In November 2021, Sam wrote an article outlining experiments we had been doing at Slow Ventures to invest directly in creators and serial entrepreneurs as individuals rather than backing traditional companies.
What a difference a year makes.
In the last 12 months the idea of directly financing creators has gone from a fringe experiment to an industry movement with dozens of companies now offering different options around creator finance and more on the way.
Despite the general pullback in the market and softening around the creator economy in particular, new forms of creator financing are clearly here to stay. Now, the questions are what—and how long—it will take for the financing of creators to become mainstream, as opposed to a budding cottage industry.
A year ago, even a creator with a large following looking for capital to grow would have had a hard time. As a result, most creators were forced to do one of two things.
The first and most common option (even today) is for creators to rely on their own cash flow, recycling income from ad revenue, brand partnership deals or promotions into more content, more audience or more new projects. Jimmy Donaldson, aka Mr Beast, is an example of someone who did this aggressively for a long time with great success, but there are many others, from YouTuber Markiplier to fitness celebrity Kayla Itsines. This is a fine model, but it can constrain how fast a creator can grow a business. It also leaves the creators with less leverage over partners who have more capital, forcing them to be price takers on things like brand deals rather than setting the terms of their own business lives.
The second option historically was for a creator to develop a product they could sell or create a media company they could finance as a traditional company. Reese Witherspoon’s production company Hello Sunshine and Gwyneth Paltrow’s lifestyle empire Goop are good examples of this model, where celebrities formed a traditionally investable company as placeholders for their personal brand equity.
This can also be fine, but it has two challenges. First, the success or failure of these companies is so driven by the creator’s attention that investors may worry about putting in their own capital for fear that the creator will get distracted or move on. Second, it forces the creator to do slightly unnatural things with their time and effort such as dealing with low-level problems that have little to no expected returns vs. investing in content to support system-wide growth.
The New Creator Financing Options
What creators historically lacked was access to the traditional financial infrastructure for corporations such as debt and equity. That is changing very quickly.
Where last year there were only a handful of nascent options, we are exiting 2022 with more than a dozen firms offering creators versions of traditional financial products.
These are orienting themselves around two axes. The first is whether the product is a revenue-based cash advance (more akin to debt) or whether it looks more like equity, where there’s no specified repayment amount and investors share in the upside. The second is whether the financing covers part of the creator’s work, which has always existed, or more holistically finances the creator themself, which is new.
Revenue-based financing, where a creator receives cash today in exchange for a percentage of future revenue, is quickly becoming commonplace. The best known players are Spotter and Jellysmack, both of which are well capitalized, share a backer in SoftBank and have worked with big creators like MrBeast and YouTuber Airrack. Other providers like Creative Juice strike similar deals but tend to offer less money over a shorter time frame compared with their peers.
By and large, these catalog licensors use analytics to evaluate the performance of the creator’s videos and estimate their future earnings potential. Underwriting is largely formulaic—the more predictable a creator’s revenue, the more favorable terms they can receive. Since deals are generally shorter term (6 months to 5 years) and only cover a portion of a creator’s future revenue, there’s a limit to how much an investor will pay. Revenue-based financing tends to be better for creators than a traditional loan since for most offers, there’s no interest charge and no requirement to repay the advance.
Equity-like financing for creators, on the other hand, is longer term and offers uncapped upside for investors. The possible returns for investors allow capital to be less expensive than in debt-like models. And as with revenue-based financing, equity backers can finance a specific company or the creator overall.
For a specific company, these investments are pretty typical. Sugar Capital’s investment in MrBeast’s Feastables or Imaginary Ventures’ bet on Skims are, under the surface, no sexier than an enterprise software deal. But as the power of creators becomes clearer, deals like these are accelerating.
