Why Angels Invest and Why they Choose Tech

2/22/2017

Why don't "Rich Tech [People]" invest in film? Part 2/7

In order to understand why an investor should invest in your film, you need to understand why investors invest at all. What is an angel investor? What does it take to be a successful angel investor? Why don’t they just buy that second yacht?

To answer the first question, an angel investor is person of means, who generally has a sizable amount of liquid assets and wants to do something more interesting and potentially lucrative than buying stocks or mutual funds. In order to be an accredited investor, an unmarried person must have made at least 200,000 USD for two consecutive years, and be likely to do the same in the current year. If they’re married, that number is more like 300,000 USD. They could also have 1,000,000 in liquid assets, not including their primary residence.

The reason this came about was to protect individuals from being taken by scam artists. The theory behind the income threshold is that if you’re that affluent, you would either have the education or sense to know if you’re being taken, or the means to hire someone who does.
Apart from the aforementioned asset requirement, what does it take to be a professional angel investor? It basically requires two things. Access to capital and deal flow. In layman’s terms, money to invest and projects to invest in. Essentially, Investors generally assume that about half of their investments will tank and they’ll lose everything due to an inability for the company to exit.

So why do Angel Investors invest? This question is more difficult to answer, and actually has several answers that we’ll explore throughout this blog series. But, essentially it boils down to the fact that These investments have the potential to breakout in a big way.

Below is a chart illustrating that point. It has been simplified, and assumes very early stage investments. This chart is generally based on loose feelings and assumptions asserted by many investors I’ve talked to. Just like it’s very difficult to estimate how many films break out, it’s very difficult to estimate how many investments are completely lost. It’s very easy to track winning bets, harder to track losing ones.

If you’re a filmmaker reading this, you might be thinking to yourself, why are they hunting mythical horses and WTF is a decacorn? A Unicorn is a company valued at more than 1 billion before exiting. If you’re a decacorn, your company is valued at more that 10 billion prior to exit. The reason that you don’t really see it on that pie chart is that it’s only about 1 in 1000 to 1 in 10,000 chance of happening.

So how do investors get their money back from a tech investment? in order for a tech investor to get their money back, generally the company has to be acquired, or go public [IPO.] Films on the other hand, simply need to find profitable distribution, or self distribute the product. Each exit in each sector have their pros and cons, but in the end the boils down to which is more accessible. So what does the return look like in both cases?

Let's assume an investor invested One Million Dollars across 20 tech sector investments, each investment is made equally. I know that these tables are going to be hard to fully understand, so I’ll have a better data visualizations after table 3.

As you can see the overall ROI is about 85%. This is assuming that the investor isn’t completely green, and has some idea of what they’re doing, so they make better picks. At some level, this looks very similar to the studio tentpole system. Experts making bets confident that the ones that hit will cover the losses of the ones that miss. Unfortunately, the numbers don't back that up in the way we would like, partly due to the fact that most angels in film are not experts, and many filmmakers don't package as well as they should. .

What does the picture look like for the investor going with no real knowledge of film look like?

That’s not Pretty, but it is making a fair amount of negative assumptions about the slate of films. That’s assuming they don’t have distribution going in, the film is financed entirely by private equity, the hypothetical investor made the investment at the outset of the project, AND the film isn’t well cast with an eye for international sales.

BUT, if you films on a slate look get at least a letter of intent for distribution from a reliable sales agency, and work filmmakers with their sales agents on casting to make sure you get the best cast with a high international appeal. It’s at least possible that you could have slate that looks more like this.

That’s better, but a well managed tech portfio still obliterates it if we go solely by total return potential. The Graph I mentioned is below, to help illu strate my point. Trying to convince a tech investor to break from what they know to invest in something that has less potential to return is a hard sell.

Filmmakers, this is what you’re up against. But fear not, you may have an ace in the hole. In fact you may have more than one. The first is the fact the APR on the investment isn’t as different as you may think, but there are many others.

You’ll have to come back next week though. In the meantime, check out some of these other blogs, resources, books, or audiobook. If you have any thoughts, questions, or comments I will be monitoring the comments below as I can.

Please take some time to check out the books section of my site, where you can learn a lot more about the business of Film, and tech, or even get a free copy of my audiobook.

This entire series is about why the Film Industry is not a good investment. The numbers above indicate that very well, but they don't say why. As you'll find out later on in the series, there's a huge knowledge gap in the film industry, both from investors and from filmmakers. Investors don't understand the metrics of the film industry, and filmmakers don't understand how to give their projects the best chance at profitability. That's why I offer a program to turm both investors and filmmakers into savvy executive producers. It teaches all about indie film packaging, film financing, marketing your indiefilm, and traditional independent film distribution. It all starts with a FREE Strategy session to assess where you are, and chart a path to get to where you want to be. Sign up for yours today.

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