How to Invest in Creators?

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The internet gave birth to two children: The startup and the creator. Both phenomena are curiously similar, yet they differ on one central point: financing. Startups can raise millions of dollars in a few weeks while creators often struggle for years to make ends meet. Over a couple of decades, the startup ecosystem has pioneered new financing models adapted to the world of the internet. The creator ecosystem hasn’t done the same yet, meaning that today it’s where the startup ecosystem was in 2003.

For creators, the great leap forward is bound to happen in the next 5 years.

Why? Because everyone is realizing that the opportunity of the creator economy is much broader and deeper than originally anticipated. Creators aren’t simply disrupting the media world, they’re turning entire industries upside down. Because they are scalable friends, educators & retailers, they can take over the markets of loneliness, education & CPG. The commoditization of business infrastructure means any creator can now transform their audience into a scalable empire. Suddenly, what looked like a multi-billion-dollar opportunity is becoming a multi-trillion-dollar one.

So what financing options exist today for creators? Which are the most promising and who’s out there pioneering new models? Because I recently joined JellySmack to build a YCombinator-like accelerator for early-stage creators, I’ve spent the past few weeks researching, having calls with creators, founders & investors to understand the different options. Here’s what I’ve learned:

  1. Debt
  2. Equity
  3. Revenue-based Financing (RBF)
  4. Income Share Agreement (ISA)
  5. Shared Earning Agreement (SEAL)
  6. Convertible Income Share Agreement (CISA)
  7. Continuous Agreement for Future Equity (CAFE)
  8. Donation-based crowdfunding (DBC)
  9. Decentralized Finance (DeFi)

 

1. Debt

Debt is the most common instrument used by creators. Most of the stories I’ve heard from creators revolve around leveraging credit card debt to meet their short-term cash needs (cost of living, equipment, etc.). The reason for this is very simple: Credit card debt is the only external source of finance to which a creator has easy access. Loans have existed for a long time but banks separate those into two categories: Consumer & business. Creators are neither, so they’re underserved. Hence, credit card debt.

The upside is that this form of financing is easy to access. But the downsides are quite large. Debt usually means compounding interest: the amount you owe will grow as the interest compounds and your payments will get larger over time. That’s why debt is generally suitable for very low-risk profiles, which does not correspond at all to the reality of creators.

Debt is only interesting for very specific needs and low-risk situations. Need to buy a new camera lens in a hurry, knowing that some money is coming in soon? Debt might be the best option. The only other time where debt would make sense is for a late-stage creator with *very* predictable revenues, which is what Encore is intending to do. But other than that, there are unfortunately no traditional investors who have the knowledge and the experience to underwrite those types of businesses.

2. Equity

Equity is a different beast. A creator could sell a % stake of their business for a fixed amount of cash. The cost of capital is zero, but the investor would become more involved in the business. Whereas debt is very transactional, equity financing is more like a wedding or a face tattoo: very hard to get rid of. Just like a startup, creators have to be very careful about who they partner with, for better or for worse! Because equity fundraising is the go-to solution for startups, the financial tools & education to make it happen are widely available. But there are two main reasons why equity investment hasn’t happened in the creator world.

First, because creators don’t have exit scenarios that can make their investors rich. For a startup investment, the best scenario is a multi-billion dollar IPO. For a creator investment, the best scenario is a steady stream of positive cash-flows. Hence startups get tech-like 10-20x valuation multiples and creators only get media-like 2-3x ones.

Second, because creators are (scalable) individuals, not (scalable) organizations. Does equity fundraising mean that investors get a share in the holding company of a creator for the rest of their life? Can a creator declare their creative company bankrupt and then start another one? On what terms? Are all the future businesses of a creator integrated within the holding company (e.g. merch, courses, etc.)? All these unanswered questions mean that equity fundraising is not yet a real option for the vast majority of creators and thus for the industry in general.

In what cases could it still make sense? In my opinion, for the most ambitious creators who are actually starting media companies, having the ambition from day one to scale beyond themselves. Like Alex Lieberman with Morning Brew or Dave Portnoy with Barstool Sports, the next CNN or ESPN will probably be creator-led and could definitely be VC-backed. The commoditization of business infrastructure alongside the creator lifecycle and the entrepreneurialization of creators makes it likely that a new class of audience-first and creator-led empires will emerge.

3. Revenue Based Financing (RBF)

Revenue-based financing means a creator would be “selling” a percentage of their future revenue for a cash advance today. RBF terms are strongly dependent on the creator’s risk profile. The more established the creator is, the more predictable the revenues are and therefore the more advantageous the terms.

