The Creative Social Enterprise: An Impact Investment

In the wake of the worst global economic recession in living memory, the creative industries sector has emerged as a powerful engine for economic growth and social, environmental, and cultural sustainability. With growing concern over the staggering amounts of funding now being directed toward social impact initiatives globally and the effectiveness of those investments, perhaps the time has come for gatekeepers to consider adding the creative industries to the short list of investment-worthy target sectors. One of the most profound trends in the social sector today is the emergence of a new class of entrepreneur: the creative social entrepreneur. Creative social entrepreneurs generate market demand for their goods and services while also contributing to the dynamic shift in cultural sustainability, social justice, and economic development around the world. Sadly, social entrepreneurs operating within the creative economy seldom receive the attention of institutions practicing and promoting impact investing — a fairly new investment approach that seeks to create positive social and environmental impact and generate a profit.

The majority of financial asset owners and managers that invest for social impact do not consider the creative industries a target sector for these types of investments (Harji and Jackson 2012; Lyons and Kickul 2013). Impact investors say that they want to invest in social innovation opportunities that lead to sustainable social change, yet scores of creative social entrepreneurs go unnoticed every year. Resilient in their mission to use creativity as a tool for social change, creative entrepreneurs can be found addressing some of most intractable social issues of today, including poverty eradication, women’s empowerment, environmental protection, and adolescent promiscuity, to name just a few.

Earthen Symphony, a decorative art and design studio in Bangalore, India, provides untrained women with employment opportunities as designers, artisans, and craftsman, as well as promotes a healthy work culture in the local community. Indego Africa is a lifestyle brand company in Uganda that works with women artisans through local cooperatives to generate income to support women and their families in the present, provide them with training to build profitable and sustainable businesses for the future, and gain access to international export markets. The avatar therapy project, led by Thomas Craig of King’s College London, is a computer-based system that aims to treat people with schizophrenia who suffer with hallucinations despite drug treatment. There are even digital artists and health care providers coming together to tackle bold projects, like PR:EPARe, a video game developed by the Serious Games Institute designed to help teenagers deal with sexual coercion during adolescence. These are just some examples of the many socially driven entrepreneurial businesses effecting change all around the world and in virtually every sector of the creative industries.

There are plenty of creative social entrepreneurs in the United States as well. Greg MacGillivray of MacGillivray Freeman Films in Laguna Beach, California, believes in the power of giant-screen, experiential IMAX Theatre films to transform how people see, experience, and value the ocean. Janet Rodriguez founded the wonderful SoHarlem boutique in New York City. SoHarlem is a West Harlem–based social enterprise founded to ensure that artisans and the local community benefit from the economic development in the Manhattanville Factory District. The People’s Cook, led by playwright/transmedia humorist Robert Karimi of Minneapolis, Minnesota, unites cross-cultural cooking and interdisciplinary art to promote well-being.

Regrettably, the lack of access to financing for businesses such as these is endemic worldwide despite growing evidence that the sector could potentially offer more resilient, inclusive, and environmentally viable paths to economic recovery and gross domestic product (GDP) growth. Therein lies the paradox. It appears that when it comes to social impact, creative entrepreneurs are absent from the impact investment conversation. So this begs the question, how do our creative enterprises get an invitation to the table? To answer that question, we must first understand a little more about this practiceof impact investing.

Impact Investing

Impact investing as a practice draws its inspiration from earlier trends such as socially responsible investing (SRI), sustainable investing, environmental, social, and governance (ESG), community development, and microfinance (Clark, Emerson, and Thornley 2014; Combs 2014). Both microfinance and community development, for example, have for decades driven positive change in underserved communities thanks to pioneers such as Muhammad Yunus, founder of microcredit and the Grameen Bank, and the work of organizations such as the United Nations, the World Health Organization, and the Organization for Economic Cooperation and Development.

