Not ‘because we’re worth it’

This week we read in AP that a consortium of organisations active in the cultural sector are launching a pilot scheme for an Arts Ventures Fund. Key movers include Tim Joss of the Rayne Foundation whose New Flow paper has been so influential and Clare Cooper of Mission Money Models which recently published research on capital availability and entrepreneurialism in the arts in the UK This initiative is very welcome. It is all very well for governments and others to exhort arts organisations to become more business-like but they typically suffer from a problem which prevents them from behaving like other businesses – they have great difficulty raising capital. Adrian Ellis addressed this issue of undercapitalisation very clearly in a 2004 conference presentation .

It is no use having a great plan to open new catering facilities, create a platform for digital sales, invest in professional fundraising, develop commercial touring or whatever if you don’t have the money to invest properly. Having not quite enough money is if anything even more dangerous; as any business person will tell you, starting a new business venture without sufficient investment is a recipe for failure and financial loss.
Most of our cultural organisations (I am speaking about Europe as a whole, not just the UK) are charitable foundations or directly part of government which means they cannot sell equity stakes and not many bank-managers would view a cultural organisation as a sound risk, or even understand the business model.
So, the creation of the Arts Ventures Fund is wonderful news. The people and organisations involved seem well equipped to raise the necessary finance and to put in place systems to manage the overall exposure of the Fund to financial risk. There are no guarantees when investing, even when accepting only the most promising projects, but the Fund should expect to be repaid by most loan recipients and to cover occasional write-offs from interest and other charges.
But there is an important and related problem: the managers of many cultural organisations would themselves not be able to put together a convincing business plan. Jenny Tooth of the Angel Capital Group produced a report in 2010 for the European Commission on financing options for the creative industries which highlighted this problem of ‘Investor Readiness’ This is hardly surprising since most publicly-funded cultural organisations around Europe (including the UK until quite recently) have for decades been under instructions from funders to operate at break-even and never, ever, to build up unallocated reserves. In many countries public money for culture is still conceived as deficit-funding i.e. covering the shortfall between costs and earned income. Often, an arts organisation which improves its income or which attempts to build up a reserve for future investments will actually find its public funding reduced! With such penalties for financial success it is no wonder that few cultural managers have seen the benefit of learning more about business management and why there is chronic lack of investment in (or understanding of) marketing and fundraising in countries outside the UK.
It seems unlikely that the new Arts Ventures Fund will succeed unless it also helps potential recipient organisations to become ‘Investor Ready’. Indeed one of the main indicators of its success should be how much it can help cultural organisations to understand better how they work as businesses, offering investment only against well-prepared business plans but providing support to organisations who are not yet able to put such plans together.
This concept of social investment is well advanced in the wider charity sector in the UK. One really interesting question is whether the Arts Ventures Fund will limit itself to lending only against financial returns or also against social returns i.e. benefits whose financial benefit can be imputed but which will not arrive directly in cash. A recent report from New Philanthropy Capital  gives estimates for the financial value of social outcomes from the work of several arts organisations working in the criminal justice system. In the case of imputed financial benefit from social returns, somebody somewhere has to pay up when these returns are achieved. In some cases private donors (or investors) can do this job but in the UK the government has also started to make contracts with organisations which can demonstrate that they have saved money for the public purse.
Can we calculate the social returns on investment in cultural activities? And how about imputing a value for cultural production and presentation itself? Clearly, in the context of investment it is no good simply to assert that the arts are valuable in their own terms (I call this the Jennifer Aniston shampoo argument: “because we’re worth it”). If other people are being asked to finance something the outcomes and outputs need to be clearly defined in advance and then measured before, during and after. That sounds tough! Perhaps it is easiest to start with investments which yield strictly financial returns. In any event, I look forward to seeing how the new Fund tackles these issues and in seeing the effect it will have on the effectiveness of our arts organisations.