When Kubos, a semiconductor company, recently raised $2m (£1.6m) to accelerate the development of its MicroLED technology, its lineup of investors was surprising.
S4C, the Welsh language TV broadcaster, was among those taking an equity stake in Kubos, which has a base in south Wales, alongside Development Bank of Wales and Drew Nelson, the founder of the British chipmaker IQE.
The investment represented the first move for S4C’s new commercial growth fund run by Laura Franses, a former Channel 4 executive, which has been set up to provide funding for fast-growing Welsh companies in exchange for equity.
“I would call it an adjacent business, and it is a business that is connected with television viewing,” Franses said of Kubos, which was spun out of research at the University of Cambridge and is now developing new technology for the augmented reality (AR) and virtual reality (VR) industry. Its MicroLEDs will result in improved brightness and colour consistency on VR headsets, enabling viewers to watch content on their devices for longer, for example.
S4C’s investment is part of a growing shift by broadcasters including Channel 4 and ITV to take stakes in early stage businesses – often by providing advertising airtime in return for equity in digital companies.
Last week, ITV took a stake in the online estate agency Strike, which trades as Purplebricks.
The broadcaster set up the ITV Adventures Invest division in 2021, which allows ITV to take minority stakes in return for advertising inventory.
As part of ITV Adventures Invest, ITV agreed to subscribe for £1.5m convertible loan notes in Strike Ltd, with further options to sign up for two further tranches of £1.5m each in return for advertising inventory across ITV’s channels and ITVX, its streaming service.
The deal is the first investment by ITV this year for its investment fund, which already owns stakes in PitPat, a pet health company, and the pain relief brand Flarin, as well as Carwow, the car buying marketplace. The company has invested £20m in total plus some unconverted loan notes, according to its 2023 financial accounts.
The broadcaster Channel 4 set up its own media for equity investment division in 2015 called Channel 4 Ventures, which forms part of its revenue diversification strategy away from advertising revenues.
It has completed more than 50 deals, investing in consumer companies from the seed to pre-IPO stages and backing companies such as the location technology platform what3words, Oddbox, which reduces food waste, Purplebricks, Pinterest, Crowdcube and Carwow as well as Raylo, a consumer products leasing company, and the modular furniture company Swyft.
The division now has 21 active equity investments with a balance sheet value of £45m at 31 December 2022 (up from £30m at the end of 2021), according to Channel 4’s 2022 annual report. Exits so far have included the digital newsstand app Readly, which floated on Nasdaq Stockholm.
The move comes as broadcasters continue to face a tough economic downturn where corporate clients have slashed spending on advertising – which is traditionally seen as a bellwether of the economic climate.
The UK’s advertising market recorded a 6.1% increase in investment to a total of £36.6bn in 2023 – but this was a 1.2% contraction in real terms after accounting for high inflation, according to the latest annual Advertising Association/WARC Expenditure analysis published in April.
The AA/WARC report found that TV advertising spend fell almost 9%, dropping from £5.3bn in 2022 to £4.9bn last year. Dame Carolyn McCall, the chief executive of ITV, last year said that the industry faced the “worst advertising recession since the global financial crisis”.
ITV, which recently announced it was cutting up to 200 jobs, said in May that there had been signs of a recovery. Total advertising revenue rose by 3% in the first quarter of 2024, with the second quarter expected to be up about 12%.
One analyst pointed out that more recent investments come at a time when there is likely to be spare advertising inventory.
Alex DeGroote, a media analyst, said of the investment strategy: “It makes sense for broadcasters because they may have unsold advertising space during the current downturn and because some of these early stage investments might make money and improve diversity.
“The advertising outlook has improved for the second quarter of 2024 but the outlook for the rest of the year looks uncertain.”
Vinay Solanki, the head of Channel 4 Ventures, believes that, despite the growth of social media, consumer companies still rely on the power of TV advertising campaigns.
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“When you are getting millions of people there is no alternative to that,” he said. “TV is a cultural institution. It’s the water cooler for the nation – you will see this in the election campaign – and people forget that.
“If you think about the investment market, we have a really important role to play. There are very few consumer specialist funds left. Everyone is chasing AI and tech.”
So far, the equity stakes – and the potential risks – taken by broadcasters have been relatively small. Channel 4 Ventures, which typically does about 10-15 deals a year, began doing deals of about £1m to £2m but now typically invests between £1m and £5m in airtime.
However, there are risks involved in funding new companies, as Channel 4 found when Boomin, the online property portal, in which it had an investment, called in liquidators in 2022.
Solanki said each investment is made in “an incredibly thought-through way”.
He said: “If you are doing this sort of activity you need to step back, We look at it as a portfolio and we have an assumed level of things that aren’t going to work out and I think everyone – all the early investors – do exactly the same.”
Franses, who is the adviser to S4C’s commercial growth fund, which has funds to invest, agrees: “I would say it’s risky to do nothing in this market; the risk is bigger to sit still,” she said, pointing out that S4C spent six months evaluating the Kubos deal, which was a “calculated risk” as part of what will become a broader portfolio of investments.
“You are always assessing that risk,” Franses said. “It’s not like you take a bet on a company and you close your eyes. You work with that company and then, every day, you actively support that company for growth and in that way you are helping to manage and mitigate risk. You are not going to take 10 bets in semiconductors.”
Gill Hind, the chief operating officer and director of TV at Enders Analysis, said: “These equity investments that the broadcasters are taking are quite small, so there is less concern about potential risk. For ITV or Channel 4, taking stakes can help them fulfil their societal remit to back creative companies. Also, TV advertising can now target a particular postcode or demographic and it helps if, in a sales pitch, broadcasters can tell other small businesses that this has worked.”
Channel 4 Ventures recently expanded to launch Untapped, a new programme that is seeking to invest in small businesses led by founders with a broader diversity of profiles who have traditionally been overlooked by venture capitalists.
Franses said that the S4C fund can target Welsh companies and that the Kubos semiconductor investment can also help the broadcaster understand new technology in areas such as virtual reality, which will ultimately have an impact on TV content.
“These are not the big bets,” Franses said. “This isn’t paying £1.15bn for All3Media, this isn’t buying Paramount. No one is betting the farm here.
“These are sensible, informed investments which feel achievable within what’s happening in the current economic environment, so I think you will see more of these smaller investments which potentially have high returns.”