Investing in Movies: Is it Worth It?
Everyone likes the movies. They’re fun, a good way to relieve stress, and they’re profitable. But if you think getting returns from movies is a walk in the park, think again.
With industry-disrupting streaming platforms such as Netflix, the shutdown of cinemas and film festivals, and a wobbly demand-to-supply ratio for content during the pandemic, the film industry is with its fair share of losses. Moving forward, putting money in motion pictures is going to be trickier than usual.
During our latest DiffuseTap event, we had a unique opportunity to explore what goes on behind the scenes, particularly on the finance side, with our guest speakers AJ Salmen, producer and co-founder of SolCo Entertainment, and Roger Welp, director of alternative investments at RCM Alternatives, producer, as well as former actor.
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It All Starts With a Little Bit of Equity
There is a veil of mystery surrounding the finance side of the entertainment industry, and very few of us know what actually goes on behind the scenes. But Roger Welp, who has been in the entertainment industry for over 26 years, says it’s not much different from funding a startup. Similar to other projects, it all starts with equity.
“Financing a project starts with equity. You have to put together a pitch deck and a finance model. And you want to have an exit strategy. It typically takes equity to attach talent and directors, and helps facilitate the process. The more equity you have, the more control you have over a project.”
The Need for an Exit Strategy
Another way investing in films is similar to investing in a business is that you have to have an exit strategy. Because of the nature of the industry and the lack of guarantee, AJ argues that an exit strategy must be established from the get-go.
“The exit strategy really should be built-in first. I came into the industry through the business side. I started out arranging marketing and monetization strategies for projects before their ‘street date’. Because of that experience, now that I’m producing, I typically come to a project with the exit plan in mind first. The truth is, no matter how good your director is or how much you believe in the script, in the end there really are no guarantees.”
Netflix Just Dipped: What Does it Mean for Streaming?
Netflix has had some highs and lows over the years, but recently saw major setbacks in its quarterly reports. What does this mean for the streaming boom?
Roger says that, despite what the numbers are saying, Netflix is not going away anytime soon. More than anything, it’s growing bigger by the day. The problem they’re currently facing is having to deal with that rapid growth, especially in terms of content.
“I think there’s no way that it’s finished, but I do think Netflix is definitely struggling a little bit there with content. They grew really fast, they bought an $18 million studio in New Mexico and Albuquerque. I think they’ve gone through a lot of changes, and they’re still trying to figure out what that sudden growth means. All of a sudden, they’re starving for content like all the others are.”
AJ echoed Roger’s sentiments, saying Netflix is not going anywhere, and that advertising-based video on demand (AVOD) will become a larger player gaining larger market share.
“Some of the economics might change, but I think AVOD is an absolute win for everybody, including the consumers. Netflix’s inability to put a new splashy product out because of the pandemic may have hurt them a little bit, but streaming definitely isn’t going away. We’re going to see a lot more direct-to-consumer over the next couple of years, I believe.”
Types of Investors
Investing in movies is no easy foray. Sometimes there might not be returns at all. Therefore, investors typically support a movie because of a personal cause. Much like any other form of art, you do it as a labour of love, AJ explains.
“The type of investor that you get basically depends on the project and its premise, and the motivation of the investors. There’s investors that love to promote films that celebrate humanity and inclusivity while also having a commercial chance, but they want to get behind a film that they can identify with first.
“There’s also investors who come into film for pure profit. For those business focused individuals, it is important to understand their risk tolerance and craft a plan that aligns with their alternative investment strategy identifying content as an asset class worth the allocation. But if you want to have your hand in films, you obviously have to have a passion for it. Like many alternative investments, there are ups and downs, if you do know love what you are doing, you probably shouldn’t be in the game.”
Obviously however, passion doesn’t put food on the table. So what AJ aims for when discussing with investors is that model that balances the cause with the necessary commercialization, similar to how you would build a business plan for most of your businesses. It all has to start with the story, the story must be good. And then, you can craft the correct strategy to market and monetize with some risk mitigation built in.
“In a VC sense, you want to build a floor. You’re swinging for the fences, so you want to build a floor that you know you can at least preserve capital, and not swing wildly for a grand slam without any type of break-even plan set in place. That’s the type of plan I put in front of a more monetary, motivated investor, rather than one that might look at cause first.”
There are a lot of parallels between investing in a movie and investing in a business. One is that you want to fund an idea you stand for. Another is you have to manage the risk that comes along with it.
There are a number of great films that weren’t box office hits right out of the gate but eventually became cult classics (e.g. Blade Runner, The Big Lebowski, etc.), and a lot of passion went into them. At the end of the day, you really have to do it for love.
Meet the Speakers
AJ Salmen is a film producer. In 2009, he co-founded SolCo Entertainment, a motion picture company that runs the whole gamut of film distribution services including management and projections, cash flow, and film valuation.
Roger Welp started his career as an actor and later ventured into the alternative investment space with futures and derivatives trading. He is now the director of alternative investments at RCM Alternatives, an investment management firm that helps investors, asset managers, and brokers succeed in the alternative investment space.
About the Host
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