Independent Films' New Path to Financing

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Independent Films' New Path to Financing
by Jeff Steele

Film finance expert, FilmClosings.com
Posted: April 27, 2010 02:54 PM

Indie filmmakers are always looking for money, and as I wrote in my last post, as conventional forms of financing for indie films continue to dry up, enterprising producers have discovered an unprecedented new resource for money: they're going online and hitting up their audiences. This online solicitation is called "crowd-funding" or "tribe-funding." This lets the audience members who care most about a film its "tribe" -- play a bigger role in getting it made.

Intriguing idea -- so intriguing that, although my background is inside traditional film financing, I have been actively exploring how crowd-funding might work either on its own or in conjunction with traditional and alternative film financing models.

To see some of the sites in the tribe- and crowd-funding space, visit Biracy, IndieGoGo, Investedin, Kickstarter, Rockethub and Massify. These sites are cool, hip, innovative - absolutely - and some of what they offer might help producers get their projects off the page and into production.

One site, Trampoline Systems, publishes a blog about crowd-funding along with definitions and information.

Who's got the best platform and the best ideas? These are my suggestions about how to use crowd-funding, who's got the best ideas out there, and what strategies to avoid:

DVD Salesmen. Some of these sites tout the strategy of pre-selling DVDs to investors as a way to amass film financing. This might have worked a few years ago, but DVDs are about to be extinct. DVDs as a sell-through are down 15%, whereas DVD rentals are up 7%. But video on demand (VOD) is the fastest growing segment in home entertainment. I own a Blu-Ray player and I think Blu-Rays look amazing (especially "Coraline"), but I don't buy them, I only Netflix them. The ONE exception to this is family films/animation: kids love to pop in the same disk and watch it over and over again. That's why their revenue projections for US home video are 100% higher than other genres. But again, I use Netflix's Watch Instantly feature for unlimited viewings of "Dora" and "The Wiggles." Pre-selling a video download won't cut it either -- it's valueless.

Donation. For documentaries and social issue filmmaking, online donations can expedite (or circumvent) the traditional charitable giving circuit. On IndieGoGo (recently nominated for a Webby), "Seventh Gay Adventist," a documentary sponsored by the San Francisco Film Society, has raised nearly $10,000 over the past six months from 27 donors. In this case, crowd-funding can replace or supplement grant writing and other fundraising efforts. But if your project needs significant money, like $250,000 or $500,000, this process could take years; the online option is like putting out a house fire with a water gun. It's the right idea, it's just going to take too long to matter.

Swag Fatigue. Another strategy is to reward funders with gifts, like the coffee mug you get from your local PBS station during pledge drive or that license plate frame from your alma mater. But people tire of swag, the exception being for fan-boy films with a built-in cult following. In that case, if the producers can include an exclusive, collectible reward of some value, like an actual cell from an old-school animated film, a "gift with purchase" might be a good strategy. A hurdle here is for indie filmmakers to license characters and properties that generate large-scale interest. People don't want kitsch, they want cash.

The SEC is Watching You. Since the SEC regulates investing, and restricts soliciting to "qualified investors" within state lines, indie producers can't just open a PayPal account and start selling investments in their films. Given how busy the SEC is cleaning up real problems - 80% of their staff must be working solely on Goldman Sachs - I'm not sure how closely they're monitoring developments in crowd-funding, but no independent producer I know is too big to fail, so filmmakers are not immune to investigation. It only takes one article about a poor retiree who lost her savings investing in films online to rally the ire of regulators.

Club-Funders. One possible way around this might be for local crowds to create local, intrastate investments clubs (clubs whose investors all reside in the same state) and raise enough capital so that the club entity itself becomes accredited. This, to me, is a smart entrepreneurial move for the motivated business player.

Take It Outside. Another good move is to create off-shore-based crowd-funding businesses (like in the British Virgin Islands or Costa Rica) where income isn't generally reported. Many large productions companies keep their projects' intellectual property rights off-shore, and it's possible crowd-funding could get "out-sourced," too.

Buzz Killers. As I wrote recently in my blog, FilmClosings.com, YouTube hits for your trailer and general Internet buzz doesn't necessarily equate a strong return on investment (see "Kick Ass"). Online buzz might make for a nice chart/graph in your business plan deck, but don't misconstrue this as something that can be converted into hard dollars. Likewise, tribe interest in a movie may not translate into tribe investment.

Sweat Equity. The Biracy Project uses an innovative crowd-funding strategy: work now on a movie, and get paid later, when (and if) the movie makes a profit. This allows film crews to earn money and experience on indie projects. This feels "win-win" to me, and I think the people at the head of Biracy, David Geertz and Phil Botana, can make it work. I'm not sure what kinds of assignments they're doling out to the crowd, but it can't be anything too critical, because the filmmaker is still going to have to re-check their work.

Finishing Funds. Vlad Vukicevic of RocketHub.com shared the idea on FilmClosings that the best use of crowd-funding was to use the money for post production: visual effects, editing, sound track. This seems like a great idea for several reasons, most importantly that the film is already finished enough to give investors a good feel for what they're investing in and a sense of security that the movie will indeed be completed. Finishing funds might be a smaller amount of money to raise through a funding space, and could be raised over the duration of the project, with the filmmakers posting dailies and reports from the set. At present, I think this is the best use and has the best potential for crowd funding.

Combo Funds. I'm researching the possibility that crowd-funding could be used to raise that first critical 20% of equity that most films need (along with a strong business plan) before they can attract traditional funding. In this scenario, the crowd replaces the "friends & family" investors that always get burned on most filmmakers' first films. I think this avenue could help pull indie filmmakers out of the "no funding" abyss while also avoiding the rookie mistake of doing business with friends and family in the first place.

These are just a few of the ideas out there, and this is my perspective on these possibilities; I welcome comments and input. One of the more intriguing ideas I've seen lately came from a reader's comment to me on Twitter: @NoRestrictions told me, "We'll be crowd-funding for an iPhone app that donates a portion of a film sale to a related cause/charity/org that deals with a social issue in the story." That's a very cool idea.

Ultimately, if crowd-funding is going to work, it needs to appeal to those most basic investor emotions: greed and self-interest. Why do disinterested investors support a project? Because they see a potential upside for their money -- and it's the producers job to make sure that happens. You can't reinvest a producing credit.