De­con­struct­ing the $1 mil­lion Ven­ture Cap­i­tal Fund for Nige­ria’s cre­ative in­dus­try

We ex­pect that the Min­istry of In­for­ma­tion, Cul­ture and Tourism will is­sue clear pol­icy guide­lines on ven­ture cap­i­tal fi­nance for the cre­ative in­dus­try.

Financial Nigeria Magazine - - Contents - By Olubunmi Abay­omi-Olukunle

One must com­mend the Fed­eral Min­istry of In­for­ma­tion, Cul­ture and Tourism and its part­ners for suc­cess­fully or­gan­is­ing the maiden edi­tion of the Cre­ative Nige­ria Sum­mit last month. The sum­mit, which held on July 17-18, was a bold step in thought lead­er­ship and en­gage­ment on some of the key is­sues af­fect­ing Nige­ria's cre­ative in­dus­try. Some of the more ex­cit­ing out­comes of the sum­mit were the hints on pol­icy di­rec­tion for the in­dus­try pro­vided by the Min­is­ter of In­for­ma­tion, Cul­ture and Tourism, Lai Mo­hammed, and the Act­ing Pres­i­dent, Yemi Os­in­bajo.

With­out a doubt, Os­in­bajo's hint that tax breaks will be con­sid­ered for play­ers in the cre­ative in­dus­try is a wel­come sug­ges­tion. Tax in­cen­tives in Nige­ria have his­tor­i­cally been di­rected to­wards man­u­fac­tur­ing, agri­cul­ture and ex­trac­tive in­dus­tries. Equally ex­cit­ing is the idea of a $1 mil­lion ven­ture cap­i­tal fund, which Lai Mo­hammed pro­posed.

As con­ceived, the ob­jec­tive of the ven­ture cap­i­tal fund is to pro­vide seed money for young and ta­lented Nige­ri­ans to set up busi­nesses in the cre­ative in­dus­try. The an­nounce­ment of a tar­geted ven­ture cap­i­tal fund for the cre­ative in­dus­try is re­mark­able for many rea­sons. Macroe­co­nomic con­di­tions seem right for in­vest­ment in Nige­ria's cre­ative sec­tors. There­fore, a ven­ture cap­i­tal pol­icy will be an im­por­tant ad­di­tion to the tra­di­tional debt fi­nanc­ing struc­ture avail­able in the in­dus­try.

Nige­ria's cre­ative in­dus­try re­quires much more than a clin­i­cal fi­nanc­ing ap­proach. The com­bi­na­tion of pa­tient and in­tel­li­gent cap­i­tal à la ex­po­sure and in­dus­try-spe­cific knowl­edge, which ven­ture cap­i­tal fi­nanc­ing prom­ises, are what the in­dus­try needs right now. It is use­ful to note that the an­nounce­ment of the fund is in line with the ob­jec­tives of the Eco­nomic Re­cov­ery and Growth Plan (ERGP) of the Fed­eral Govern­ment. The ERGP aims to in­crease film pro­duc­tion by 15% on an an­nual ba­sis and gen­er­ate $1 bil­lion in for­eign ex­change by 2020 through ex­ports of Nige­rian films.

The es­tab­lish­ment of a ded­i­cated ven­ture cap­i­tal fund is the first of a num­ber of strate­gic moves the Min­istry wants to take to sup­port the long-term growth of the cre­ative sec­tors. How­ever, the broad ob­jec­tive is to cre­ate an ac­tive mar­ket that al­lows both lo­cal and for­eign in­vestors to in­vest and exit with de­cent re­turns. Ac­cord­ingly, the suc­cess of a ven­ture cap­i­tal pol­icy in the cre­ative in­dus­try will be a func­tion of many fac­tors and the Min­istry will need to adopt some of the best prac­tices which have been tested and proven in the pri­vate funds man­age­ment in­dus­try, al­beit with mod­i­fi­ca­tions nec­es­sary for pub­lic in­ter­est con­sid­er­a­tions.