Interestingly enough, conversations about investing for social good or variants thereof have been taking place for more than thirty years with concepts such as “social entrepreneurship,” popularized by Bill Drayton, the founder of Ashoka, who sought to invest both financial and human capital in those individuals who offered creative, sustainable, and replicable solutions. The “blended value” conceptual framework, espoused by several management researchers, evaluates nonprofit organizations, businesses, and investments based on their ability to generate a blend of financial, social, and environmental value. The status quo today for impact investing is the triple bottom line of economic, social, and environmental returns. Jon Hawkes (2001) and Thomas Aageson (2008) contend that perhaps the time has come to consider a “quadruple bottom line,” adding the cultural dynamic in order to achieve true sustainability.

Toward a Common Definition

To better understand the meaning behind impact investing, consider how the term is currently used in the industry. The Global Impact Investing Network (GIIN) defines impact investing as “investments made into companies, organizations, and funds with the intention to generate social and environmental impact alongside a financial return” (US Advisory Board on Impact Investing 2014). The World Economic Forum (WEF) argues that impact investing is “an investment approach that intentionally seeks to create both financial return and positive social or environmental impact that is actively measured” (World Economic Forum 2013).

Both the WEF and the GIIN definitions emphasize the importance of intentionality in actively seeking direct investments in social businesses/enterprises with high social and environmental impact outcomes as well as an expectation of financial return. In this definition, impact investing is regarded as neither an investment afterthought nor an unintentional result in social good, which is common in the corporate social responsibility practices of many multinational corporations. Moreover, this dual bottom line, or what some researchers refer to as the triple bottom line of people, place, and profit, helps distinguish this type of investing from the popular socially responsible investing (SRI) of the 1980s and 1990s, which applied positive or negative screens, seeking to avoid investments that were deemed harmful to society, or to support those investments that were considered beneficial to society.

The WEF (2013) adds measurability as a third criterion stating, “The degree of financial return may vary widely from recovery of principal to above-market rates of return. In addition to financial return, the investment’s social or environmental value must be measured in order for the investment to be considered an impact investment.”

As mentioned earlier, the major actors that invest for social impact do not consider the creative industries a target sector for these types of investments. Many have taken the lead from the GIIN’s Global Impact Investing Rating System (GIIRS) and its companion Impact Reporting Investment Standard (IRIS), which provide a catalog of generally accepted performance metrics that leading impact investors can use to measure social, environmental, and financial success, to evaluate deals, and to grow the credibility of the impact investing industry. The sectors listed on the IRIS tool website are agriculture, education, energy, environment, financial services, microfinance, micro insurance, health, housing/community development, land conservation, water, and other. The WEF developed its own list of eight key sectors from the IRIS model, selecting agriculture, education, energy, environment, financial services, health, housing, and water. Because arts and culture and the creative industries are noticeably absent from each of these lists, a national and international petitioning effort is needed to encourage investing gatekeepers to include the creative industries as a viable social impact subsector. GIIN does at least collect some data on art-related subsectors, such as artisanal, culture, and tourism. It is interesting to note that in 2013 the number of affiliations for artisanal and culture were higher than three of GIIN’s key sectors: education, housing development, and environment.

Creative Industries and the Creative Economy

In recent years, researchers and policymakers have come to recognize creativity as one of the most important drivers of sustainable growth, economic development, and innovation in the world today. A growing body of evidence points to the increasing competitive advantage that the “creative class” and the “creative economy” wield in today’s knowledge-based society (Pugatch, Torstensson, and Chu 2014; White, Gunasekaran, and Roy 2012). Economic activity that has creativity as its main source and foundation is commonly referred to by different interchangeable terms such as creative economy, creative industries, cultural industries, and even the creative sector.

A consistent definition for the creative industries is difficult to come by since the subsectors that constitute its makeup tend to differ slightly by country, region, and even city. One of the more popular definitions comes from the United Kingdom, where the Department of Culture Media and Sports describes the creative industries as consisting of thirteen business sectors “which have their origin in individual creativity, skill and talent and which have a potential for wealth and job creation through the generation and exploitation of intellectual property” (Higgs, Cunningham, and Bakhshi 2008, 3).

