I've read plenty of indie film offer documents and prospectuses recently, and it's clear that they are doing their best to talk up the possibility of box office return.
But, sadly, we know that the reality for independent films is harsh. Really harsh. Even if the film gets international distribution and great box office returns we know most of that money won't filter back to the investors.
It is sobering to read the prospectus of a respected independent film fund only to find that 'You can be an extra!' and 'You get movie memorabilia!' are still being touted as serious benefits. And this is a film fund which, by definition, is only open to high net worth individuals
So I thought I'd look at some reasonably recent film funding decisions to see what I can learn. Why did investors put money into these independent films?
I'll start with a recent success story: "The King's Speech"
Investor 1: Prescience Film Finance/ Aegis
They funded the bulk of this - putting in almost $10 million. So how do they make profit from their investment?
The answer is simple - they make profit by lending at 15% against the UK tax credit and against presale contracts. They also loan against distribution in territories that aren't presold - at a higher rate of about 20%
This ensures that their return isn't really based on box office. The investors can expect about 14% income from their investment based on fees ... and even the MASSIVE success of the King's Speech is only going to push this up to about 24% ! It is very telling that their business model is organised so that the difference in ROI between funding a failure and a hit is only 10%.
It's also interesting to see how Prescience Film Finance estimate the share they will get from box office return. To quote one of the company directors:
"The U.S. is now worth exactly the same as the Philippines - but at least you know you’ll get a good deal out of the Philippines. The U.S. market used to be worth 40%, but now it has to be discounted to zero."So it seems that the key is that the 'investor' is simply loaning against presales. That might be possible for $15 million productions - but how relevant is it to an indi film with a tenth of that budget?
It so happens that I recently chatted with a producer behind a direct to DVD title that fitted that description perfectly - it had a $1.5 million budget. It even turns out that one of the presales was with Transmission - who was also one of the presales behind 'The Kings Speech'.
So I asked him, and his attitude was interesting:
"Presales are a tricky thing. We are producers with our own financing and presales are a must for us to internally green-light a project.
As well, if a project can’t get acceptable presales based on cast, key crew and script, that would be an indicator that there is not a strong market for your film or it needs to be re-tooled.
It is also a great check on whether the budget is realistic or not, examining the sales estimates vs. the actual sales numbers.
Why is it expected [that investors have such a high risk of no return] in the film business?Financial discipline is the key."The most curious outcome is that this seems to be in direct contradiction to everything I read - which talks about how presales have dried up completely in the last five years!
Investor 2: Molinare
They invested about $320k in the film. The reason for this investment was one I hadn't considered before.
They invested the money as a post-production company to help get the work of post-production.
At first this seems to be the financial equivalent of a perpetual motion machine ... but if we think of it as a way of putting the post-production costs onto a deferred payment plan it makes more sense.
Mark Foligno started doing this to help his SFX company during the recession. It was successful - which doesn't mean that they recovered their money in all the films they worked with, but they certainly recovered more than their total investment. As well as this the company had enough post-production work for them to flourish during the lean times.
What I learned from this:
1. Post production companies can be a source of investment
2. Investors don't have to rely on box office returns for recoupment
For the second point to apply there is the problem of having sufficient pre-sales ... which is a major undertaking. But it is possible for the right project.
There's more to come in later blog posts - I'll be looking at some smaller Australian films with a vastly different finance model.
However I'll leave you with an interesting interview with Paul Brett of Prescience Film Finance: