Nigeria’s $1M Venture Capital Fund for Nigeria’s Creative Industry: A Deconstructive Analysis

Money fall on you, Banana fall on you…Davido

One must commend the Federal Ministry of Information, Culture and Tourism and its partners successfully organising the maiden edition of the Creative Nigeria Summit. The Creative Nigeria Summit is a bold step in thought leadership and industry engagement around some of the key issues affecting Nigeria’s creative industry.

Perhaps, more exciting are the policy direction hints which the Honourable Minister of Information, Culture and Tourism and the Office of the Vice-President dropped. Without a doubt, the Vice President’s hint that tax breaks will be considered for players in Nigeria’s creative industry is very welcome, as tax incentives have historically been directed towards manufacturing, agriculture and extractive industries in Nigeria. Equally exciting is the idea of a $1M venture capital fund which, the Honourable Minister, Alhaji Lai Mohammed noted. As conceived, the objective of the venture capital fund is to provide seed money for young and talented Nigerians to set up business in Nigeria’s creative industry.

Alhaji Lai Mohammed.
Nigeria’s Minister for Information and Culture.

The announcement of a targeted venture capital policy cum fund for the creative industry is remarkable for many reasons. In addition to the fact that macro-economic conditions seem right for investments in Nigeria’s creative sector, a venture capital policy will be a departure, albeit complimentary, from the traditional debt financing available in the industry. Nigeria’s creative industry requires much more than a clinical financing approach.

The combination of patient and intelligent capital a la exposure and industry-specific knowledge, which venture capital financing promises is what the industry needs now. It is useful to note that the announcement of the fund is in line with the objectives of the Economic Growth and Recovery Plan of the Federal Government which aims to increase film production by 15% on an annual basis and export videos to generate $I billion in foreign exchange by 2020.

Some pertinent questions

The set-up of a dedicated venture capital fund is however the first of a number of strategic moves that the Ministry will take because the broad objective should be to create an active market that allows both local and foreign investors to invest and exit with decent returns.

Accordingly, the success of a targeted venture capital policy is 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 targeted venture capital fund for the creative industries raises some fundamental questions, answers to which should go into the framework and structuring for the proposed venture capital fund. Alhaji Lai Mohammed was widely quoted to have said that “

“20 people, each investing $50,000, are expected to help make up the required amount of 1million 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’ raises some concern as to how the Ministry is thinking about the proposed venture capital fund as they suggest a charitable purpose or at a best, a grant scheme; both not within the context of a serious venture capital financing strategy; but assuming that’s loose use of language, 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 and that the Ministry is not committing any of its own capital to the fund.

The foregoing raises questions of whether these individuals who have ‘volunteered’, to invest are ‘accredited investors’ within the context of securities regulation, which entity is carrying out the marketing of the fund as it appears that marketing activities are in full swing and also, questions around compliance with securities laws regarding venture capital fund raising and formation.

If the fund is not captive as it appears, the marketing, formation and investment of the fund monies clearly 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, 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 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.

Who manages the fund

Another critical point of reflection is the question of who the managers of the proposed creative industries 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 dedicated fund managers focused on the Nigerian creative industry.

We think that government should also consider broadening the search for a management team on both local and international media and aim to receive the best combination of sectoral expertise and 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 may morph and independently raise subsequent funds on a management fee basis.

Regardless, resident, as opposed to consulting, sector expertise should be a crucial qualifying factor for qualifying fund management teams given the inherently risky nature of financing film projects. – Typically, all investor’s monies are completely used up before returns start to materialize – An additional reason why 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 alignment with the broader objectives of the fund, although, such commitments may be subject to a programmed withdrawal and sale of  its participating interests.

What about intellectual property?

The success of the proposed venture capital fund also has to be situated within the context of intellectual property law. An efficient intellectual property administration is central to and required to attract and sustain both talent and capital to the creative industry.

There is a need to further strengthen Nigeria’s Intellectual property from an administrative point of view and also with the 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 likeness or image under Nigerian intellectual property law, hence, image/personality rights continues 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 within the context of fund management or direct investments.

Our expectations

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

Secondly, we expect that the Ministry will issue clear policy guidelines on venture capital finance for creative industries. 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 that 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 Nigeria’s creative industry.

 

Olubunmi Abayomi-Olukunle leads the private equity and venture capital transactions team at Balogun Harold

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