Richard Florida in his highly popular and richly debated book titled The Rise of the Creative Class (2012) attributes much of the modern-day definition of the term creative economy to John Howkins, a British writer and media manager, who documented the creative economy’s global impact in his 2001 book titled The Creative Economy. Howkins’s creative economy comprises advertising, architecture, art, crafts, design, fashion, film, music, performing arts, publishing, R & D, software, toys and games, TV and radio, and video games. Howkins’s (2001) 2000 estimates indicated that these fifteen creative-content sectors were worth $2.2 billion with an annual growth rate of 5 percent.

Florida (2012) posits a broad interpretation of creativity, claiming, “Every human being is creative,” and that urban cities must capitalize on creativity as a valuable economic commodity, attracting a “creative class,” which he defines as “people in science and engineering, architecture and design, education, arts, music and entertainment whose economic function is to create new ideas, new technology, and new creative content.” Using this expansive notion of the creative class, Florida further asserts that there are as many as forty-one million creative workers in the United States, roughly a third of the US workforce.

Some conclude that the creative economy is not a cohesive or discrete industrial sector but rather a broader concept consisting of a large proportion of nonprofit organizations, small businesses, and self-employed practitioners who do not identify themselves as part of a major industry. This presents a serious challenge for creative businesses in particular, for important business networks that could be a source of support and intermediation are sorely underdeveloped mainly because creative types do not identify as part of an industry and hence have difficulty finding peers. In addition, platforms could be built to link these potential business networks to existing supply chains in a local community and thus increase program and operation efficiency. This tendency of creative entrepreneurs to nonaffiliate may be one of the reasons why the creative industries as a discreet sector are not reflected as a priority within the impact investing space. Robust levels of support and investment in the creative industries may in fact already exist; however, they are “hidden” within other industry sectors, as is the case with video gaming, product design, advertising, and independent broadcast production (Miles and Green 2008).

Despite the lack of consensus, efforts continue to be made to define the boundaries of the creative economy, as demonstrated in the 2013 report America’s Creative Economy published by the Creative Economy Coalition, a working group of the National Creativity Network (Harris, Collins, and Cheek 2013). Banking experts, like Felipe Buitrago and Iván Duque of the Inter-American Development Bank, are even grappling with this issue. Their 2013 treatise The Orange Economy: An Infinite Opportunity updates Howkins’s original projections under an “Orange Economy” moniker, associating the color orange with culture, creativity, and identity. Buitrago and Duque (2013) assert that if the “Orange Economy” had been a country in 2011, it would have been the fourth largest economy at an estimated 4.29 trillion dollars.

In the United States, according to Americans for the Arts, there are 750,453 businesses involved in the creation or distribution of the arts that employ 3.1 million people. A report released in January 2015 by the US Bureau of Economic Analysis indicates that the arts and culture sector now represents 4.32 percent of the country’s GDP at $698.8 billion (US Department of Commerce 2015). To put these numbers in perspective, 4.32 percent is higher than that of the transportation and construction sectors.

Challenges to Impact Investing in the Creative Industries

When considering the creative industries from an impact investment perspective, one needs to understand the difference between the term creative entrepreneur and social entrepreneur. Creative entrepreneurship is the practice of setting up a business in one of the creative industries. The creative entrepreneur is concerned first and foremost with the creation and exploitation of creative and intellectual capital, whereas the social entrepreneur is primarily interested in pursuing innovative solutions to social problems. Some even suggest that wealth creation and cultural value should be specific returns expected from creative entrepreneurs (Aageson 2008; Mangematin, Sapsed, and Schüßler 2014).

The social entrepreneur creates an enterprise that is both mission driven and market focused, with the mission being just as important as the return. The mission and vision of the institution help to determine the return and define how problems will be solved and how opportunities will be taken advantage of through the enterprise. Creative enterprises must stay focused on the market as well in order to remain financially viable. For the most part, the impact investing community seems primarily interested in the altruistic form of entrepreneurship that focuses on the benefits that society may reap. Entrepreneurship in this case becomes a social endeavor when it transforms social capital in a way that affects society positively.

