Motion picture investors typically finance distribution, production and/or development. There are massive differences between these opportunities in risk, return of investment timing, and historical performance. The next few paragraphs reveal some of the differences between development and production funding, explain their performance dynamics and offer pragmatic counsel that can help investors qualify viable investment opportunities and optimize returns.
The very nature of each private offering affirms there is risk. Key questions are whether the risks are reasonable in relation to one’s portfolio and the possible reward.
Approximately ninety percent (90%) of all US motion picture investments fund production. In 2010 there were approximately 1,900 private US motion picture production offerings funded. This total financing exceeded a stunning $2 billion. Historically, well over half of these investments are not returned to their funders, and most of these do not return any investor capital. The reason these investments predominate is that they flood the marketplace, with over 8,000 on the street annually, and they are pitched passionately by mostly well-meaning producers and their representatives.
By contrast, last year US private investors financed approximately twelve motion picture development offerings for a total low nine figures. Historically, most of these offerings return their investment capital and some profits.
There is a reason for these traditionally high losses and returns. The next few paragraphs explain the dynamics of these processes and will be a convincing dialogue to all who read, to never, unless return of capital is not a primary requirement, participate in the high risk dynamic associated with production financing that comes entirely from private investors.
Bank Production Financing
The most successful and powerful production companies chiefly obtain their production financing from banks. The greatest advantage to the picture and its participants is not the retained equity and substantially lower interest. The greatest advantage is derived by the necessity of engaging distributor and other relationships providing the project its earnings relationships prior to production, as well as much of its needed bank loan collateral.
Simply stated, bank loans drive producers to develop and produce their pictures in close collaboration with major global territory distributors. This collaboration assures each picture’s maturing in the major global markets over several months preceding its production, and importantly almost guarantees sufficient distribution to return all funds to lending and investment sources and at least some profits.
Private Production Financing
Producers using non-bank financing can produce their pictures without major territory collaboration. Releasing motion pictures theatrically is sophisticated and costly. The average motion picture US theatrical release expenses are currently $50 million each picture. Motion pictures are slated on studio release schedules twelve to thirty months in advance. Producers may boast low production costs, but distributors demand pictures with sufficient earnings power to offset each picture’s high cost of brand establishment.
Ancillary sales including electronic games, mobile apps, brand tie-ins, books, soundtracks and merchandise must be set seven to twenty-four months in advance of theatrical release. Producers waiting until after their picture is produced to seek distribution, place themselves in the poorest negotiating position and put their pictures earning’s at risk.
Unless they have distribution relationships already set, typically producers seeking full private production financing lack the business capacity and experience to engage the global marketplace and bank financing’s crucial advantages.
Private Development Financing
Producers using bank financing often use private development funding. This funding delivers them a substantial advantages of being able to option literary properties, attach directing and acting talent and culture multi-territory relationships for their pictures. This funding also enables producers to develop and produce multiple picture slates and own the copyrights to their pictures.
Development funding is usually accomplished through subscribing investors in multi-picture development company offerings. The development company is owned by the production company and the investors. These offerings may prescribe a pre-set purchase price for each developed picture, to be paid by each producing company. The number of pictures developed and the purchase price of each picture may be configured in a manner to return the investors capital before the pictures are produced or distributed, and to provide a safety net allowing for one or more of the pictures to not complete development without destabilizing the development company.
There are a variety of development offering structures, but most are designed to return investors capital and some profits from development fees earned by each picture and also to participate in the completed pictures’ earnings.
The Most Important Question To Ask Producers or Their Representatives
Are these investment funds principally for production or development?
If the offering is for production funding and they do not have a US theatrical negative pick-up relationship, or license, and/or other agreements that total more than half the picture’s cost, walk away. Consider these statistics: In its highest distributor pick-up year, the Sundance Film Festival odds were one in four hundred. Approximately 2,000 pictures in all categories apply, approximately 200 are accepted and five were picked-up. The lowest year was two pick-ups. That was one in one thousand odds. This is unreasonable risk.