The Chernin Group has gone a step beyond simply financing creator companies with the aim to capture more of the creator’s commercial power. It has made substantial equity investments—often taking majority stakes—in creator-led media businesses including Dave Portnoy’s Barstool Sports and Steve Rinella’s Meateater. The upside is technically limited to the value from a specific entity, but deals are often structured to include multiple revenue-generating assets. The Chernin Group and Night Management recently formed Night Capital, a $100 million investment company that aims to acquire majority interests in established consumer-facing companies in partnership with creators to drive growth. This initiative doubles down on Chernin’s existing model and pairs it with Night’s deep creator network.
There is a step beyond this that Slow Ventures (our firm) and others like CreatorDAO are pursuing: Financing the creator as an individual with equity—in other words, seed stage venture capital for people. There are several reasons why we and others are doing this.
First, financing a creator as opposed to a specific project better aligns the investor and the investment. Without the risk that a creator will change their mind about what to work on, financiers can provide cheaper capital than through other options.
This approach also gives the creator more freedom in how to invest their time and money. An investor may put money into a specific project, but that project may not be the best way for the creator to create long-term financial success. As an example, it is still shockingly cheap for creators to gain YouTube subscribers by upping the production quality of their videos, but a creator who accepts investment for a specific project can’t use it for such a broad-based tactic.
What Needs to Happen Next: Financial Data and Liquidity Options
The past year saw an explosion of financing options for creators, but some other things still need to happen before creator financing can truly go mainstream.
First we need more complete and trusted financial performance data on influencers and creators. YouTubers can access revenue-based financing most easily because potential investors can easily model how much a video is likely to earn via AdSense. Within a few years, we’ll know better how these deals have played out in terms of repayment rates, defaults, etc., which should make more capital available, but it will be a while before we can see how early investments in creators pay off. This will limit the amount of capital available for this form of financing for some time, which isn’t necessarily a bad thing for investors. It means the market for financing early-stage creators will stay inefficient, which is to your advantage if you have dollars to invest. But it also means debt-like financing will dominate the field for a while.
One important note on developing trusted financial data for creators: Even now, creators largely monetize on a handful of large platforms either directly through embedded advertising and revenue shares or through brand partnerships based explicitly on their platform stats. YouTube’s data is largely trusted, but other platforms must up their games.
The second thing we need are examples of liquidity for investors on big wins for creators. There is no question individual influencers and creators can drive positive financial outcomes—Michael Jordan and Oprah proved that way before social media. The Kardashians have more recently proven that individuals can spin out large businesses in certain verticals, as has Witherspoon. Almost no one seriously questions that we will see a new and larger crop of individual influencer billionaires in the coming years. But how will an investor realize returns?
One answer is that creators will be just like any other public equity—the big guns will go public. There are a couple big caveats here, however, the first and most obvious one being reputational risk—think of Martha Stewart’s fall from grace with a public company ticker to her name. And while someone like Michael Jordan in theory could have wrapped up his income streams and done an IPO of sorts, that has never been done before to our knowledge. We don’t have good examples yet of influencer-driven public companies with enough liquidity to create a real market for the shares. If and when this happens, it will drive more cash to creators.
Another possibility is crypto. Even a $1 billion company is almost too small to go public these days, but crypto could allow micro-offerings of creator equity to their communities and create liquidity for investors in a way that would make sense for all. That said, this remains several steps away from reality.
The Cat Is Out of the Bag: Many of the Next Great Businesses Will Be Creator-Led
The creator financing market has evolved way faster than we expected a year ago. This is a good thing—more financing through more varied channels is a net-positive for the world.
There is no question that as the world pulls back, some energy will come out of financing creators, if only because alternative investments make more sense when traditional investments are overpriced and interest rates are low. But that pullback really should only be on the margin. Many of the next great businesses and enterprises will be creator-led. Finally, in a world of ever tighter controls on web and app advertising, it is lost on no one that creators are a good way to reach targeted differentiated populations with products.
You can argue that creators now have real debt-like and equity-like options for financing themselves, which is a massive step forward. As financial performance data comes online and the path is established for creators to truly create liquidity for investors, the current drip of dollars coming into the creator economy will become a torrent.