Why Film Needs Venture Capital

8/17/2014

There’s an old joke that goes something like this. Three artists move to Los Angeles, a Fine Artist, a poet, and a Filmmaker. The first day they’re in town, they check out the Mann’s Chinese Theater. When they get there, a wave of inspiration overtakes them. The fine artist says, “This is incredible, I have to draw something! Does anyone have a piece of chalk?” Low and behold a random passerby happens to have one, and hands it over. The fine artist does a beautiful rendering on the sidewalk.

Watching this, the poet says, “I’ve had a flash of inspiration, I must write! Does anyone have a pen and paper?” It happens to be a friendly sort of Los Angeles day, and someone hands over a pen and paper. He writes a beautiful Shakespearean sonnet about his friend’s artistry with the chalk.

The filmmaker says “This is amazing, I’ve got to make a movie about it! Does anyone have any money?”

Even though the costs of making a film have been cut drastically, the joke remains true. I mentioned in my last post that the film world is in need of new money, and that what the film world really needs is something akin to Venture Capital. I think the topic deserves more exploration than a couple paragraphs in a post about transparency.

Venture capitalists bring far more than money to the table. They also bring connections and a vast knowledge of financial and industry specific business knowledge to the table. Essentially these people are experts at building companies, and when you really break it down the best films really are just companies creating a product.

The contribution of connections and knowledge is just as vital to the success of the startup as the money is. We have something somewhat similar in the film world, it’s generally the job of the executive producer to find the money for the film and put the right people in place to run the production and complete the product.

The biggest problem is that good executive producers with contact to money are few and far between, and there are very few connection points between the big money hubs and the independent film world. Filmmakers often don’t only need money, they need to have an understanding of distribution and finance that many simply do not have, and most film schools just do not teach. These positions are generally not full time positions, and most filmmakers just don’t have the money they need to pay people like this. If a venture capital model were to be adapted in film, the firm could link to these experts, and included in the budget for the film at a cost far less than it would normally be, because the person could split their time between all of the projects represented by the firm.

Most people understand that filmmakers need money, what many people do not understand is that there are very valid reasons for an investor to invest in film.A good investor knows that a diverse portfolio is far better than one that focuses solely on one industry. Industries can change and the revenue brought in by any single industry can crash with little notice. Savvy investors will seek to have money in many pots as it really helps to weather through downturns. Film is considered to be a mature industry, and has grown steadily over the past several years, even in the economic downturn. In fact, the film industry is moderately reversely dependent on the economy, so it often does better in economic downturns.

The biggest problem is that most investors just don’t invest in things they don’t know. Investors need to understand an investment before they put money into it.

Film is a highly specialized and inherently risky business. All the money goes away before any comes back, and that can scare off many investors. Especially since they often don’t understand what a good use of resources for a film is and are often incapable of seeing when the project should be stop-lossed as to not lose any more money.

One solution a venture capital firm could bring to this industry that single investors simply cannot is stage financing. Stage financing is a system of finance that is widely used in Silicon Valley. The concept is basically that the investors only release funds once certain checkpoints are met. Single angel investors do not have the time or expertise to act in this way, which is a big part of the reason for the standard escrow model. If a project that makes it through the screening process is only given the money they need for pre production up front, they must pass a review to have funds released for principle photography then it becomes a far more sustainable investment.

Filmmakers may balk at the idea of review, but quite frankly so long as the production is being well managed, they should be able to complete the checkpoints and have the additional funds released with little difficulty, assuming that the right review panel is put in place. The fund itself has every reason to see it’s projects through to completion, so it will only be filmmakers who are not doing their jobs that end up not passing the review process.

Edit: Additionally, there are deals that can be made to help agents and bankable talent feel more comfortable with such a process. This may be a subject of a later blog, and is mentioned in the comments.

Why does the fund have every reason to see films through to completion? Because if the films are not completed, then the fund will have lost all the money it put in with no chance of getting it back. That said, if the production is a disaster, and it’s clear that additional funds would not actually result in a finished and marketable film, then it is far better to cut losses and move on with other projects that have higher potential for revenue.

As mentioned in the last blog, a lack of transparent accounting is also a big issue with investors.

A single filmmaker does not really have the ability to negotiate with a distributor, at least not to a level necessary to resolve the transparency issue. In the relationship, the distributor has all of the power and there’s really very little most filmmakers, especially those just starting out, can do to change that.

But in film as in any industry, money talks. If there were a venture capital firm for film that only worked with distributors who have transparent books, and those distributors could then turn around and propose new projects to the venture capital firm, then some of the issues of transparent accounting could start to change. Many distributors, especially those working in the low budget sphere, are continually raising money for their own projects. So, having a good relationship with a venture capital firm is a big incentive to maintain good books and responsible business practices for filmmakers.

It got listed in the comments section of Black Box that filmmakers shouldn’t necessarily need to have that much business sense, since it takes their whole being to create. Filmmaking is indeed a collaborative effort, and it’s not a director’s job to think about target demographics and marketing strategies. The problem is the people in the film world that truly understand investment and recoupment are few and far between. Many of them also take advantage of filmmakers, as evidenced by the stories of studio accounting from Black Box. Part of what’s needed is the creation of teams that have what it takes to both tell quality stories with high production values, also get the films to market and figure out exit strategies, target demographics, and general budget recoupment tactics.

Many Film Schools just don’t teach this part of the business. Film schools focus everything on how you can make the film, and what it takes to do it, but few of them really give you the ability to actually go raise money. So what’s really needed is a new class of producer that understands the executive side. What’s really needed is a new class of investor that understands what it takes to invest in film, the risks, the rewards, and how it’s diversified. What’s really needed in film is a company that can successfully link the two together, and create a new class of media entrepreneur. What’s really needed is an incubator for independent film with a team that can execute both of these aspects and create a sustainable business model out of it.

Right now no such organization really exists, although I’ve been trying to start one with my work at the IIFF, Global Film Ventures, and more recently Producer Foundry. It’s clear that the industry is changing, but quite frankly it needs to. The best way to effect the change in practices that need to happen in the industry is to change the way the industry is financed. The entrance of a venture capital firm into the film industry would do just that, and is exactly why it needs to happen.

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