BusinessDay 19 Oct 2017

14
BUSINESS DAY
COMPANIES & MARKETS
C002D5556
‘Crowdfunding programs can be very risky for
both investors and those looking for funding’
PAUL BARKES is Senior Counsel, Hogan Lovells, a leading global law firm providing businessoriented
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
Paul Barkes
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
Thursday 19 October 2017
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 oneway
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-andforth
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.