
world

Insurance
companies

Pension funds

Individuals

Unit trusts

J Sims
Investment
trusts
Other financial
institutions

Charities

Private
non-financial
companies

Public sector
Beneficial ownership of UK shares, 31 Dec 2010

Banks
61
 Distribution of AIM* listed companies by equity market value

Number of companies
0-2 2-5 5 - 10 10 - 25 25 - 50 50 - 100 - 250 - 500 - over
100 250 500 1,000 1,000
250
223

200 187

153
150 129 136

104
100 90

50 31
9 5
0
Market value range (£m)
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* Alternative Investment Market: smaller, less-developed firms
 Providing long-term finance for the small business

Venture capital

Business angels

Government assistance

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 Venture capital

Start up capital

Early stage capital

Expansion capital

Buy out/buy in capital

Rescue capital

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 Financing small businesses, 2002 to 2004

Venture Partners and

capital shareholders Asset-based finance
4% 7% (for example HP,
Banks factoring and trade
21% finance)
57%

11%
Other

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Funding: start-ups
• Raising initial capital: an entrepreneur might have a great idea and clear plan of
how to turn it into a successful business, but without funding it is unlikely the
business will get off the ground
• How much funding is required?
• When and how long the funding is needed for?
• What security can be provided?
• Is the entrepreneur is prepared to give up some control (ownership) of the start-
up in return for investment? (Equity funds)

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Key areas
• Set-up costs (the costs that are incurred before the business starts to trade)
• Fixed assets that the business needs before it can begin to trade
• Working capital (the inventory needed by the business; e.g. raw materials +
allowance for amounts that will be owed by customers who buy on credit terms)
• Growth and development (extra capacity)

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Internal and external providers of capital
• Sources from within the business are internal; from outside are external
• Personal sources: the most important sources for a start-up
• Retained profits: cash generated by the business when it trades – an
important source of finance for any business, large or small. Retained profits
can generate cash the moment trading has begun.
• Share capital invested by the founder: a common method of financing a
start-up. Founder provides all the share capital of the company, retains 100%
control over the business
• Once the investment is made the firm owns the money. The shareholder has
a return on investment through dividends and/or the value of the business if
ever sold

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 • Loan capital: the most common are a bank loan or overdraft
• A bank loan: long-term finance, with a fixed period over which the loan is
provided (e.g. 5 years), a specified rate of interest and timing and amount
of repayments. The bank will usually require some security for the loan,
usually personal guarantees provided by the entrepreneur. Bank loans are
good for financing investment in fixed assets and are generally at a lower
rate of interest that an overdraft. Not very flexibile
• A bank overdraft: short-term finance widely used by start-ups and small
businesses. An overdraft is a loan facility – the bank lets the business "owe
it money" when the bank balance goes below zero, in return for charging a
high rate of interest. Thus an overdraft is flexible; only used when and as
needed. Bank overdrafts are excellent for helping handle seasonal
fluctuations in cash flow or short-term cash flow problems

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 • Share capital – outside investors: friends and family of the entrepreneur
• Opinions differ on whether friends and family should be encouraged to invest:
may be prepared to invest for a long time; may not want to get involved in
day-to-day operations: positives
• However, there are pitfalls – tensions inevitably develop when family and
friends are fellow shareholders!
• Business angels: main kind of external investor in a start-ups. Business angels
are professional investors who typically invest £100k - £5m. Prefer to invest in
businesses with high growth potential.
• Tend to have made their money by setting up and selling their own business so
have proven entrepreneurial expertise; they make their own skills, experience
and contacts available.
• Provide all sorts of advantages but the entrepreneur gives away control over
the business
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 • Venture Capital is a specific kind of share investment that is made by funds
managed by professional investors. Venture capitalists rarely invest in
genuine start-ups or small businesses (minimum investment is usually over
£1m, often much more). Prefer to invest in established businesses with a
proven track record
• Another is "private equity" – just another term for venture capital
• A start-up is much more likely to receive investment from a business angel
than a venture capitalist

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Funding: established firms
• The capital markets:
• new share issues
• rights issues
• Loan stock
• Retained earnings
• Bank borrowing
• Government sources
• Business expansion scheme funds
• Venture capital
• Franchising.

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Investment appraisal – the basics
• What does an investor need to know?
• Return
• Timing
• Risks

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Group tasks

Seminar: ½ hour
• Form into an assessment group with no more than 4 of your fellow
students
Portfolio assessment: ½ hour
• Discuss with your fellow students how you will approach the
assessment – how does this week’s class influence what you will do?
Plenary: ½ hour

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