Hi Jeff,

Thanks for another excellent post!

I recently did a similar blog posting on new ‘hybrid’ funding models and got some interesting comments as well as links to some case studies.

I agree with you 100% that crowd funding is a great solution for buttressing more traditional financing models, but in most cases unrealistic for funding entire indie budgets (unless we’re talking ultra ultra low budgets).

Something I found interesting lately was the fact that Kevin Smith yanked his crowd funding campaign due to ‘legal reasons’. I wonder what those were and whether it’s better to ask for ‘donations’ (like Robert Greenwald has been doing for years) or to pre-sell to your audience (either a DVD or credit in the film).

I look forward to seeing more interesting comments here!

Regards,
Stacey Parks
FilmSpecific.com

Hi Jeff

Now that would be really helpful and certainly satisfy an urgent need to us indies at the moment! I was about to pay a bomb to a top London solicitor to answer me some similar questions. Come to think of it, I’ll still need to do it because of the different security laws here in the Britain.

The two classic cases of crowd-funding so far are “The Age of Stupid” (producer Lizzie Gillett) and “Iraq for Sale” (producer Jim Gilliam). I contacted Lizzie to find out if their crowdfunding managed to pay back the investors and deferrals but I’ve not (yet) had a reply. They’re pretty open with their Finance Plan, which you’ll find on the Internet if you Google the film.

Looking forward to reading the results

All the best

Eddy Grabczewski

This is a short step-by-step guide to using the crowd-funding model that has made The Age of Stupid possible. We hope you find it helpful.

1. Write a Crowd-Funding Budget
First things first. How much money do you need to make your film?

Once you know how much you need to raise, you can work out how many investors, each contributing a standard sum, it would take to make up the full amount. How much does the minimum investment sum need to be, and what are people going to get for their money?

The question of what percentage of the profits they get for their cash investment is crucial. Offer a bad deal to investors (ie too little percentage for too much cash) and nobody will put money in, but offer a great deal to investors (lots of the profits for not much cash) and you’re short changing yourself, your crew and your production company.

Our Investment levels:

STAGE MINIMUM NO OF ‘SHARES’ TOTAL RAISED

Stage 1 £500 100 £50,000
Stage 2 £5,000 40 £200,000
Stage 3 £5,000 40 £200,000
Final £10,000 15 £150,000

Raise the stakes as you go along. Obviously it’s much more risky to invest at the beginning of the project, when there are so many unknowns including if the film will be any good or even be finished, than at the end when people can see the film. To reflect this we upped the price of ‘shares’ as we went along.

For Stupid, the initial “unit” of investment was £500 – but that was when the film was nothing but some scribbles on a bit of paper and a twinkle in Franny’s eye. Once the game was truly afoot and the production underway, the minimum investment sum was raised to £5,000. Now that we’ve finished people are paying £10,000 for the same percentage of profits they could have brought at the beginning for £1,000.

Our Percentage Profit Levels

STAGE MINIMUM % PROFITS
Stage 1 £500 0.05
Stage 2 £5,000 0.25
Stage 3 £5,000 0.25
Final £10,000 0.10

It is quite challenging to administer paying all the individual investors back – more than a couple of hundred and you could find yourself buried under the paperwork so you need to be super organised at every stage.

Donating – Always offer the option of donating rather than investing. Some people are not interested in getting their money back and this is the brilliant for you – money without any strings attached.

Syndicates – Individuals who couldn’t raise the necessary cash themselves clubbed together to form syndicates and invested that way. In this instance it’s important to be clear with the syndicate that there will be one named individual who essentially buys the ‘share’ and who you deal with as you don’t want to be dealing with different people from one group. We suggested that syndicates have a letter or contract between their members to formally detail the agreement. You definitely don’t want to be dealing with groups who have fallen out or lost contact with each other for years to come.

Altogether, a total of 258 individuals and groups invested in The Age of Stupid. Any investment bought an on onscreen credit and a small percentage share in any profits. At one stage, when we were desperate for cash we offered people who invested £5,000 the chance to star in the film (no one was actually interested in this but you see but creative you can be with what you exchange for investments)

The SEC provides the Playbook for crafting the crowd/tribe fundraising financing structure. I work within that framework on a daily basis.