The an­nounce­ment of a ven­ture cap­i­tal fund for the cre­ative in­dus­try raises some fun­da­men­tal ques­tions; and an­swers to these ques­tions should go into de­vel­op­ing the frame­work and struc­ture for the pro­posed ven­ture cap­i­tal fund. Lai Mo­hammed re­port­edly said that, “20 peo­ple, each in­vest­ing $50,000, are ex­pected to help make up the re­quired amount of 1 mil­lion dol­lars…so far, five peo­ple have vol­un­teered to in­vest $50,000 each and ex­pressed op­ti­mism that more in­vestors will come for­ward.” (bold ital­ics mine).

The words 'vol­un­teer' and 'help' raise some con­cerns as to how the Min­istry is think­ing about the pro­posed ven­ture cap­i­tal fund. Such ter­mi­nolo­gies are more as­so­ci­ated with char­i­ta­ble causes – or at best, grant schemes – than a se­ri­ous ven­ture cap­i­tal fi­nanc­ing strat­egy. But even if we as­sume that was a faux pas by the Min­is­ter, what is clear from the above quote is that the Min­istry is look­ing to reach out to wealthy in­di­vid­u­als to com­mit to the fund as lim­ited part­ners. It ap­pears the Min­istry is not com­mit­ting any of its own cap­i­tal to the fund.

The fore­go­ing ob­ser­va­tions raise ques­tions of whether these in­di­vid­u­als who have “vol­un­teered' to in­vest are 'ac­cred­ited in­vestors' within the con­text of se­cu­ri­ties reg­u­la­tion. It is also not clear what en­tity is car­ry­ing out the mar­ket­ing of the fund. Mean­while, it ap­pears mar­ket­ing ac­tiv­i­ties are in full swing. There are ques­tions around com­pli­ance with se­cu­ri­ties laws re­gard­ing ven­ture cap­i­tal fund for­ma­tion that have to be ad­dressed. If the fund is not cap­tive as it ap­pears, the mar­ket­ing, for­ma­tion and in­vest­ment of the fund monies will come within the purview of se­cu­ri­ties reg­u­la­tion. Get­ting the fund struc­ture right from the out­set is crit­i­cal for the fund to achieve its de­sired ob­jec­tives. This is crit­i­cal to at­tract­ing the right qual­ity of ta­lent and cap­i­tal, and also from a risk man­age­ment per­spec­tive.

It is use­ful to note that Min­istries, De­part­ments and Agen­cies (MDAs) of govern­ment are not im­mune from tor­tious claims and can be li­able to dam­ages un­der the doc­trine of reg­u­la­tory neg­li­gence. Ac­cord­ingly, an un­ac­cred­ited in­vestor will be able to, in the right cir­cum­stances, make a claim for mon­e­tary dam­ages against the Min­istry and its part­ners.

An­other crit­i­cal point of re­flec­tion is the ques­tion of who the man­agers of the pro­posed cre­ative in­dus­try fund are, or should be. Whilst the Min­istry may de­cide to call for ap­pli­ca­tions from the ex­ist­ing pool of gen­er­al­ist fund man­agers that are avail­able lo­cally, there are no known fund man­agers fo­cused on the Nige­rian cre­ative in­dus­try. We think that govern­ment should also con­sider broad­en­ing the search for a man­age­ment team lo­cally and in­ter­na­tion­ally, while aim­ing to re­ceive the best com­bi­na­tion of sec­toral ex­per­tise and re­li­able fund man­age­ment cre­den­tials.

The Min­istry may also de­cide to hand­pick and cor­po­ra­tize an as­sort­ment of pro­fes­sion­als and fi­nance op­er­a­tions for the first fund cy­cle af­ter which the team could morph and in­de­pen­dently raise sub­se­quent funds on a man­age­ment fee ba­sis. Re­gard­less, res­i­dent, as op­posed to con­sult­ing, sec­toral ex­per­tise should be a cru­cial fac­tor for qual­i­fy­ing fund man­age­ment teams given the in­her­ently risky na­ture of fi­nanc­ing, es­pe­cially, film projects. Typ­i­cally, in a movie project, all in­vestor's monies are com­pletely used up be­fore re­turns start to ma­te­ri­al­ize. This is an ad­di­tional rea­son ac­cred­i­ta­tion of an­gel in­vestors may be im­por­tant. Also, al­though film funds are struc­tured like typ­i­cal ven­ture funds, there are sig­nif­i­cant dif­fer­ences in terms of the le­gal struc­tures for chan­nelling in­vest­ment funds.

