Lecture 2. Business Models and External Financing for Creative Startups
In this lecture we will look at two main stages in the process of starting up a new arts venture: the elaboration of the business model and seeking external financing.

As an initial orientation, the stages in the entrepreneurial process in the arts differ, based on the arts discipline, the essence of the startup venture and other factors, but usually they are 5:

  1. Initial preparation and generation of innovative ideas

  2. Filtering process: evaluation of these ideas towards specific preliminary set criteria

  3. Protecting the idea via intellectual property options

  4. Elaboration of a business model and a business plan

  5. Seeking and securing initial financing in a partnership mode and considering the crossover strategic framework

What is a business model?

By definition, the business model is the plan implemented by a company to generate revenue and make a profit from operations. Business model is also regarded as a series of relationships participating in the creation of value. The value creation and care about clients and customers is what distinguishes business models that are primarily market oriented from those that are oriented also towards societal and cultural goals.

Setting up a basic business model is a key task before we start looking for external financing. It describes in a written and/or graphical way:

  1. How will the future arts enterprise sell products, services and create value?
  2. Who are the customers and clients?
  3. Where from will the revenues be generated? and
  4. In what way will it achieve its strategic objectives?  

There are different types of business models for an arts venture creation and each one of them is unique.  Some business models are considered as traditional where the business has a physical presence (e.g. a dance company, a theatre venue or a commercial gallery).  These are sometimes referred to bricks and mortar – describing the physical presence of a building or another structure where the business is located and a physical interaction with clients or buyers occurs. “Offline” models include also:

  • collective business models, popular among artists who share resources in order to decrease overhead costs

  • non-intermediaries models, where artists do not rely on the traditional distribution channels and cut off the middleman (agent, producer, wholesaler, broker)

Others are based on the use of online and mobile technologies. These are:

  • an online platform for selling art works

  • membership subscription model

  • life streaming of a stage performance

  • freemium model for offering basic online services free and additional one - on a paid basis

Remember that in online models there is no live interaction between the entrepreneur and online users, so they certainly influence the overall marketing and communication strategy.

Business models could be simple or complex, depending on the entrepreneur’s initial idea, resource availability, and vision for the future growth. Never forget that there are two important focus points in the business model and in the business plan too: the revenue projection and the break-even point.

  • Forecasting the revenues is crucial. Many entrepreneurs complain that building forecasts with any degree of accuracy is time consuming. But remember one important thing: investors will not contribute to your business if you are unable to provide a set of thoughtful forecasts. Also, a proper financial forecast will help you develop operational and staffing plans that will help make your business a success.

  • Simply saying, break-even is the point at which cost or expenses and revenue are equal. Establishing the break-even point helps businesses in setting plans for the levels of production which it needs to maintain being profitable.

Before seeking external financing, we need to answer to the following key questions:

  • How much money do we require to start the business and what for are the initial investment costs?

  • What is the planned ratio between our own investment and the external financing for the future arts business?

  • What is the potential for growth of our new arts venture?

  • Where from the external financing will be secured – individual and/or institutional financing?

External financing could come from individuals (family members, friends, donors, angel investors, or crowdfinancing) and institutions (banks, foundations, government institutions or other organisations). 

  • There are two basic types of funding available for startup enterprises – debt and equity financing.

  • Debt instruments relate to borrowed money (usually in a form of a loan) that need to be repaid. It requires monthly payments, but does not dilute ownership.

  • Equity instruments involve raising money by selling and giving up a portion of the future company to an external investor. It does dilute ownership and may result in a loss of control.

This is why start-up entrepreneurs prefer debt than equity instruments.

  • Crowdfundung is raising capital from many individuals for startup project or venture.   It usually happens online and allows individuals and the general public, as well as companies, to contribute whatever amount they choose to help an initiative come into being.  Some of the common methods of crowdfunding are:

  • The donation method -refers to many people donating small amount of money for supporting a project or a startup venture that has important social values, moral and ethical impact.

  • The pre-ordered method - clients or buyers prepay a certain product which is not developed yet to support its production.

  • Equity-based method - allows a number of people to invest small amounts as equity investors in the early startup of the product or project development.

  • Angel Investors is another option for external financing. These are individuals who provides capital for a business in exchange for an equity ownership interest.   They are usually retired professionals with long entrepreneurial or executive career who know well the respective business.  

  • Venture capital funds are provided by external investors for startup companies that have a high potential for growth. It entails a high risk for the investor, but on another hand the potential for return on investment is very high-sometimes up to 30-50%. The typical investments are in high technology industries and other industries with high potential for growth, so arts startups rarely benefit from this option.  

Once when we understand the basic business model and the potential sources of external financing, we will discuss in the next lecture the elaboration of the business plan in a crossover, collaborative and strategic environment.

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