How can a Film Slate make more money than a Tech Portfolio?

Why Don't Tech people invest in Film? Part 3/7

In the words of Albert Einstein, “The most powerful force in the universe is compound interest.” He also called it “The 8th wonder of the world, he who understands it, earns it.  He who does’t, pays it.”  In this post, we’re going to be examining how we can use the notion of compound interest in comparison to tech and film investments.  ​

In the previous installment, we looked at the average ROI of a film slate vs. an early stage tech portfolio.   Here’s what we came up with before.  For the full tables, check out last week’s post.

Related: Why Investors Invest and why they choose Tech

Unfortunately, the numbers don’t look good for film.  By the math above, we can see that tech portfolios make on average of 7.5X what a film slate would over their lifespans.

But, film does have one advantage over tech.  The amount of time that it takes for a film to recoup [if it’s going to] is much shorter than what it would take for a tech exit would be.  

For instance, the average time from when an Angel becomes involved in a project to when they see their money back is around 12 years.  For a film to at least start recouping investment, that time period is around 2-3 years, if it’s done well and distribution is planned from the beginning.

Why is that?  Generally, for a tech investor to get their money back, the company they invested in has to either be acquired by a larger company or make an initial public offering [IPO] and be listed on a stock exchange.  Sometimes an investor will be able to list their stock on a secondary exchange, but that’s a little beyond the scope of this article.  Acquisitions tend to happen more quickly than IPOs, but there’s generally less money and less prestige. 

​Given that the size of venture capital [as opposed to angel investment] rounds have ballooned in the last decade, many venture capital firms are pushing their companies to IPO instead of be acquired.  This may make the time from an early round angel investment to exit take even longer than the 12 years mentioned above.

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Related: Why Film Needs Venture Capital

Films, on the other hand, start getting some of their money back shortly after they start distributing the film.  If the filmmakers get a minimum guarantee [MG] they may get a decent check up front.  If they don’t, they may not, and it may take an additional year or so to start getting their money back.  I should note MGs are more the exception than the rule. 

So for this exercise, we’re going to look at the APR of both a technology investment portfolio and a film slate.  We’re going to make the assumption that both investments are early stage, since the angel round for a technology company is very early in the investment process, generally directly after the friends and family round.  Later rounds are generally dominated by institutional investment firms.  A similar scenario can be said about film.  Most angels from other industries get involved very early, since they don’t have contacts with completed projects.  

Since revenue from a film tends to come in over time, we’ll count the lifespan of a film investment to be 3-5 years as opposed to the 2-3 years mentioned above.  Further, while the time period for complete recoupment from a film is closer to 5-7 years from distribution, the latter years revenue is not really worth accounting for, since the vast majority of the revenue comes in during the first 2-3 years of distribution. Tech exits on the other hand generally come with a large lump sum for the investor after a quite a long time that may be getting longer, we’re going to do the math based on 12-14 years years to exit for a tech company. ​

From my Medium: The Five steps to Vet your Investors.  

When we compare APRs, this is starting to look a little more reasonable, but still not great.   When we compare the APR of a film as opposed to a technology company, we’re only looking at around a 1.5X to 3X instead of a 7.5X differential.  Unfortunately, looking at things through this lens raises other issues, in that the average mutual fund pays out around 5-7% APR, depending on the health of the entire economy.  

Could a savvy investor do any better?  Perhaps.  ​

Everything we’ve been looking at so far has assumed that all of these investments were early stage.  If it were a tech investment, we’d say Seed or Series A, in film, we’ve been assuming these investments take us out of development and into preproduction.  But what if we were to include completion funding and distribution funding in the portfolio?  I would do a similar analysis for technology companies, however given that the VCs dominate that world due to the gargantuan numbers, I’m not sure it’s entirely reasonable to do so.  ​​

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The assumptions I’ve made on this note are that the slate would be made up half of finishing/distribution funds, and half of early stage investments.  As such, the risks are far lower, and since much of the later stage debt may be done in the form of debt as opposed to equity, we can assume not a huge amount of loss on those investments.  Also, since the film needs to be finished and not made from start, the time for recoupment of these funds is greatly lessened.  With that in mind, we'll assume that the bulk of these returns come in from 3-4 years instead of 3-5.  

I'd like to take this opportunity to remind you that none of this is meant to be scientifically accurate, but rather a very good estimate and approximation of what these slates could look like given the right set of circumstances.  Take these numbers with a grain of salt, just as you should any revenue projections from a pre-seed stage startup or revenue projections from a filmmaker.  
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So with that, Let’s take a look at those numbers.  ​​

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\Now that made a rather large difference.  Admittedly, these numbers are highly speculative, [See disclaimer on part 1] but the right team backing up the right filmmakers may make it possible.  Given I work with investors, I should state these do not constitute any legal documentation, it’s really just a theoretical exercise to help compare two asset classes. 

By creating a slate investment that includes completion funding as part of the investment mix, we lessen the risk and decrease the time to getting the money back.   How does that affect the APR?

With the inclusion of completion funding in a portfolio, the APR of a film slate is looking relatively competitive.  If you’re an investor, you may be asking yourself, “Well if it makes that big a difference why not focus only on completion funding?”  It’s a great question, there are many funds that do.  So many in fact, that the playing field is getting fairly crowded.  Especially when you compare it to the other places for available funding.

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Related: One Simple Tool to Reopen Conversations with Investors

  If a fund only offers completion funding, It would be difficult to establish the long term relationships with emerging talent necessary to make an organization like this work.   It would also be harder to attract the high-end prospects.   If a fund does a mixture of the two, it can be a very good way to find new filmmakers and help them pass the goalpost on their first film.  Once they’ve done that, you can start to work with them on future projects at an earlier stage.  By doing this, the fund creates a better vetting process, and attracts higher end talent. 

With that in mind, a mix of investments seems to further the goals of the organization and the industry in a much more cohesive manner.   It also starts to sound a lot like Staged Investments, like Seed Stage, Series A, B, C and the like.  Don’t worry, we’ll have a much more in depth conversation about this later in the series.  

But first, We’re going to talk about some of the excitement associated with both of these types of investment.  The Decacorns and Breakouts.  That blog will go live next week.

In the mean time, since this blog series is written both to help Filmmakers understand what they're up against as well as to act as a primer for people who have an interest in investing in film, I'll make a minor and somewhat vague announcement.  I'm currently working with others to establish an angel group focused around film, media, and other cultural investments.  We should have some news regarding this for you soon.  If you'd like to stay in the loop aout this, you can do so with the form linked below.  

We are not currently taking submissions, but we are gathering steam for some great events in the bay area.   Aside from that, please like and share the article, and if you have a question I'll be monitoring the comments section for at least a week.  

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This entire blog series is a long-form examination of why Investors don't invest in film, but instead invest in technology.  This blog shows one incredibly narrow example of how a film CAN do better than even a successful tech company.  However, there are issues in making successes happen more often.  Two of those issues are that investors don't understand the film business, and filmmakers often don't understand how to help their films become profitable.  I've developed a program to help both parties transform into competant executive producers.  The program teaches you all about packaging, financing, marketing, distribution and even helps you develop the docs you need to take your film to investors.  It all starts with a completely free, no obligation strategy session.  In the strategy session, I'll help you figure out where you are, and how to get where you're going.  Sign up for yours today.  

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