When revenues are predictable, terms are very advantageous for 3 reasons. First, it’s a non-dilutive funding option, so creators keep their cap-table clean. Second, it’s flexible. The monthly payments are a function of monthly revenue, contrary to debt where creators have to reimburse a fixed amount each month, no matter what happens with their revenue. Third, it’s light. Creators would typically pay a percentage of their topline revenue (generally 2-8%) over a period of 3-5 years.

But when the revenues aren’t easily predictable, things can get tricky. For example, in the music business—where labels often make bets on artists with high potential but very light track records—cash advances too often have uncapped, predatory terms. Artists often effectively give up all of their album ownership forever because 99% of them won’t recoup the costs of their predatory advance.

We need to set healthier standards for early-stage creators with a higher risk profile. It’s a problem that 3 amazing companies are trying to solve: Creative Juice, Stir & Karat. They’re aiming at an RBF underwriting model by building the financial service platform for creators. The pitch is simple: If they can bank the creators, they’ll have access to first-party revenue data that they can combine with third-party engagement data to build a proprietary and defensible underwriting model. The 3 companies have different entry strategies but all end up in the same place. While Creative Juice promises money (investments) in exchange for a bank account, Karat promises status (limited-access metal card), and Stir promises power (automation features). This competition will be one of the most fascinating and defining aspects of the entire creative economy.

One last adjacent RBF model that I find fascinating is Sam Lessin’s Creator Fund. They invest anywhere from $100k to $5M in return for a percentage (<10%) of a creator’s income & the IP they generate over 30 years. Because risk is a function of the upside, they’re essentially using RBF models to replicate equity-like upside. They’re pioneering a new hybrid model that I can’t wait to learn from.

These new options are still in their infancy and more tinkering is needed to make sense out of early-stage revenue-based financing options. As of now, in order to raise RBF, a creator would normally be generating recurring predictable revenues. In essence, this model currently fits:

  • Newsletter creators turning their paid subscriptions into upfront capital with Pipe (e.g. Pompliano)
  • Creators with large Patreon followings turning recurring donations into cash advances with Patreon Capital.
  • YouTubers turning their evergreen videos revenues with predictable future performance into cash advances with Spotter or even selling their channel altogether with Electrify.
  • Video creators distributing & monetizing their content across multiple platforms with JellySmack and receiving upfront cash advances + minimum guarantees.
  • Creators instantly turning their future platform short-term ad revenues into cash advances with CreatorCash or Flowbo.
  • Music artists turning the streaming revenues of their existing song catalog into cash advances with Indify, Stem, TuneCore, TheMusicFund, and RoyaltyExchange.

4. Income Share Agreement (ISA)

Instead of borrowing money at a certain interest rate as they would with debt, with an ISA a creator agrees to pay back a percentage of their future personal income for a limited period of time (~5-10 years) and with a ceiling (~2-5x). This financing model comes mainly from education, used as an alternative to student loans, but it could very well be applied to creators. In this scenario, a creator wouldn’t create a company and would pay back the investment from their future income at the individual level, not at the company level. Here’s how it works in detail.

If it fails, the creator walks away debt-free; if it succeeds, the investor shares a better upside than with debt. With ISAs, the risk is mainly on the investor’s side. Unlike equity, an investor can only recoup their ISA investment up to a limit, which means they should be able to provide enough value that makes a creator successful, so as to systematically increase their chances of having made a good investment. That’s why today ISAs are provided by organizations like coding boot camps that know they can systematically turn smart kids into bankable assets. This doesn’t (yet) exist in the world of creators.

This option would theoretically be best suited for up-and-coming creators who’d need ~$50k to focus 100% on their content for about a year and see if they can make it as a full-time creator. But as the risk profile needs to be quite low on the investor side, I think that ISAs will and should be mainly used to train employees of the creator economy (video editors, content strategists, etc.) Will we see a Lambda School for video editors anytime soon? I believe so.

5. Shared Earning Agreement (SEAL)

This is essentially a combination of the equity option and the ISA but at the company level. Just like an ISA, the SEAL includes an upfront investment that is paid back from the creator’s company’s future earnings. And just like equity fundraising, the investor has the right to convert future earnings into equity if the creator later decides to raise an equity round with external investors.

This financing option is what I would describe as high-resolution. It has the potential to evolve and grow alongside the creator’s ambition. It can start as a mid-level risk / reward scheme with ISA and then evolve into a high-risk / reward one when it converts into equity. After all, a creator’s ambition can be dynamic, not static, for example with a successful YouTube channel that could turn into an empire, but doesn’t necessarily have to. Funding options should allow this dynamism to be reflected in aligned incentives along the way, and that’s what a SEAL allows for.

That’s why it could match every early-stage creator. In my opinion, this scheme could become one of the standards for investing in creators. Not only because of its dynamism but also because raising a SEAL by definition involves the creation of a legal entity, which is a necessary step for creators. The creator economy needs a standard, open-source financial instrument, and my bet is that it’ll be a fork of the SEAL, which is what Jonathan Hills (who wrote an amazing article about the topic) is pioneering with his Creator Fellowship.

6. Convertible Income Share Agreement (CISA)

Invented and pioneered by Chisos, the CISA model is a combination of an ISA at the individual level and a convertible note at the company level. It’s a combination of revenue-based financing, a bank loan with a personal guarantee, and a convertible note. This model allows investors to be comfortable funding a company or an entrepreneur at an early stage, which could well be applied to creators.

It offers the same high-resolution advantages as the SEAL with the ISA acting as a backstop for the equity investment, which brings more guarantees for the investors. Perhaps it’s most applicable for career changes, when one goes from a high-income job to becoming a creator?

7. Continuous Agreement for Future Equity (CAFE)

A CAFE allows a company to continuously fundraise from its community and stakeholders in order to give them access to the financial upside early on! Fairmint, which invented the instrument, is taking away all the legal & technical complexity to make it as simple as possible for any creator to fundraise from their community. One of the main differences with equity fundraising is that it offers a fixed dilution, no matter how much capital the company ends up raising. This model offers many other advantages (liquidity, governance, automation, crypto-compatibility) and is truly pushing the boundaries of not only fundraising, but capitalism in general.

This model is quite new, and even if I’d trust the Fairmint team with my life (they’re THAT reliable), I’d understand if most creators wouldn’t take the risk of being among the first to try it out. Also, raising with a CAFE means that you’ll have a public valuation, available for anyone to see on your website (like Fairmint’s).

This is best suited for later-stage creators with super-engaged communities that are financially educated, to make sure they understand the risk profile. So this would be amazing for creators like Packy McCormick from ‘Not Boring’ or Mario Gabriele from ‘The Generalist’, for example.

8. Donation-based crowdfunding (DBC)

Kickstarter, or non-equity crowdfunding, is arguably the OG of the Creator Economy. It’s fair to say that half of the creator economy today is just an unbundling of Kickstarter. Pre-selling future digital & physical products to your fans has now been massively replaced with higher-resolution, higher-LTV options (Spri.ng, Patreon, tips, etc.). But for a long time, it was one of the only ways creators could finance their short-term needs and projects.

This is the least binding financing option, but crowdfunding still comes with a major downside: losing focus. Crafting, launching, and operating a successful crowdfunding campaign requires a lot of energy & time, and this comes at the expense of shipping more content. Especially given that a crowdfunding campaign won’t yield life-changing returns (average successful project: ~$6k), the opportunity cost for creators could often exceed the reward.

Kickstarter would probably still make sense for super early-stage creators who need a few grand to buy their first video gear. And it can definitely be a better option than credit card debt.

9. Decentralized Finance (DeFi)

DeFi is doing to finance what the mp3 did to music: destroying the gatekeepers. It is therefore only natural that each of the options listed above should gradually be replaced, one by one, by a crypto-native alternative. Equity fundraising is being challenged by Social Tokens like Roll, Rally or BitClout, debt by decentralized lending platforms like MakerDAO, ISA by Tokenized ISAs, Kickstarter by NFTs, etc. This is only the beginning, as more and more people over the world are starting to own crypto and understand its fundamentals. DeFi probably will slowly but surely rebuild most of the financial infrastructure stack over the next few decades and allow creators all over the world to access capital for growth.

In the meantime, the space is still nascent and most of the options available today are still at the experimentation level, which is why you’ll see things like the Social Token platform Roll reporting a security breach resulting in a $6M loss.

For me, going full-crypto as a creator only makes sense for specific use-cases, where the creator and their community are crypto-educated and big crypto-believers/activists. For 99% of the creators today, it still makes sense to use one of the legacy options for fundraising and wait until crypto takes over the ownership economy.

 

Conclusion

Pioneering the financial instruments to support creators’ needs is a central concern of the industry. This could unlock a flywheel that could grow the creator economy 100x, fueling the next generation of creators with top talent & investors.

The first battle in the creator funding war appears to be Revenue-based Financing with everyone rushing to bank the creators and pioneer the underwriting model. In parallel, others are exploring tailored financing options that could cater to an Indie Hacker as well to a creator. And in another world, hordes of barbarians are fleeing legacy legal & financial institutions to invent an entirely new crypto-powered financial world.

I don’t know who’s going to win, but the creators are arguably the first native citizens of the internet, so whatever happens to them will probably happen to the rest of the world later on.

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