Lending to Creators
Li Jin, who I view as the thought leader in the passion economy, recently wrote an article about the rise of the middle class of creators. It described several different strategies to enable and further the rise of such a middle class and I wanted to dive into one area in particular, which is providing capital to creators to grow their businesses. Before diving any deeper, depending on who you ask, the term creator can be quite robust including, but not limited to, Artists, Content Creators, Designers, E-Gamers, Influencers, Models, Musicians, Writers, Photographers, etc…
As more people begin to monetize, it’s apparent that they have similar requirements to other small businesses and need the proper tools to grow - including having enough cash to efficiently operate. It is our belief that the injection of capital via debt or equity will allow these creators to invest in themselves beyond just the cash flow they are earning month to month, which in many cases is barely enough to sustain their business plus basic life needs. Cameras, travel, editors, equipment, software, etc. are all material expenditures that tighten their cash flow, thereby impeding potential growth.
At the same time, banks and traditional financial institutions have a challenging time underwriting a creator’s ability to pay back a loan, thus leaving the creator with minimal choices to bring capital into their business. Even at the high end of the market for creators earning millions a month in revenue, the underwrite is not super clear to banks. How do they analyze and understand YouTube ad revenue or Spotify streaming revenue when the asset class is relatively nascent in comparison to the traditional small businesses they are used to working with?
As such, creators are left with few options to make significant investments into their own businesses. So how does this change?
The first part of this equation is to look at a variety of types of creator incomes that may help us better understand what revenue is predictable, and therefore easier to underwrite.
● Brand deals: Brand deals are when a business hires a creator to provide a service for their company and is achieved via direct relationships or through advertising/creative agencies
These deals are typically one-time deals (though sometimes creators have retainer agreements) and range in rates depending on the task at hand.
A lender will struggle, unless there is significant data and track-record, to predict how much a creator will make over the next period of time, therefore this revenue is harder to lend against.
Additionally, affiliate links have proven to be reliable sources of revenue for creators, but are not fully in the creator’s control (as pay rates and products offered may change.)
Company to look out for: Archie, whose wedge product offers invoice financing to creatives.
● YouTube streaming revenue: Creators earn money on YouTube in a variety of ways, but primarily through its programmatic ad exchange (AdSense).
This revenue can be verified via YouTube’s content management system, which decreases fraud risk of misstatement of earnings, and the revenue will continue to accrue on all uploaded videos, even those uploaded several years ago.
While not every YouTuber has consistent monetization (viral videos create challenges for predictive modeling), on the whole underwriting forward-looking revenue is reasonable because of the immense data YouTube provides.
Company to look out for: ChannelMeter, a payments provider for YouTubers.
● Digital streaming platforms (i.e. Spotify, Amazon Music, Apple Music, etc.) revenue:
Similar to YouTube, insofar as new releases will generate more streams and therefore more revenue, but the back-catalog of content will also generate material revenues, that become more predictable over time (after the initial upload, the power users or listeners will remain with minimal attenuation over time).
For musicians who otherwise lost a significant core of their revenue through the loss of touring during COVID, streaming has remained steady, proving its ability to be securitized and provide financial relief for artists.
Company to look out for: Stem, which provides digital streaming financing for musicians.
● TikTok creators: TikTok creators are similar to Instagram creators in that they need to generate revenue for themselves via a number of means, with the exception of money earned from the Creator Fund.
The Creator Fund pays out at a low rate per view, meaning consistent uploading of high-quality content is the only way to predictably generate revenue from it (the TikTok algorithm is a black box and viewership/engagement can ebb and flow with little rhyme or reason – although, similarly to Instagram and even YouTube, a slower pace of upload can impact the exposure provided by the algorithm.)
Brands have been toeing into the TikTok ad world and are now seeing the full potential of the virality and the value they can get on ad dollars spent relative to other platforms, which is a hopeful tailwind for TikTok creators.
Business-in-a-box solutions are still in their early days, with Patreon leading the way but offering limited functionality outside of its core subscription model. Other platforms, such as Snipfeed, have emerged that create all-in-one landing pages for creators, to consolidate all potential revenue sources, ranging from e-commerce to personalized engagement videos to private courses for purchase.
As these platforms take hold, more monetization streams will emerge, with greater predictability and more resemblance to small businesses that financial institutions are used to underwriting. In the interim, fintech companies in the vein of those listed above will emerge to fill the gaps that banks have left.
These fintech businesses are set up to intake data in a scalable way directly from the platforms generating revenue for creators, and are built to understand the risks that banks cannot wrap their heads around. These cash streams are not a silver bullet solution, but will further access to funding and spur growth for those without access to such capital now.
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