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No (Ad)venture Capital Hurts Indies by Ben Yennie
How can we grow the indie film economy? illo: courtesy B. Yennie
THERE'S AN OLD JOKE THAT GOES
something like this: a fine artist, a poet and a filmmaker move to Los Angeles. The first day they’re in town, they check out 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 a piece of chalk and the fine artist does a beautiful rendering right there 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?” Given it's a friendly sort of Los Angeles day, someone hands him pen and paper and he writes a beautiful Shakespearean sonnet about his friend’s artistry with the chalk.
Not to be outdone, the filmmaker joins in saying, “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 by the new technology, which does indeed greatly lower costs of production, the joke remains true and especially so if you want to attract the talent or foster the creativity you’ll need to rise above the noise of the current sea of content.
The film industry is in desperate need of new ideas and therefore—by definition—new money, perhaps something akin to a venture capital cinema fund.
Venture capitalists bring far more than money to the table. They also bring connections and a vast array of financial and industry specific business knowledge.
Essentially, these people are experts at building companies. And, when you really break it down, the best films really are just highly functional companies creating an excellent product. The contribution of connections and knowledge is just as vital to the success of the startup as the money is.
Group of Bay Area film professionals discuss strategy in January 2014. illo: courtesy B. Yennie
To be sure, we already have something similar in the film production world, it's called Executive Producer. It’s the Executive Producer's job to find the money, put the right people in place, run the production and complete the project, which is to produce one product: The Film.
The big problem is that talented executive producers with big money contacts are few and far between.
Secondly, there are precious few cross-over or connection points between money hubs and the independent film world, ie crazed cineaste freaks, leaving up-and-coming creative with no access. And its often not only money they lack.
Filmmakers also need an understanding of distribution and finance that many simply do not have, and most film schools do not teach. This is beginning to change, due in large measure to new organizations coming forward to help filmmakers better understand business, but the problem is far from solved.
Most films don’t need full-time representation handling the high-level marketing and distribution of the film from the script stage on. But most films don’t budget the costs of the marketing team to check in periodically and to help build hype for the film as it moves through production.
If a venture capital model were to be adapted in film, the firm could link to these experts. Given that the firm would be working with several films at a time, the budgeted marketing cost for each film would be far lower than any individual film could secure, with people splitting time between all the projects of the firm.
Most people understand that filmmakers need money, what many people do not quite get 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 puts all your eggs in one industry. Industries can change and the revenue brought in by any single industry can crash, often with little notice.
Savvy investors naturally seek to have money in many pots in order to maintain a strong portfolio through common industry shifts as well as recessions.
The biggest problem is that most investors don’t invest in things they don’t know. Naturally, investors need to understand a prospective investment before they put in their money.
Admittedly, film is a highly specialized and inherently risky. Every last dime of 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 a film is.
Conversely, they are often incapable of seeing when the project should be abandoned, if it’s gone so far off the rails that little money will ever come back.
One solution to this dilemma a venture capital firm could bring is that single investors simply cannot do "Stage Financing," a system of finance widely used in Silicon Valley where the investors only release funds once certain checkpoints are surmounted.
Ben Yennie, a radical film finance theorist? illo: courtesy B. Yennie
Single angel investors do not have the time nor 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 completion, distribution and marketing.
If Stage Financing is employed the project immediately becomes a far more sustainable investment.
Filmmakers may balk at the idea of review, but so long as the production is being well managed, they should be able to complete the checkpoints and obtain additional funds with little difficulty, in my personal assessment, assuming that the right review panel is in place.
Since the fund itself has every reason to see its projects through to completion, it will only be filmmakers who are not doing their jobs who fail the review process.
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 not just all its money, with no chance of getting it back, but also its film completion rep.
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.
The current 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.
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.
Some may say that filmmakers shouldn’t necessarily need to have that much business sense, since it takes their there to create. Moreover, filmmaking is a collaborative effort and it’s not in a director’s portfolio to think about target demographics, marketing strategies, etc.
The problem is the people in the film world that truly understand investment and recoupment are few and far between. And many of those people also take advantage of filmmakers.
What's needed is the creation of teams that have what it takes to tell quality stories with high production values, as well as get the films to market, 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.
In my not-so-humble opinion, we need three things. First, a new class of producer that understands the executive production angle. Second, a new class of investor that understands what it takes to invest in film: the risks, the rewards, and how it’s diversified.
And Third, we need a company that can successfully link these two together, creating a new class of media entrepreneur. In other words, a truly inclusive venture capital incubator for independent film. This should be a no-brainer for Silicon Valley.
In point of fact, venture money is starting to flow into film but not in the United States.
A Korean Venture Capital Group financed the film "Snowpiercer", a 2013 sci-fi action film based on a French graphic novel. Then there’s a company called Junction Investments, based in New York, that's trying to move VC and Hedge Fund money into independent film.
Koreans have become Asia's hipsters, especially in K-Pop and Film.
The biggest issue in this scenario is that these groups seem to be focusing only on highly marketable movies, some that have already found their budget through other sources.
I know that sounds confusing, but it’s true. I think there’s a lot of room for an earlier stage venture group to focus on the creation of films budgeted at and under one million dollars to build up the next era of independent producers, much the way the K-Pop and Film studios did.
Right now, no such organization really exists, although The Producer Foundry is a good start (at least the educational side).
Nevertheless, it’s clear that the industry is changing and, quite frankly, it needs to. The best way to effect the necessary changes 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.
Ben Yennie is a indie agent and film consultant who is happy to listen to a pitch on what might the next big thing; he can be reached .