INDIEVEST

A NEW INDEPENDENT FILM INVESTMENT MODEL

February 2010 issue

Movie Mania

A new company called IndieVest hopes it can make independent films turn a profit for investors. Will the model work?

By Eric Rasmussen

When most people think of alternative investments they think of gold, oil and gas pipelines or inverse market strategies. They don’t often think of independently produced movies like Sex, Lies and Videotape, Reservoir Dogs or Sideways.

Indeed, it’s rare that people think of independent movies as investments at all—because it’s rare that they make any money. The vast majority of filmmakers outside the Hollywood orbit never find distribution for their work, and all that risk of hiring actors, scouting locations, doing the makeup and paying for the catering usually goes down the drain when the theatrical distributors say no to the finished work, which they do 95% of the time. Only a handful of indie movies make their investors whole. What most people don’t realize is that the cost to shove a movie down the public’s throats often costs more than the movies themselves. Just one reason scrappy maverick film artists don’t get their work seen.

Add to that the current problem of the last couple of years—a huge glut of indie films coming to market with not enough places or public interest to show them—and the outlook for these investments gets even worse. It’s a big risk that people usually do only as a labor of love, or folly.

Of course, some films such as My Big Fat Greek Wedding stroll out of left field and make all sorts of bank from a tiny investment, keeping hope alive. But that’s the kind of gamble some liken to the slot machines, not the methodical, disciplined investment strategy of a conservative investor.

“Typically, the only people who make money in film deals are the promoters,” says Larry Ginsburg, a CFP licensee with Ginsburg Financial Advisors in Oakland, Calif. He says that without Hollywood money and the backing of somebody like Tom Hanks or Steven Spielberg, these films are often money holes. “These are essentially vanity investments,” he says. “People are investing in them for their ego.”

“It’s very much a field of dreams,” acknowledges veteran venture capitalist Wade Bradley, who is making his own bid to be a player in the film business. “You have folks out there raising capital on a script and hope to raise at least enough to shoot part of the film or hopefully shoot all of the film. When the post-production is done [they feel] that it’s going to be so special that everyone will want to distribute it. And the problem, we know, in the marketplace is that 95% of the time they won’t.”

Yet into this giddy firmament, Bradley has launched his own company, IndieVest Inc., a business that he says offers a better way for investors to get seed money to movie makers without necessarily taking a bath. Bradley is also the managing director of Empire Ventures, and in the past has worked with such start-up tech companies as Snap Names, Learning.com, Xora and Teseda. But he always had the movie bug, he says, and he thought he might be able to come up with a new model to make independent films not only viable, but even profitable.
The strategy he has come up with involves bringing the distribution in house so he can guarantee it. He also offers total transparency to investors, he says, something notoriously lacking in the murky mechanics of Hollywood accounting. The films are usually low budget, $10 million or less to produce, but bring into the fold top talent that the company thinks can get a return.

“With the advent of better and better technology, just about anyone can make a movie,” says Bradley, who is IndieVest’s CEO, as well as its founder. “You have such a fragmented, unstructured marketplace, you have investors who get excited about projects. And this is generally not their domain, so they don’t know what they should be looking for in a project. More important, they don’t know what the red flags are that should make them run away.”

IndieVest’s first feature, Saint John of Las Vegas, hit theaters in January 2010, first in the cinema hotbeds of New York and Los Angeles, then later in wider release. This buddy comedy stars independent film stalwart Steve Buscemi and follows insurance fraud investigators in Sin City. Indie-Vest currently has five projects and hopes to work on eight to ten pictures per year.

In a big coup, it has partnered with Vivendi Entertainment to handle its projects on DVD and pay-per-view, which can be the most important profit centers in the age of movies-on-demand and downloading. Vivendi has “direct relationships with all the big box stores—Wal-Mart, Kmart, Target, etc.,” says Bradley.

IndieVest works on a private placement model. First, it sells memberships with different tiers. A premiere portfolio membership costs $2,950 up front and $1,950 per year and allows the investors a look at its entire slate of film projects, as well as giving them visits to screenings. For $4,950 up front and $2,950 per year, the member gets other perks, including invites to film festivals such as Sundance. Bradley and his partners, including IndieVest Pictures President Mark Burton (executive producer of the Oscar-nominated film Water and a former partner with Hilary Swank) then offer investments in minimum units of $50,000 for a stake in the films.

But the more intriguing aspect of the operation is that the company is guaranteeing distribution—the Holy Grail for filmmakers. When Bradley and his team put the companies together, they built it with three companies: a parent company, a studio/distributor and a securities firm.

