6 Things stopping a sustainable investor class in film.
Much of this series has been focused on the numbers behind film investment. While metrics like ROI and APR are very important when considering an investment, they’re not the only reason that high-net-worth individuals (HNWIs) tend to shy away the film industry. Here are 6 things that are stopping them.
In order for independent film to develop a sustainable investor class, the asset class itself needs to be taken more seriously. The reason that no one has yet been able to create a sustainable asset class out of film and media is much more complicated than the numbers not being in our favor. In this post, we’re going to examine some of the other things stopping independent film from becoming a sustainable asset class. This list is in no particular order, except how it flows best.
1. LACK OF INVESTOR EDUCATION
Investors tend not to invest in things they don’t know or understand, at least as anything more than an ego play. The Economics behind film investment is difficult to understand even before you factor in how difficult it is to find reliable information on film finance from an investor’s perspective.
Even the basics of the industry can be difficult to learn. Generally, film investors are forced to read older, often out-of-date books on film financing targeted more at filmmakers than at investors. This industry is in the midst of a reformation, so much of the information is out of date before it’s published. Most investors don’t really spend a long time learning information from a different perspective which may or may not be correct.
Whit that in mind, many Investors learn how money flows in the Film industry from the filmmakers they invest in. Apart from the conflicts of interest, there’s another rather large problem with that strategy.
2. FILM SCHOOLS DON’T TEACH BUSINESS AS WELL AS THEY NEED TO
Film Schools can be great at teaching you how to make a film, but they’re generally not good at teaching necessary business skills. Even things as basic as general marketing principles, how best to finance a film, or how to make money with a film under current market conditions.
While film and media are an artistic industry, focusing solely on the quality of the film is not going to recoup the investor’s money. Film Schools aren’t great at teaching branding filmmakers how to define their core demographic, or how to access them once they have.
3. DISTRIBUTION ISN'T WHAT IT USED TO BE.
The big risk in film distribution used to be the gatekeepers. You had to make a good enough film to attract a distributor so you could get your film out there. However, that problem has been traded for an entirely different one, oversaturation of content. I would argue that a new problem is harder to overcome.
The old model was that the home video sales would be able to make a genre film profitable, even if it wasn’t that good. Essentially, if you had access to a wide-scale VHS or DVD replicator, you could make a mint selling the licenses. There wasn’t much competition, so a cottage industry sprung up around film markets.
That model worked when it was much more expensive to make a film. Given the high barrier to entry from needing to raise enough money to shoot on film, as well as develop the skills to expose it correctly, there was relatively little competition compared to the demand. However, now that anyone can make a film with an iPhone and 500 bucks the marketplace has been flooded.
Additionally, since the DVD Market has all but dried up, it’s difficult to make a return for newer filmmakers. VOD (Video On Demand) Numbers haven’t risen to the occasion, since most people can get their fix from watching Netflix. It used to be easy to sell DVDs as an impulse buy at the checkout line. Now that everyone has hundreds of free movies at their fingertips, Why should they pay 3 bucks to watch something when there’s an adequate alternative I can get for free?
So the problem is now less how to get distribution, and more how to market the film once you’ve got it. It’s both hard and expensive to market a film. Generally, it’s best to create something of a hybrid between these two types of Distribution. However, there are issues with that as well, and these are less associated with expertise.
4. SEVERE LACK OF TRANSPARENCY IN INDEPENDENT FILM
I’ve written before about the lack of transparency in Distribution, so I won’t go into too much detail here. In Essence, the black box that is the world of film distribution is very intimidating to many investors. Investors want to be able to know when their money is coming back, and many filmmakers are unable to make any real promises about that. However, there’s another issue with transparency from an investor’s perspective.
Unfortunately, many filmmakers don’t communicate well with their investors or other stakeholders. I’ve spoken with many film commissioners, investors, and others about their frustrations with filmmakers not keeping them in the loop.
Filmmakers understandably focus on the admittedly difficult task of making the film happen. Between all of the tasks like scheduling and budgeting the film, finding the locations, confirming the crew, making the shotlist and storyboards, sending out call sheets, and a whole lot more, it’s easy to let communication fall by the wayside.
5. INVESTORS LAST TO BE PAID
Now I know that Filmmakers are reading this thinking “BUT I GET PAID AFTER THEY GET 120% BACK!?!?” To a level, you’re right. However, unless you waived your producer’s fees, you got paid before they did. Sure, you did a lot of work for often too little money to make your film happen, but you did get a fee to produce this film. If your investor wanted to be cynical about it, you produced or directed a movie for hire that you got to take most of the credit for.
Here’s what a waterfall for a film normally looks like. Investors generally did a lot of work to get their money, and now they’ve paid you to make a film and it’s unlikely they’ll ever get all of their money back.
1.Buyer Fees
2.Sales Agent Commission
3.Sales Agent Expenses
4.SAG/Union Residuals
5.Producers Rep (If Applicable.)
6.Production Company
7.Gap Debt (+Interest)
8.Backed Debt (+Interest)
9.Equity Investor
I may be persuaded to do a financial analysis of what that would actually look like in terms of money. Oh look, I did a blog explaining exactly what this means. Click here to read it.
6.LACK OF ACCESS TO TASTEMAKERS AND CURATION
We explored the numbers of why indexed film slates just don’t work in part two. However it takes a fair amount of training, experience, and a bit of luck to recognize what films will hit and what films won’t. While William Goldman is famous for saying “nobody knows anything,” there has to be a balance between a dart board with script titles and industry experts guiding the ship.
Developing an eye for what makes a successful film is something that most prospective film investors don’t want to take the time to learn, especially since many get burned on their first investment. it takes a lot of time to understand what projects have what fit in the market, and that’s generally not something that an investor has time for.
Having a few sets of experienced eyes looking over what investments would be good to fund is something that could make independent film a more sustainable asset class, and not enough investors have access to it to avoid getting burned.
So, what is there to be done about it? Check the next post for the final installment, How do you make a sustainable asset class out of film?
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