Summertime and the living ain’t easy if you are in acquisitions. Whether you operate in film or tech, the fish are now jumping and your scouting alerts are on high. Movie distributors have already been shadowing – and in some cases preemptively buying – films pegged as potential breakouts from an upcoming festival season that is anchored around those eleven September days in Toronto. Similarly, venture capital and angel groups are currently busy doing the rounds at various “Demo Days”, stalking promising startup ideas that have been incubated through TechStars, 500 Startups, Y Combinator and the myriad other mid-year accelerator programs that now include Warner Bros’ newly graduated Media Camp. No matter the season, it is clear that both film and tech remain fixated on landing The Next Big Thing. But how each world goes about that pursuit is a study in contrasting deal-flow mechanics.
Where they differ most markedly is in who it is that actually leads the early chase. In film, the gestational life cycle of even the biggest festival hit is typically spent banging on endless investor doors, submitting grant applications and combing through production incentive schemes, all the while trusting that the script will attract the level of talent that in turn attracts the right level of money. It is only once all that hard pitching, cajoling and juggling is over, and there is film footage to show, that most distributors then come waving their checkbooks. The solicitation onus, in other words, falls squarely on producers’ shoulders.
In tech, however, it’s the money itself that does much of that initial sweet-talking. Sure, startup entrepreneurs have to pound the Silicon Valley pavement in search of backers but they do so in an inviting ecosystem where investors are very much the driving force. VCs want to see absolutely every startup idea out there. And so, increasingly, do seed investors, which is why so many have aligned themselves into angel groups in the hope of leveraging an advance look-see at the hottest investments prospects.
Such is this tech obsession with “proprietary deal flow” that investors go to great lengths to steal a march on competitors and differentiate themselves in the marketplace for ideas. Referral grapevines are cultivated, industry events aggressively mined and positional think-pieces constantly offered up on websites all in the quest for an inside track. Early-stage tech investor Mark Suster says he first relied on lawyers as his own advance warning system, since they are the ones entrepreneurs turn to in order get their company registrations done. Today, he views blogging as his “best source of high-quality deal flow imaginable.” We know this because Suster blogged about it earlier this year.
Now compare tech’s open courtship displays with what happens in the movie business. Other than the occasional yacht party at Cannes, film investors are leery of even announcing themselves, far less tweeting about their financing strategies, for fear of being swamped with pitches. They just trust that the industry’s inner circles will beat a path towards them and deliver the goods.
Of course, a proactive investment stance does not necessarily translate into greater “deal velocity.” For all their come-hither attitudes, it is not unusual for VCs and angel groups firms to fund less than 1% of the hundreds of business plans they review in any given year. But by virtue of sheer volume, they can lay claim to ever-greater deal-making intelligence. Having sifted through a mountain of proposals, Silicon Valley players have developed an exquisite nose for what constitutes the real deals – and, just as crucially, a strong stomach for failure. The fact is Silicon Valley is way more crucible than it is cradle. More than 90 percent of start-ups flame out and yet setbacks are embraced here, not so much as friends, but as teachers.
Paradoxical as it might sound, investment history has tended to side with those who have made those bold, early leaps into the dark. Their secret sauce, at least according to the various VC general partners I have interviewed, has been based around “pattern recognition.” Certain characteristics are common to even the most life-altering, game-changing, mold-breaking ideas. Research backs this up. An often-cited 2006 study by Harvard Business School academics demonstrated how serial entrepreneurs who have made money once are the ones most likely to be money-making the next time around. Regression analysis also done by VCs investigating which entrepreneurial attributes are linked to repeated successes found that a team’s interpersonal dynamics as an operating unit hold the key. The ability to spot such salient tendencies is what gives tech investors the comfort to back even the most outlandishly disruptive propositions in their embryonic stages.
The same should also apply to film investing. This summer’s string of studio box office misfires is another reminder that audiences still like to be surprised. You can only force-feed so many facsimiles of yesterday’s spectacles before people clamor again for unexpected characters and stories told in unforeseen ways. The problem here is that financiers don’t like surprises – which is why it is so important that the most original ideas in cinema come wrapped in creative teams that signal success through their collective track record in making films that industry buyers crave. Just as with startups, these producer-led teams are the quantifiable elements – packages, if you will - worth banking on. And the more that investors learn to reach out and find them, the better they will all become at identifying the real deals well before those festivals and demo days start selling them off at handsome, auction prices.