Artists are serving as social innovators in developed nations throughout the Global North as well as playing an important role in retaining the vital support system of millions at the bottom of the pyramid in emerging nations in the Global South. Yet still, the creative industries sector suffers from the following:

• the misperception of being a risky, transitory sector,
• lack of awareness by the financial community and likewise a reluctance to invest in a sector that they do not understand or know much about,
• lack of clarity on what constitutes the creative industries,
• research gaps in how artistic and cultural activities contribute to economic innovation and quality of life, and
• inadequate statistical tools or indicators to measure the contribution of the cultural industries sector to the economy and its impact in local communities.

The biggest challenges that creative enterprises face are:

• lack of entrepreneurial knowledge or know-how regarding business plan development, forecast modeling, distribution networks, and intellectual property protection
• lack of proper mentoring by industry specific professionals and seasoned entrepreneurs
• problems gaining access to growth capital to manage cash flow, build the means of production, and cover the deficits a firm incurs en route to sustainability
• lack of proper infrastructure: How do you develop the right talent to run the business efficiently and profitably? (Oftentimes the creative person is saddled with this responsibility as a sole proprietor.) How do you create new markets for your creative goods and services?

Gaining access to capital is a huge issue for creative enterprises. Banks are unwilling to take risks on creative entrepreneurs with weak credit histories. Venture capitalists are not interested in funding community-oriented start-ups that intend to stay small and local. Philanthropists direct their capital to social service agencies and other nonprofit activities, unwilling to help capitalize arts-related social enterprises or rather woefully uninformed about the breadth of relevant investable opportunities that exist within the creative industries sector.

Despite the lack of access to capital, some creative social enterprises are beating the odds. Take, for example, Chairigami in New Haven, Connecticut, which creates handcrafted recyclable furniture from renewable resources. Elvis & Kresse, a UK-based social enterprise, makes lifestyle accessories using industrial waste that is diverted from landfills, and provides 50 percent of its profits from their fire hose line to the Fire Fighters Charity. Elvis & Kresse also employs workers from Poole’s Remploy factory, an organization that helps people with disabilities find work.

Barriers to Entry

Most investors are risk adverse; nevertheless, investing by its nature requires a certain tolerance for risk. The creative industries sector is often associated, rightly or wrongly, with a variety of risks that serve as barriers to investing. The predominance of small and medium enterprise (SME) businesses is a deterrent for some who prefer to invest in scalable projects or structure large-scale deals. High-stakes investors such as these struggle to find investment opportunities that are large enough to justify the fixed costs incurred in sourcing the investments and conducting due diligence. Impact investing may be less attractive to these investors who are unable or unwilling to invest the additional effort required to source the deal. Perhaps this is where business support intervention can be extremely helpful, in that intermediaries like business incubators and accelerators can make it easier for investors to find and qualify potential deals and mitigate some of the risks of investment.

The biggest challenges that impact investors face with creative industry enterprises are these:

1. sourcing viable investment opportunities
2. understanding how value is created and assessed in the creative sector from an economic and social impact point of view. Creative businesses often deal with intangible, difficult-to-trade assets like images, traditions, music, stories, and cultural heritage.
3. measuring the impact of their investments on the communities in which they are made
4. navigating a still immature impact investing ecosystem and the loosely defined creative industries sector
5. finding suitable exit opportunities

The Great Recession of 2007–9 resulted in decreased governmental subsidies globally, thereby forcing many to become more entrepreneurial in the way they manage their businesses. This economic crisis has inadvertently produced a new kind of creative entrepreneur who is much more comfortable marrying the artistic with the commercial and is much more open to applying management best practices to creative businesses. A skills and knowledge gap still exists nonetheless, especially when it comes to business development, strategic planning, and financial and management skills. Those operating in the visual and performing arts, who benefited for decades from significant public sector subsidy, now face a great deal of uncertainty in the current climate of austerity and reduced governmental funding, particularly in Europe. Weak management skills do unfortunately affect the investment readiness of creative businesses who are seeking funding from investors that are unwilling to devote the time and effort needed to get these businesses up to speed.

