Is the Traditional Investment Model Right for Indie Films?

Is the ‘traditional investment model’ the right way to finance an indie film? It’s hard to look at the massive growth of crowdfunding and not give the old ways a second look. Some argue that crowdfunding is decidedly better than traditional finance, which just isn’t suited to indie film. However, the traditional model doesn’t seem to be going anywhere.

For one thing, traditional investment appears to be on the rise — Cannes this year saw the announcement of a wave of new, multimillion-dollar financing companies.

Why are the very rich flocking to film investments? Well, the common-sense answer is that investors tend to look to film for high return on investment. According to film financier Cassian Elwes, “you go to the bank, you’ll get 1 percent interest or less…If you are a debt investor in the independent film business, you’ll get 15 percent back…if you’re an equity player, you’ll get 20 percent.”

But those high returns must come at a price, right? Doesn’t film tend to be risky? Yes and no.

Film is what’s known as an alternative investment, which means that investors put it into their portfolios as a hedge against the market. Other such investments include precious metals, art, and even stamps. Film has demonstrated time and again that it’s a largely recession-proof business, so when investors are trying to lower their systematic risk (risk that stems from market fluctuation) they can put their money into film.

So with high returns and the opportunity to decrease overall risk, why don’t all investors put money in film?

Well, while diversifying into film may decrease systematic risk, investors also have to look out for unsystematic risk, which is unique to individual investments. This risk can be diversified away, which means that some is acceptable, but it also means there is no reward for taking it on. Investors have no reason to take on projects that seem risky, so they don’t. And there’s the rub: investors may be looking for film investment, but as producer Stacey Parks points out, these investments have to be suitable.

According to Parks, the problem with the traditional model is this: filmmakers are experiencing a shortage of investment, while investors contend with a shortage of “suitable” projects. But what makes a project suitable?

Naturally, investors want to be able to predict the success of a film before they bet their money on it. This means having a proper business plan, and having enough money already, but most importantly it means having enough of the right kind of money. According to Parks, financiers “are looking to come in only after at least 50% of the ‘market’ financing is already in place.”

Market finance comes from a handful of sources, most notably pre-sales, and is a deciding factor in investment because more than demonstrating a filmmaker has money to spend, it is proof in itself that the film can perform in the marketplace.

How to solve this dilemma?

Indie producer Jeff Steele has one idea. Show him that you can “crowdfund 20-25% of the project’s budget,” and he’ll “wrap a finance structure around that.” Sites like Kickstarter can fill the market financing gap because a strong showing in a crowdfunding campaign proves that a film has an audience to tap when it hits the market. It might even be better — after all, pre-sales are one thing, but people paying for the privilege of later getting to pay to see your film? That’s a solid investment.

Crowdfunding is certainly a fantastic tool, but this doesn’t mean that traditional finance isn’t suited to indie film. If anything, its ability to build off of innovative tools, like Kickstarter, proves just how well-suited it can be.