filmonomics

The New "Soft" Money

They may not have realized this but more than forty-six thousand individuals – many of them ordinary Americans with no prior film industry knowledge – had a direct bearing on what has been happening this past week thousands of miles away at the Cannes Film Festival. Not so much on the rain-sodden red carpet action, as on the business dealings that went on in the makeshift offices of the French film sales company Wild Bunch just a short distance away from that nightly fusillade of flashbulbs. For it is here that Zach Braff’s WISH I WAS HERE, a project only made viable by the $3.1 million that this multitude of individuals have pledged towards his total production costs, was being pitched to territorial distributors from around the world.

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Without that Kickstarter-enabled contribution, Braff’s long-gestating project would have remained stunted by the same market forces that have conspired to prevent him from directing a follow-up to his 2004 indie darling GARDEN STATE for close to a decade. “I have almost no foreign value,” he explained recently to the L.A. radio station KCRW. “I had done a TV show for ten years that doesn’t count. Garden State did well overseas. But not numbers that are going to show up on their algorithm.”

But throw in $3.1 million of non-recoupable crowd donations and the business calculus becomes so much more attractive. What would have been a reported $5.5 million package requiring quantifiable box office stars to make the numbers work, is now transformed into one costing less than half that amount and with a cast of characters played by actors Kate Hudson, Anna Kendrick, Josh Gad and Mandy Patinkin that could be chosen on creative grounds, rather than their overseas economic values. A ten-year lost cause has, in the space of just 31 crowdfunding days, flowered into one of the hotter projects pitched on the Croisette – a feat made all the more astonishing when you consider there were a total of 3,340 new projects unveiled for the first time at this year’s Cannes film market.

Welcome to the indie world’s new arithmetic, a film financing revolution for which Braff has become the inadvertent poster-child through his committed embrace of crowdfunding. In the face of industry skepticism and media cynicism, the actor-writer-director has doggedly kept the faith and in so doing opened the doors to not only a new source of seed money but to better equity deals from bona fide film investors. Independent cinema is becoming a rational business proposition again. Here’s how...

The old film math hinged on combining three broad swathes of financing: debt, usually in the form of loans against bankable foreign pre-sales; a tranche of private equity; and whatever soft money can be extracted in the form of tax credits, government subsidies, service discounts, box office rebates and co-production programs.

Each of these three pillars has its challenges. Banks have tightened their lending criteria and foreign distributors are more conservative in what they are prepared to pre-buy. Soft money incentives are being held up to political scrutiny in this age of fiscal austerity. And private equity is being asked to bridge the budget gap on films after most of the rights have already been sold off – meaning less and less upside opportunity for those profit participants.

Under the new scenario, a project like WISH I WAS HERE no longer has to give away a slew of distribution rights at rock-bottom prices. Even with an August production date looming, Braff’s effective budget is low enough now to allow him to hold out for a handful of decent upfront offers and then trust in the end-result to tantalize the marketplace at a future film festival. Any shortfall will be met by a combination of Braff’s own money and a “gap financing” arrangement with Worldview Entertainment that essentially backstops the production.

For some reason crowd donations have come to be characterized as replacement film financing for private equity. In truth, those pledges are really another iteration of soft money, one that comes with the added bonus of indicating future audience demand. U.S. distributors now weighing up whether to acquire the domestic rights to release WISH I WAS HERE already know that there are 46,000-plus people out there highly motivated to buy movie tickets – and with a vested interest in encouraging their friends to do the same.
Seen in this light, the likes of Kickstarter and donation platforms such as IndieGoGo can be seen as existing in a symbiotic, co-dependent relationship with equity financing. Those donations not only serve as early proof of concept they also make the business proposition far more palatable to equity investors hoping for a return on their risk.

And, of course, that equity financing - as Braff himself alluded to in another recent interview in which he singled out Slated as the future “home-base for online film investment” - can itself be crowd-sourced using the latest social technologies.

Right now, market dynamics are still determining the optimal economic balance between crowd donations and equity financing. In high-profile cases such as WISH I WAS HERE, VERONICA MARS and, potentially, Ron Howard and Brian Grazer’s planned new version of FRIDAY NIGHT LIGHTS, donations can be expected to assume a very significant portion of the overall budget. They do so by tapping into highly addressable fan-bases.

For those projects not blessed with such ready-made constituencies – as actress Melissa Joan Hart found out to her cost recently with her failed crowdfunding campaign for a prospective film titled DARCI’S WALK OF SHAME – the equation came be quite different. But even in the best of cases, a successful donation campaign will only deliver a tiny piece of the overall financing patchwork on a typical independent film project targeting a commercial release.

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Take the 15 films that have come to Slated having also launched donation campaigns on Kickstarter. Internal data shows that donations on those projects account for less than 9% of the entire budget goal sought by the production teams for these “Kickstarted-Slated” films. Between them, these 15 projects were have sought an aggregate total of $7.74 million in production financing. Of this amount, Kickstarter campaigns contributed $684,533 – for an average of $45,636 per project. In other words, 8.85% of their budgets came in through the donation door, leaving a significant financing mountain still to negotiate. (Interestingly, the two Slated films where donations accounted for a significantly larger percentage of the total raise were each based on existing properties already known to TV or online fans – further evidence of crowdfunding's affinity towards established franchises with pre-baked audiences.)

By helping to bring costs down from the onset, Kickstarter is fulfilling its mission as a seed-sprinkler that helps nurture the film-financing ecosystem. Equity crowd-funding will be an increasing beneficiary of all that incubation. 

Colin Brown
Editorial Director

Colin Brown on Google+

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