Many creative enterprises are content-based businesses with intangibles that the investment community often finds much more difficult to value, monetize, and sell in case of default. When one works with content-based activities and is dealing with intangible assets, there is considerable concern around issues of intellectual property. The investing community has a tendency to require prohibitively higher rates of return from creative business in order to compensate for the risks that these investors take when considering investment. This of course leads to a host of creative enterprises finding it impossible to access equity and debt financing and points to the need for more public policy incentives to ensure creative industry equal access to financial investment and business support programs.

Recommendations

I conclude with a few recommendations that could help accelerate the growth and development of creative enterprises and the impact they are having in communities large and small around the country. The recommendations are grouped under three actor categories:

• asset managers: banks, fund managers, foundations, corporations, impact investment funds/intermediaries, venture funds, angels, and government investment programs
• demand-side actors: social enterprises, small and growing businesses
• service providers: incubator and accelerator programs, standards-setting bodies, consulting firms, nongovernmental organizations, universities, capacity development providers

Asset managers are encouraged to

1. increase capital outlay investments in creative enterprises,
2. embrace hybrid structures and the fluidity of the creative industries sector,
3. develop new risk profiles that are specific and appropriate for the creative sector,
4. consider developing public and private sector partnerships that could serve to minimize risk profiles and maximize impact outcomes, and
5. establish support models that include a mix of debt and equity products.

Demand-side actors are encouraged to seek out opportunities to

1. improve their business development skills, business model innovation competency, and intellectual property knowledge,
2. connect with industry experts and veterans for mentorship,
3. investigate the newer SME capital delivery systems (e.g., online micro- and small-business lenders, supply-chain finance programs, angel investors, and crowd funding),
4. join local networks of businesses for collaborative opportunities and supply chain integration, and
5. learn how debt and equity finance can help to grow and strengthen one’s business.

Service providers must begin to

1. embrace the social innovation and social impact agendas of creative enterprises,
2. engage investors with limited prior sector knowledge and educate them on the investment potential of the creative industries sector,
3. develop support interventions that emphasize intermediation, business model innovation, and debt and/or equity financing as well as focus on the later growth and expansion phase of business development,
4. partner with the legal community to offer workshops and seminars on intellectual property concerns in the creative industries, and
5. adopt robust research, measurement, and knowledge transfer practices, providing continuous assessment and quantifying of the impact and value created.

In conclusion, I am reminded of an article I read in the Winter 2015 issue of the GIA Reader titled “Culture in Crisis.” Authors Terence E. McDonnell and Steven J. Tepper give the clarion call for new metaphors that speak to the soul, heart, and memory of a community. They argue that a healthy arts sector will require “new institutional forms, new types of enterprises, new forms of arts, and new ways of connecting to communities. Existing metaphors limit our ability to imagine and consider alternative ways to support the arts, ultimately constraining the way people talk about their value.” This sentiment resonated with me deeply, and I can only hope that continued discourse on this subject and the establishment of creative enterprise incubators and accelerators will be a part of the “newness” needed to engage artists and their creative businesses in meaningful and sustainable community development.

The notion of a powerful creative economy challenges artists and creatives alike to reconsider their role in society, perhaps seeing themselves as leaders and drivers of this new world order instead of being a vital and necessary drain on limited resources. Let’s work together to disrupt the status quo of public subsidy and donation-dependency among arts-related businesses, embracing market-driven strategies and demanding inclusion in the target sectors prioritized by the impact investing community. Let’s step into our role as standard-bearers of the cultural vitality that is transforming our local communities and driving sustainability throughout the nation and around the world.

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