“Our head of distribution was the president of distribution for Miramax and prior to that for well over a decade ran all domestic theatrical distribution for MGM,” Bradley says. Besides raising the capital to produce the film and complete post-production, he says, the company also raises money for print and advertising. “We’ve combined all this under one roof.”

Each film project is an LLC, and puts investor money in escrow at Deutsche Bank. The company dosen’t begin spending any of the money on the film until 100% of the funds are already in place for pre-production, shooting and post-production. If the money is not used, it goes back to investors. That’s one way to mitigate risk. The company then encourages investors to diversify by betting on more than one film.

In the case of Saint John of Las Vegas, 38 cents on the dollar went toward production, says Bradley, while 52 cents went toward the distribution. This makes the investors de facto distributors, he says, which means there is no one ahead of them in line to get paid, and they can receive first dollar gross on all revenues until they are paid back in full, plus a 15% preference fee. That means a 115% return before IndieVest makes money from distribution. After that, the investors keep 50% of net profits while the filmmakers share 40%, and IndieVest keeps 10%. IndieVest also owns the negative.

“When [Mark Burton] is looking at a feature film project, he’s really looking at a number of different aspects and certainly keeping costs in line. The producers, the directors and writers are going to receive a fee up front. But it’s going to be more at independent film standards. So it’s not going to be a crazy amount of fees.”

He says that the company sends out annual audits and quarterly financials so that investors will see where every dollar is spent. Beyond the 10% the company makes off the net profit of each film, IndieVest makes 10% off the syndication of the private placement through IndieVest securities. (The company, as a securities firm, is regulated by FINRA.)

“We’ll only spend the first four to six weeks, $1.2 million to release it,” Bradley says of Saint John. “If it gains in the market, we’ll continue to deploy the set aside capital and grow the market share. If it’s not gaining significant traction, we’ve already achieved our primary goal, which is a seven-figure release of the film, which opens up all of the ancillary distribution, which is where the highest margin areas are generated. And at the same time we have created significant buzz and awareness about the film so that it has a better chance of succeeding in the ancillary markets—you know, DVD rentals, sell-through, pay-per view, etc.”

The company has also created a separate fund to buy finished products at film festivals and opened that up to investors in addition to its individual film projects. Individual investors can approach the company, but RIAs can also acquire placements on the company through Fidelity’s platform.
The company targets an ambitious 17%-21.5% annualized net return over three years on the films. In the case of Saint John, 52%, or $5.2 million, of the total investment has been earmarked for theatrical distribution, but of the distribution money it is only spending 1.2 million in the first few weeks. If the film is not gaining traction with audiences after a few weeks, Bradley says, the rest of the money gets returned to investors. The goal is to return 50% to 70% of the investment if the film does not succeed.

The elephant in the room for investors, of course, is the audience. What if they don’t want to see the movies? (And they usually don’t.) Guaranteed distribution might get the filmmakers over the hump, but it won’t matter if viewers and exhibitors don’t like what they see. At the end of the day, this is still a risky, illiquid investment and while the distribution may be guaranteed, the investment cannot be.
“I hate to ask this,” says Ginsburg, “but my question is, if this is such a good deal why do they need to go to the private capital market to get money?”

“We do mitigate the risks,” Bradley says. “What we cannot mitigate completely is the subjective risk [that] people like the film. That we cannot control. Every film we put together has top-tier talent. It’s professionally developed, professionally produced, professionally distributed and marketed. In that aspect you’re mitigating as much as you can toward the subjective aspect. But at the end of the day, audiences either like it or they don’t like it.”

How do they come up with that net return? Especially when most films don’t catch on?
“What we look at is an exhaustive set of comparables,” Bradley says. “We look at similar films done over the most recent years and we narrow it down to films that are closest to our budget.

At the same time, you’re looking at similar talent, you’re looking at similar genre. And you take what is their average box office and we hair cut that box office by 30%-50% to come up with what we believe is a conservative, moderate approach.”

In this process the company removes from comparison giant grossers such as Sideways, a film that cost $16 million to make and whose latest worldwide gross was almost $110 million.

Of course in this case, exhaustive comparables can be subjective as well. Recall a recent episode of the AMC show Mad Men, when an advertising executive wondered why a TV commercial emulating Bye Bye Birdie with an Ann-Margret look-alike didn’t work.

Said another executive: “It’s not Ann-Margret.”

Such are the slings and arrows of working in showbiz.