In any event, the Min­istry will have to put some girth in the game by com­mit­ting its own cap­i­tal to the fund in or­der to in­spire in­vestor con­fi­dence and to demon­strate

We ex­pect the Min­istry will, at least, triple the size of the fund be­fore launch and that the Min­istry, in strate­gic part­ner­ship with pri­vate in­vestors, will aim to cre­ate mul­ti­ple funds to tar­get the dif­fer­ent pain points in the coun­try's cre­ative in­dus­try.

align­ment with the broader ob­jec­tives of the fund. Such com­mit­ments may be sub­ject to a pro­grammed with­drawal and sale of its par­tic­i­pat­ing in­ter­ests.

The suc­cess of the pro­posed ven­ture cap­i­tal fund also has to be sit­u­ated within the con­text of in­tel­lec­tual prop­erty (IP) law. An ef­fi­cient in­tel­lec­tual prop­erty ad­min­is­tra­tion is re­quired to attract (and sus­tain) both ta­lent and cap­i­tal to the cre­ative in­dus­try. There is a need to fur­ther strengthen Nige­ria's in­tel­lec­tual prop­erty law from an ad­min­is­tra­tive point of view. There should be an in­tro­duc­tion of le­gal prin­ci­ples that make it eas­ier to ad­min­is­ter and pro­tect in­tel­lec­tual prop­erty rights.

For in­stance, con­trary to what ob­tains in ju­ris­dic­tions like the United States, there ex­ists no stand­alone right by which an artist can pro­tect his or her per­son­al­ity or im­age un­der Nige­rian in­tel­lec­tual prop­erty law. Hence, im­age/per­son­al­ity rights con­tinue to be one of the most abused cre­ative in­dus­try rights in Nige­ria. As of date, an artist that in­tends to pro­tect per­son­al­ity rights will have to rely on com­mon law pro­tec­tions of pass­ing off or con­sti­tu­tional guar­an­tees of right of pri­vacy, which by many stan­dards, is a far more com­plex ap­proach to en­forc­ing or pro­tect­ing in­tel­lec­tual prop­erty rights. These un­der­ly­ing IP rights, are crit­i­cal to an in­vestor from a fi­nanc­ing stand­point be­cause the mon­eti­sa­tion of these rights could help mit­i­gate po­ten­tial in­vest­ment losses.

But then, it's not just a govern­ment play all through. Film/mu­sic/con­tent dis­tri­bu­tion and pro­duc­ing com­pa­nies will need to evolve by stan­dard­iz­ing op­er­a­tions and re­struc­tur­ing their teams in or­der to re­po­si­tion their com­pa­nies to attract in­vestors, ei­ther within the con­text of fund man­age­ment or di­rect in­vest­ments.

We have a few other ex­pec­ta­tions. We ex­pect that the Nige­rian govern­ment will fol­low through with this pro­posed fund. A sim­i­lar pol­icy an­nounced for the tech­nol­ogy in­dus­try a while ago has been dogged by al­le­ga­tions of govern­ment's fail­ure to ful­fil its cap­i­tal com­mit­ments, thereby, sti­fling the op­er­a­tions of the fund. This is a very bad prece­dent for the in­dus­try. Govern­ment par­tic­i­pa­tion should be the rea­son ac­cred­ited and or so­phis­ti­cated in­vestors par­take in a fund; not oth­er­wise.

Fur­ther­more, we ex­pect that the Min­istry will is­sue clear pol­icy guide­lines on ven­ture cap­i­tal fi­nance for the cre­ative in­dus­try. We also ex­pect that the pro­posed tax in­cen­tives tar­geted at the Nige­rian cre­ative in­dus­try will have been im­ple­mented be­fore the of­fi­cial launch of the pro­posed fund. We ex­pect the Min­istry will, at least, triple the size of the fund be­fore launch and that the Min­istry, in strate­gic part­ner­ship with pri­vate in­vestors, will aim to cre­ate mul­ti­ple funds to tar­get the dif­fer­ent pain points in the coun­try's cre­ative in­dus­try.

Min­is­ter of In­for­ma­tion, Cul­ture and Tourism, Lai Mo­hammed and Nol­ly­wood star, Richard Mofe-Damijo

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