I recently attended the Southwest Venture Forum in Dallas, TX. The subject was about investing in a non-traditional business, specifically Entertainment.
Non-traditional companies sound like a misnomer but it really only means non-traditional to VCs and Angels. In the past, they invested in either solutions to specific problems or new technology. With the crisis of the past seven years they are looking more at funding companies with existing revenue and cash flow. Since they are used to technology, up until recently they only looked at companies with new technology.
Non-traditional does not mean they did not use corporate structures like C-corp, S-corp, LP or LLC. In another post, I will discuss that in more detail.
While the focus was on entertainment at the meeting, the discussion can apply to any non-traditional company – to anyone who is trying to get investors in their market changing business:
Point 1: Investors invest in people. The key qualities they look for are values, positive, and thoughtfulness. Film projects previously did not display those values and this was a deterrent. Now, more projects are showing those values which make the investor much more comfortable putting their name with the project.
Point 2: Plans, goals, and the financial return to investors must be at the forefront of any company seeking investment. The majority of film projects did not (and still do not) have a plan for success, goals, or a financial return for the investor. The investor must see that the producer has plans for the money, plans on paying back, and provide very good levels of return.
Point 3: Today, investors are attracted to shorter life-cycles and repeat investments. Film projects are short term when compared to companies. That means, they get the investment, make and distribute their product, and then get a return in much shorter than a company that has to seek out customers and then go public. Within two or three years, film projects can pay an investor and then seek another investment. This is an advantage film projects can leverage over other forms of companies.
Point 4: Investors prefer simplicity and only invest in what they understand. In the past, film projects were too complex and required much expertise from the investor. Film producers would not make it easy for them to understand how they would get their return. The film industry is addressing their complexity on several fronts. First, through technology, the make process has become a lot simpler and accessible to more people. Secondly, the same technology has drastically reduced the costs to where much smaller teams can make the product/service. Thirdly, there is more visibility in their new distribution to the costs which directly affect profit. Fourth, the structure of the investment and payout are simplified to match what an investor is used to seeing.
Point 5: Investors are very technically savvy informed. Film is becoming more technical in the IT arena, and therefore, investors feel they can understand it. This can be leveraged to an advantage by showing investors they have something in common via a common knowledge base.
Point 6: Investors are both wowed by the arts and put on guard by it. They are enamored to be patrons, but at the same time realize that this luxury comes with a price. The challenge for the film maker is to make a business model that works. Your company may be the complete opposite; there is no wow for the arts. However, there is WOW for the cash returns. The challenge is for most companies are to alter their model to make it worthwhile for an investor. Investors need to see an economic basis for the relationship.
Point 7: A successful entrepreneur is one who can identify the challenges and then devise a system to work more efficiently with them or around them. This attracts investors who see these activities as game changers. The film business challenges are bottlenecks in distribution to the theaters and the fixed number of screens. The way the film business has overcome their challenges is through using independent contractors, finding unique and creative offerings and methods to provide a solution, and creating investment vehicles outside the mainstream system.
Likewise, other companies can do the same. One can lower their overhead by relying on efficiencies working with other subcontractors that are not integral to their process.
Point 8: The new model that makes film more attractive is based on breaking down only certain barriers to entry into industry. Through technology, capital investing, and proper financing, the hurdles are lowered. Hedge funds are looking at film projects as investment vehicles.
However, talent and good product are still the major hurdles for film to overcome.
Point 9: Investors should still use a portfolio approach to pick winners. Bet on between four to 10 projects. These faster return projects can also be used to bolster an existing portfolio. By providing return sooner, more cash is raised for the investors’ backers or to be used in the management of the other investments.
Point 10: There are pitfalls, especially because of the business’ history. Look for managers that manage with financial integrity. This includes visibility to the numbers, being upright with the customers (distributors, theaters, etc.), paying people properly and holding people accountable. Film has a very colorful history, and so comes with a reputation. However, due to new managers showing financial integrity and track records, this stigma is being overcome.
Point 11: Businesses need to show what makes them different. Often, this is an element of control over what others deem uncontrollable. In Film that is distribution; but by opening up new marketing channels they are able to display an ability to get to the consumer faster and retaining more of the wealth. In the other worlds, the company needs to find their points of difference to attack.
In conclusion, film is not the traditional vehicle for investors but because film-makers are changing their business model to be more technical, streamlined, and financially accessible investors are seeing them in a new light. The same thing can apply to any company in an industry that is non-traditional to investors.
The company may already be very technical, and streamlined. They need to be more financially accessible to investors by modifying the cash return model to be something they can use. Investors are very eager to find new opportunities, and using this one example of how film has become more attainable to investors, they can seek this source of funding, too.
