Kubos is a semiconductor company that recently raised 2m (£1.6m), to accelerate its MicroLED development. The investors were surprised.
S4C, a Welsh-language TV broadcaster, took an equity stake alongside Development Bank of Wales (the Welsh government) and Drew Nelson, founder of British chipmaker IQE.
The investment was the first step for S4C’s new commercial fund, run by Laura Franses a former channel 4 executive. This fund has been established to provide funding in exchange for equity for rapidly growing Welsh companies.
Franses called Kubos’ business “an adjacent one” and said it was a business connected to television viewing. Kubos is developing new technology in the virtual and augmented reality industries. The MicroLEDs it uses will improve the brightness and consistency of colours on VR headsets. This will allow viewers to view content for longer on their devices.
S4C’s investment is part a growing trend by broadcasters such as Channel 4 and ITV, who are taking stakes in businesses at an early stage. They do this by offering advertising airtime for equity in digital startups.
ITV acquired shares in Strike, the online estate agent that trades under Purplebricks, last week.
ITV Adventures Invest, a division of the broadcaster that was created in 2021 allows ITV to acquire minority stakes for advertising inventory.
ITV Adventures Invest is a part of ITV Adventures Invest. ITV has agreed to subscribe to £1.5m in convertible loan notes at Strike Ltd. Strike Ltd will then have the option to sign up to two additional tranches of £1.5m in exchange for advertising space across ITV channels and ITVX.
ITV’s investment fund has made its first investment this year. It already holds stakes in PitPat – a pet healthcare company – and Flarin – a pain relief brand – as well as Carwow – a car buying marketplace. According to its financial accounts for 2023, the company invested £20m plus some loan notes that were not converted.
In 2015, the broadcaster Channel 4 created its own division for media equity investments called Channel 4 Ventures as part of its strategy to diversify its revenue away from advertising revenues.
It has closed more than 50 transactions, investing in consumer businesses from seed to pre-IPO stage and supporting companies like the location technology platform, what3words; Oddbox which reduces food wastage; Purplebricks, Pinterest and Crowdcube as well as Raylo a consumer product leasing company and Swyft, a modular furniture company.
According to the 2022 Annual Report, Channel 4 has 21 equity investments that are active. The value of these investments is £45m (up from £30m by the end of 2021). The digital newsstand Readly was one of the exits so far. It floated on Nasdaq Stockholm.
This move is made as broadcasters face an economic downturn in which corporate clients are cutting back on advertising, traditionally a good indicator of economic conditions.
According to the most recent annual Ad Association/WARC Spending Analysis published in April, UK advertising investment increased 6.1% to £36.6bn by 2023. However, this represents a real-term contraction of 1.2% after accounting for inflation.
The AA/WARC study found that the TV advertising budget fell by almost 9% from £5.3bn to £4.9bn. The chief executive of ITV Dame Carolyn McCall said last year that the industry was facing the “worst recession in advertising since the global financial crises”.
ITV, who announced recently that it would be cutting up to 200 positions, stated in May there were signs a recovery. The first quarter 2024 saw a 3% increase in total advertising revenue. The second quarter is expected to see a 12% increase.
Analysts have pointed out that recent investments are made at a period when advertising inventory is likely to be available.
Media analyst Alex DeGroote said about the investment strategy, “It’s a good idea for broadcasters, because they might have advertising space that hasn’t been sold during the current recession, and some of these investments at an early stage could make money and improve diversification.
The advertising outlook is improving for the second quarter in 2024, but the outlook for rest of the year appears uncertain.
Vinay Solanki is the head of Channel 4 Ventures and believes that despite the rise of social media, companies still rely heavily on TV advertising.
“When there are millions of people, you have no choice,” he said. “TV is an institution of culture. You will see it in the election campaigns – but people tend to forget this.
“When you consider the investment market, our role is really important. Very few consumer-specific funds remain. “Everyone is chasing tech and AI.”
Broadcasters have taken relatively small equity stakes and potential risks so far. Channel 4 Ventures invests in between £1m-£2m of airtime, compared to the initial deals it made.
There are risks associated with funding new companies. Channel 4 discovered this when Boomin, an online property portal in which it invested, called liquidators to handle its business in 2022.
Solanki stated that each investment was made “in an incredibly well-thought-out way”.
He said: “If this is what you’re doing, you should step back. We view it as a whole portfolio and have a predetermined level of things we know are not going to work. I think all early investors do the same.”
Franses, the adviser of S4C’s commercial growth fund which has money to invest, agreed: “I’d say it’s risky not to do anything in this market. The risk is greater to sit still,” said Franses. She pointed out that S4C had spent six months evaluating Kubos, which was part of a larger portfolio of investments.
Franses explained, “You always assess that risk.” It’s not as if you bet and then close your eyes on a business. You support the company’s growth every day and help to mitigate and manage risk by working with it. “You are not going make 10 bets on semiconductors.”
Gill Hind is the director of TV and chief operating officer at Enders Analysis. She said, “These equity investments are small so there’s less concern over potential risk.” ITV and Channel 4 can fulfill their social responsibility by taking stakes in creative companies. Additionally, TV advertising is now able to target a specific postcode or demographic. It helps if broadcasters tell other small business that it has worked.
Untapped is a new program launched by Channel 4 Ventures to invest in small business led by entrepreneurs with diverse profiles, who are traditionally overlooked by venture capitalists.
Franses stated that the S4C Fund can target Welsh Companies and that the Kubos Semiconductor Investment can also help understand new technologies in areas like virtual reality which will have an impact on television content.
Franses stated, “These aren’t the big bets.” This isn’t a £1.15bn purchase of All3Media or Paramount. This is not a bet on the house.
These are smart, informed investments that feel feasible in today’s economic climate. I believe you will see more small investments with high potential returns.
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