The independent filmmaking industry needs a new relationship with investors [UPDATED]

LONELY INVESTOR Photo by Alejandro Escamilla

Prolific indie film producer Ted Hope, who spent the past year as Executive Director of the San Francisco Film Society (as of June 2015, a Production Executive at AMAZON STUDIOS), recently posted “Towards A Sustainable Investor Class: Accessing Quality Projects” as a call to build a healthy independent filmmaking industry. As always, he makes an astute and excellent comment about the big picture of indie filmmaking. We engaged in a conversation, and here’s my comment about the industry and investors:

There existed at the turn of the century a game, it was fun and I’m sure you know of it, called Hollywood Stock Exchange, and I’m surprised to check now and find out it still exists.

I lost touch with it but as I recall, it treats the concept of movie values as a game; one “invests” in movies as one might in the stock exchange, but without any real money.

It always seemed to me that this is the perfect example of how investors perceive movies: a game to play, not an environment for real investment. It has always amazed me that investors, who build their reputations  — well-known or personal delusions — on wise analysis of facts divorced from emotional tugs, suddenly fall prey to this prejudice about movies.

Almost every investor with whom I’ve had the discussion buys into an unexamined prejudice about movie investment.

For instance, most cite the fabled “Hollywood accounting” that seems to preclude real returns from “profit participant” schemes, and wholly swallow that as proof of the fallacy of movie investment, even though it is the unique purview of Hollywood studios and has nothing to do with independent motion pictures (see my blog post “Profit Participation at the Hollywood Studios is Impossible — Not so for Small Indie Producers”)

Others cite “investment” disasters that I have always called the “Car dealer from Ohio who wants his mistress to be a movie star” syndrome: that is, some energetic kid wants to make a movie (as opposed to “compelled to tell a story,” by the way) and talks someone in their small town into investing $35,000 to make the thing. Which, of course, is shitty, never completed, and nobody ever gets to see the mistress in her starring role. The car dealer then says that all movies are worthless. That is the definition of “dumb money,” the term the professional fundraising community likes to toss around with derision. Except … many themselves readily absorb that nonsense when it involves movies.

Investors routinely consider movie producers to be liars selling blue sky, yet a kid with an app for an iPhone is routinely “forward thinking” and “promising.”

MY POINT:

To accomplish what the indie film industry needs to accomplish in order to have a strong infrastructure, we as a community must find a way to overcome the nonsense that passes as unique “investment wisdom” concerning the independent filmmaking industry.

How can we do that?

I suspect, and have said this often, that part of the problem is the outrageous breadth of what we term as “independent film.” The term is used to describe $100 million Oscar-winning productions and the tons of cheap crap that gets posted on YouTube where only the filmmaker’s mother will endure it. In this outrageous breadth, everything in between those two extremes falls into the same classification as “indie film.” It is no wonder investors become incompetent at determining where real value might be.

What is more concealed in our economy than the successful and profitable indie motion picture? It is never in a producer’s best interest to be clear about the so-called “budget” (a term as fluid as jelly, mistakenly thought to be some magic absolute) for their movie, and it’s equally against their best interests to be clear about their profit-and-loss. Somehow, however, it would be valuable if the independent feature film industry could aggregate information that shows a realistic and clear picture of profit-and-loss for indie motion pictures, narrowing in on those indie films that specifically start out with ROI as their intention.

I suspect this move would be the most important step in making the independent filmmaking industry palatable to serious investors.

What are the problems?

Most investors are swarmed by filmmakers only when the one filmmaker has the single motion picture that immediately needs funding. That is out-of-step with the environment investors live in. Most investors, to my knowledge, live in an isolated world that includes business start-ups as a matter of routine, and serially. It is a clubby atmosphere where one start-up wizard is introduced by another start-up wizard and they discuss long-term dreams and goals. They exist within communities of both investors and start-up entrepreneurs. However, in the independent filmmaking industry, we are quite a closed community, frequenting festivals and seminars and screenings and mingling among ourselves, only leaving that environment to do a hit-and-run on investors at that one moment when we need money for our film. This is a wrong approach and keeps the investment community confused and distrustful of us. We need to find ways to integrate normally with investors.

Further, our approach obscures one of the clearest facts that would clarify the potential investment for investors: every single motion picture is an entire start-to-finish business operation of its own. Iconoclastic artists love to think they are unique, but not only does that make them at odds with the investment community, it also is not true. Every ROI motion picture uses the same steps as any company, such as: creation of a product concept, analysis of a market, formation of a business entity, development of the product, pre-planning for the product’s production, manufacture of the product, distribution of the product, sales and marketing, distribution, invoicing and returns, and exit. These and other steps are easily identifiable and quantifiable to investors, but iconoclastic filmmakers fail to present the business operation terms, thinking that it is at odds with their art and unique vision. Except: it has always been this way and always will be. The only thing different is that now, in order to save the independent film industry, we must start vocalizing the fact that each motion picture is an entire business operation from start to finish.

Not only will that awareness allow investors take notice, but it also reveals something else investors want to see: STAGES OF DEVELOPMENT. Filmmakers are notorious for wanting all cash up front in one shot for everything, but investors think differently. It is more attractive to investors to fund, perhaps, development, and then production, and then post-production, and then marketing and sales and distribution (the real-world terms for “P & A”), and then account for the receipts and eventually exit the business.

New opportunities

With the recent announcements by the SEC regarding implementation of the JOBS Act, independent filmmakers will soon be able to use a variety of approaches to investors. Donor Crowdfunding has existed, and continues to serve in a “patrons of the arts” capacity, offering support for non-equity participation (perks, fame, etc.). The new General Solicitation allowances mean we can now legally (naive filmmakers have always done this illegally) advertise our projects and seek “accredited investors” (simply defined as millionaires) for routine equity investment. The existing rules, under exemptions from the routine SEC regulations, are still in place for those filmmakers who want to reach out to investors to include a few dozen non-accredited investors. The upcoming rules allowing Equity Crowdfunding will bridge the gap, so anyone, accredited or not, can become an equity investor. (My personal opinion is that Equity Crowdfunding will be the appropriate place for the controversial “celebrity fundraising” efforts. See Crowdfunding and “Hey Zach Braff STFU and pay for your own movie”)

Filmmakers will likely want to blend these various options into a strategy, since each has its benefits and its drawbacks. In each of these options, some so new they are not even effective yet, filmmakers will want to develop the ROI concept for their project in the most professional manner that is acceptable to the investor class.

How can we fix this?

At the moment, the concept of an indie film industry infrastructure is a shaky concept because there is not a sustainable investor class, nor is there enough sustainable employment within the filmmaking community. It is impossible to build an industry infrastructure when the working class of the industry is routinely working for “no pay but credit and reel.”

So…HOW CAN WE FIX THIS? I hope we can.

What are your thoughts and suggestions?