Letter From Sundance: Can Investors Really Profit From An Independent Film?
After discussing last week Where To Find Investors For Your Film, the next question you are probably asking yourself is – how do investors actually profit on a film? I mean, once you find investors, you’ll need to pitch your project to them probably in the form of a business plan. So it makes sense that you need to know how they will profit so that can be a part of the recoupment strategy in your films’s Business Plan right?
Well it probably comes as no surprise to you that profiting on a film is actually a rare occurrence, especially when you don’t have a micro-budget film. It takes a solid finance plan and usually a few other forms of financing (other than private equity) to create a solid business plan for investors showing recoupment and profitability.
For example, when I have filmmakers come to me and say they have a budget of $3-$5 million and their finance plan is to raise 100% private equity, I wince. Why? Because it’s almost impossible to make that back from the current market! (as we speak, even Sundance acquisitions aren’t that high!)
And this myth of box office back end? Come on…. you know me by now! That shouldn’t even be part of the discussion!
So let’s get down to it then – where DO investors profit? Turns out there are actually a couple ways….
1. One way that investors can profit is by acting as your bank essentially and cash flowing pre-sale deals. It’s a low risk, low reward return of about 10%. These deals are very common but require pre-sales that cover the majority of the budget. These deals can also be preferable to a producer as you don’t need to pay for a bond like you would if you went to a traditional bank to cash flow your pre-sales.
2. Another way I’ve seen investors profit is by providing equity investment on a film that already has a few pre-sales in place (thus been somewhat vetted by the market) and the investors in turn are essentially financing ‘unsold territories.’ Once those territories are sold after the film is completed, the investors see their profit. This is much higher risk/higher reward obviously and unfortunately what usually happens is the unsold territories end up selling for FAR less than what the sales agents purported, and no money is returned to investors. (these are the law suits you read about in the trades!)
But every once in a while an investor hits it big with one of these deals and so that’s what keeps this type of financing alive – the mere potential for higher rewards no matter how slim the chances are.
3. And finally, there’s those odd stories once in a while of investors who really took a risk and invested in a film without pre-sales, without vetting from the market, and the film hits it big either with distribution deals, self-distribution success, or a combo of both. And this does happen, it’s just extremely rare and when it does work, it’s usually at the micro budget level where there’s more room for upside.
So how does this effect you? Well for starters I would get clear on what your financing plan is and if you’re planning on pitching investors for a 100% private equity finance plan, have a low enough budget to where their chances of recoupment and profit are higher.
If you’ve got a budget of $500K or higher, I would work out how you can supplement the private equity portion of your finance plan with market-based financing like pre-sales, tax incentives, etc. so to mitigate the investors’ risk.
Now over to you? What is your current finance plan and how will your investors profit? What is your pitch to them in your Business Plan? And if you’re an investor, how have you profited from films in the past? Please put your comments and questions below!
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Additional Resources:
Virtual Seminar: Five Ways To Finance Your Independent Film
Virtual Seminar: Financing Your Film Without Pre-Sales
Discussion in the FS Forums: How Do They Profit?
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Related Posts:
Reverse Engineering Distribution (clarified)
What Are You Bringing To The Table?
AFM Post Mortem - Pitching A Comedy + Actor Magnets
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Filed Under: Financing
It also seems likely that a first time director will have a production budget under $500K. So if you have a target of $1M to $1.5M that leaves another $500K+ for talent. And since distributors are looking mostly for talent that will pay off, that makes sense. With $500K you can afford some pretty decent talent. With room to book a good name, that should pretty much guarantee sales and profit for investors. I think some tax incentives also have a low threshold of around $1M.
I see some filmmakers trying to keep their budgets well below $500K, as if lower is better. I guess the logic is that a first time director has to start as small as possible. But isn’t this shooting yourself in the foot? There’s virtually no chance for profit there.
So what is your take on this? Is there a sweet spot for a first time director in the $1M to $1.5M range? Is under $1M going to cut down your chances? By first time director, I’m thinking writer-producer-director and I’m assuming they have a number of short films and even a feature or two under their belt. But they haven’t yet had a distribution deal. I also am considering that a first time director could be open to stepping aside to allow consideration of a director with more experience, if that’s what it takes to close a good deal. They could still get producer and/or writing credit. Tarantino started that way.
Actually there are some cases where you can get Pre-Sales in the $500K-$1 million range, of course talent dependent. In fact, I’m working with a few clients right now who have films in that range who are workin’ the pre-sales game and having success. Heck, someone in the FS Forums just reported getting a pre-sale on a $200K budgeted film, so yes it’s possible! (yes he even got a name at that budget).
Now if you are in the micro budget range and can’t get name talent, at least you don’t have as far to go to reach profitability and with the right concept and a low enough budget, sometimes you can manage it.
But yes, definitely a tightrope to walk – do you go for higher budget and ‘names’ or lower budget an ‘no names’….I say go for lower budget WITH names if you can!
Stacey
Also, check out this article on Profitability:
http://www.hollywoodreporter.com/news/sundance-like-crazys-jonathan-schwartz-412595
Stacey