This article was originally published in Law360 on May 10, 2024, and is republished here with permission.
In recent months, there has been an onslaught of negative news surrounding startup investment. However, recent reporting from The Information points to two specific sectors where investment is actually on the rise.[1]
The first is generative artificial intelligence — a recurring sweet spot for investors. The Information’s data indicates an 11% increase for the first quarter.
While articles abound on what’s happening with generative AI, this article focuses on the other area that investors are currently targeting: the creator economy.
Business Insider notes that even though investment has slowed down across numerous sectors, startups in the creator economy are still attracting investment.[2] They point to multiple startups raising seven-figure seed rounds last year, as well as several later-stage rounds for creator startups.
And the positive trend for creator startups continues. In the first quarter of 2024, the sector experienced positive growth on a year-over-year basis compared to the first quarter of 2023.
For investors looking for new centers of disruption, creator startups are a compelling story, and this despite the many challenges.
Perhaps the most famous of creator businesses is TikTok, whose future is in flux now that President Joe Biden has signed a bill to force its sale or a ban of the app, and that could potentially affect many startups in this space.[3] However, for now, it doesn’t seem to be slowing down creators or the investors looking to capitalize on the content they are generating.
What is the creator economy?
The creator economy refers to a broad software-facilitated ecosystem that enables content creators and influencers to earn money from what they make and create. Participants include the creators, the audiences they reach, the digital platforms that proliferate them, and the marketers, agencies and advertisers that are interconnected and exchange the content for money or goods and services.
Creators such as influencers, video-content producers and writers monetize their content through sponsorships, affiliate marketing, subscription models, merchandise sales, donations, and more.
According to a recent Goldman Sachs Research report, the ongoing growth of the creator economy will likely benefit companies that possess a combination of factors: a large global user base, access to substantial capital, robust AI-powered recommendation engines, versatile monetization tools, comprehensive data analytics, and integrated e-commerce options.
What does the investment market in the creator economy look like?
With The Information’s data showing that funding for creator startups in the U.S. more than doubled in the first quarter to $341 million, this is certainly a bright spot within otherwise dismal funding news. The report suggests that music-focused startups such as Duetti, as well as startups formed by the creators themselves, such as Dude Perfect, are drivers for this funding increase.
What is the total available market for the creator economy?
The existing market size of the creator economy is estimated to be at least $100 billion, and there is an expectation of continued growth as more individuals monetize their creativity through digital channels like YouTube, TikTok, Instagram, Patreon and Substack.[4]
There is tremendous potential and interest from investors in this sector, and it is clear that it represents a significant and rapidly expanding sector of the global economy.
What are the legal issues involved in investing in creator businesses?
As with any other sector, the creator economy comes with its own set of unique legal issues investors must carefully consider before diving in.
Intellectual Property Rights
Given the ease with which content can be created, shared and replicated in today’s digital world, ensuring the startup has clear ownership or licenses for all content created or posted on their platform is paramount. This includes copyright, trademark, rights of publicity and privacy, fair use, and other intellectual property rights. Additionally, investors should assess what kind of strategy exists for protecting their intellectual property and mitigating the risk of infringement.
Creator Agreements
There should be comprehensive agreements in place between the startup and its creators outlining the terms of their relationship, including compensation, ownership of content, exclusivity clauses, content guidelines, and dispute resolution mechanisms. An in-depth review these agreements can determine if they adequately protect the startup’s interests and appropriately minimize associated legal risks.
Platform Liability
Investors should also consider the potential liability of the platform for user-generated content, including copyright infringement, defamation and other legal claims. To determine the risk exposure here, consider the laws governing platform liability, such as the Digital Millennium Copyright Act.
Regulatory Compliance
Depending on the nature of the startup’s operations and the jurisdictions in which it operates, there are regulatory compliance requirements related to data privacy, consumer protection and advertising standards. There are also regulations surrounding accessibility, specific content regulations from government agencies or industry bodies, terms-of-service compliance for third-party platforms, and others. Thorough due diligence is vital to determine whether the startup follows all relevant laws and regulations.
Employment and Independent Contractor Classification
The employee versus independent contractor issue is one that affects numerous sectors, including the creator economy. Many people contributing to a creator’s platform may be classified as independent contractors rather than employees, so it is vital to review their classification practices ensuring compliance with labor laws and determining any misclassification issues.
Licensing and Royalties
If there is a reliance on licensing content from third parties or distribution of royalties to creators, an assessment of the terms of these agreements can determine how favorable and sustainable they are for the business.
Exit Strategy and Intellectual Property Transfer
Because this sector revolves entirely around content creation, it is also important to consider how intellectual property rights will be transferred in the event of an acquisition or merger. Clear agreements can help facilitate a smooth transfer of intellectual property assets and avoid disputes with creators when an exit occurs.
Litigation and Dispute Resolution
There can be a broad range of legal disputes affecting startups within the creator economy — from contract disputes to content liability to disputes with consumers. Examining the startup’s history of litigation and its approach to resolving disputes with creators, users and other stakeholders can be invaluable. If it is determined there is a significant history of legal disputes, it could be an indication of underlying legal risks and/or operational challenges.
What’s next?
The creator economy is only going to continue its upward trajectory. This is increasingly becoming a larger segment of the entertainment we consume, and more of these startups will certainly come on board looking for investors to fuel their growth. As investors look to capitalize on this expanding segment, considering these kinds of specific legal issues can help minimize risks and maximize the potential for long-term success.
[1] https://www.theinformation.com/articles/u-s-creator-funding-surges-for-first-time-in-two-years.
[2] https://www.businessinsider.com/pitch-decks-used-by-content-creator-economy-startups.
[3] https://www.nytimes.com/2024/04/23/technology/bytedance-tiktok-ban-bill.html.
[4] https://upstartco-lab.org/impact-investing-in-the-creator-economy/.