Imagine sitting down with a banker, an angel investor, or a venture capitalist and boldly admitting that an investment in your company is likely to be a total loss. Imagine telling them without reservation that they will probably never see their money returned.
Hard to imagine? Not if you are in the movie business. And yet, films of all types garner hundreds of millions of dollars of financing every year.
Business owners in every industry would be wise to understand the many creative ways that film producers wrangle budgets for their projects. With a strong emphasis on non-financial rewards, spreading risk, and creative collaboration, film producers make great role models for money-raising entrepreneurs everywhere.
NON-FINANCIAL RETURNS
Films in general, especially independent films, are infamous for losing money at the box office. So what attracts investors? “It’s not the money,” agrees Paul Scherzer, 40, an independent film producer in Toronto, Ontario and President of Six Island Productions, Inc. “It’s the glamour aspect. Film has a certain cache, somewhat like the dot-coms had in the 90’s or biotech has today.” Scherzer has produced more than 13 films, including “Khaled” and “Manufactured Landscapes” both of which recently took honors at film festivals around the world.
For some investors, it’s enough to be associated with the film and listed among the credits. Others seek a more active role, joining the crew during filming or even suggesting creative direction for the project. In any case, it’s about personal fulfillment, status, and hob-knobbing with the “in” crowd, says Scherzer.
To the extent that entrepreneurs can project an aura of being hip or cutting edge, they will always have non-financial buttons to push with investors.
PRESELL THE WORLD
One of the best sources for film finance is a “presale”. Essentially an advance purchase order for the yet-to-be-made film, the presale can come from broadcasters, theaters, DVD distributors, and others. Scherzer once secured a presale agreement from Virgin Airlines who wanted to show his short film “Babette’s Feet” on their airplanes.
“You can pre-sell the whole world if you know the market,” says Scherzer, who has traveled to film festivals in Europe, Asia and South America this year hawking films both completed and under development.
Like purchase orders, however, presales require a lender to turn the contract into cash. Although expensive (interest is often well over 10%), presale-backed loans often make up more than 15% of a documentary film’s total budget.
Odd as it may sound, sometimes the best customer-financing for films turns out to be from theaters that haven’t yet been built.
Howard Hall, 58, and his wife Michele are Emmy-award winning producers of undersea documentary films whose work includes two IMAX releases. Their breathtaking 3-D IMAX film called “Into the Deep” was launched on an initial investment from Suntory, a Japanese company that was building an IMAX theater at a large aquarium in Osaka, Japan.
Suntory’s need for an ocean-themed IMAX film coincided with the building and launch of their aquarium theater – which enabled Suntory to capitalize their $2 million investment in the film. As more IMAX theaters are being built, such capital finance deals are becoming more common. Film producers get the money up front and the new theaters get a custom-made film, bankrolled as part of their larger construction project.
THE ART OF THE DEAL
Philanthropy, culture, art and education also play a part in funding many films. For Scherzer, the largest single source of equity capital for documentaries is a Canadian government agency called the National Film Board of Canada (NFB). With a mandate to invest in projects that advance education and the economy, the NFB has helped him finance documentaries about subjects ranging from coffee and politics to tap-dancing.
“There are agencies in nearly every country in the world that have budgets to support private projects that meet government goals,” suggests Scherzer. And the best part? “The investment terms are far more generous than other sources,” he laughs.
For Howard Hall, public support comes from the National Science Foundation, which has contributed more than $1 million to the making of his films – with no requirement for repayment. “The foundation’s mission is simply to popularize scientific research,” says Hall.
TAKE ONLY WHAT YOU NEED
Beware: there is a dark side to raising money. Money often creates more problems than it solves, posits Hall, which is a good argument for not raising more than you need. When you’ve got investors who put up millions, they all want a say in the final product. “The more money that comes in, the more difficult it becomes to make the film,” he says.
“People see a bad feature film and wonder how it could possibly have gotten so screwed up…but I know exactly how that happens.” Hall says. “With lots of investors, everyone wants a say. Unless you can afford to tell you investors to ‘take a leap’ the film gets destroyed.”
The lesson for all businesses is clear: take on only as many investors as you need. Investors may bring dollars, but they also bring new problems – personal, political, and emotional problems that may end up endangering the business.
SPREAD THE RISK
Filmmaking is expensive – budgets run into the hundreds of thousands of dollars for television documentaries and millions for an IMAX theater film – but the market for films includes the whole world. It’s no surprise, then, that independent producers like Scherzer and Hall often turn to collaborators overseas to get the job done.
Hall’s first major film was co-produced by a European partner that contributed all the post-production work (editing, etc.) in exchange for the European rights to distribute the film.
Likewise, Scherzer looks to both domestic and foreign co-producers for the resources to get projects off the ground. “Ideally there will be a natural fit between the film’s message and the co-production model,” Scherzer laments, “but in the end it’s sometimes just about getting the money, wherever it comes from.”