I like this topic, I’ll toss my two cents in. Putting aside gap loans, bonding, and anything related to banks I have a proposed idea:

Let’s say your budget of your film is $1 million. (simple number to work with). On a simple independent film budget that excludes borrowing money from an entity, a film producer would ask to borrow money from individuals on an equity loan. The equity loan would be paid back once the film producer raised half of the needed budget. Let’s say they needed $50,000 for legal and other expenses like some up front money to secure some name talent to get the ball rolling. Then they would raise the rest of the funds via private investors. They hit the half way point of raising the budget and then pay back the equity loan. At this point, just like in crowdfunding, once you hit the halfway point on raising your funds more people become interested and start to get involved because it actually looks like the film will be made and isn’t a pipe-dream. Then you raise the rest and produce the film. Each investor getting a cut of the profit.

Take the equity loan out of the picture. You need $50,000 to get the ball rolling, so you crowdfund the $50,000 by offering pre-sale copies of the film after it is completed. What I would do in this case is not just offer that, but also create something they can have then and there (more immediate). I would use a portion of the $50,000 to create what some call a microshort or Scene Select or what I term Visual Pitch. Grab a sequence that is either in the film or something that could have been in the film and shoot it. Great example is the original teaser to Finding Nemo. It’s a scene not in the film. Use a portion of the $50,000 to create this Visual Pitch and give it to the people who contributed to the crowdsourcing campaign.

Now take the Visual Pitch, use the rest of the $50,000 for legal and to get name talent involved and reach out to investors. The Visual Pitch is an example of what the film will be like. Even post the Visual Pitch on YouTube and other video based sites. Build a following, show the investors the following. Investors are all about numbers, so show the numbers of people interested.

Also, when you do your crowdsourcing campaign, be totally up front that these funds are not the full budget, they are designed to kick start the project. Tell them the full budget and everything you are going to do with it. By being totally up front no one can accuse you of dishonesty. When the entire film is completed, each contributor to your crowdfunding campaign receives a copy of the film (obviously after the theatrical run).

This is how I think it is possible to create a hybrid project.

Jeff, this is your most intriguing post yet. I’ve been following your blog, and need to confess: I apologize, but I presumed you to be a blue-suit Wall Streeter who wouldn’t even notice an indie filmmaker chatting about crowdfunding. I apologize. I was thrilled to see your comment, “I may be a financier who works within the traditional film finance model, but I’m not traditional. In other words, I like disruption and I’m open to change.”

One thing first: crowdfunding is the new mania, born of the opportunities and fears resulting from the malaise of the indie film biz. So, please add to your list this brand new crowdfunding site launched last week: invested.in Undoubtedly, there will be many more; then, of course, a shakeout.

I have several concerns about crowdfunding.

1) As has been noted, there are no success stories of full length feature films being crowdfunding as the concept is currently understood. AGE OF STUPID was an exciting effort, but it was a) pre-crowdfunding mania so it had a leg-up by being innovative; b) a hybrid of many investment types (some gave over $100,000); c) a documentary driven by political passions more than a drama driven by marketplace expectations.

I watched a few crowdfunders. AD Layne has spent months and months on Twitter aggressively begging for donors for a horror film, and has raised approximately $5,000. I think few people have the tenacity he has exhibited, and doubt most crowdfunding efforts will ever raise even $5,000 as the market exists today.

If I were going to raise 10% of my budget for A FATHER AND SON, I would need to raise $100,000. I can’t imagine putting so much effort into crowdfunding to make that any more easy, or logical, than “just” going out and finding investors for $1 million. Both are incredibly painful, but at least a few investors would be easier to handle than hundreds of the “crowd.”

I’m scared shitless about the SEC. It was a gutless threat until Bernie Madoff; now it has to prove itself to be aggressive. What could be worse than a government bureaucracy that needs to prove its power? But of course, nobody really feared the SEC before. Not because it was toothless, but because one really needs to fear the INVESTOR himself. The SEC is just the excuse investors use to sue the producer when they don’t get what they think they should have gotten.

It’s not possible to verify all crowdfunder participants as accredited investors. Not only that, but the whole concept is based on the notion that they are NOT accredited investors. They are your neighbors, acquaintances, and friends from whom you beg a few bucks.

Crowfunding, as it sits today, in my mind, MUST be nothing more than the “love gifts” that tent preachers extracted from the flock decades ago. If it’s not a voluntary gift, how can it escape securities regulations?

Worse, again, is the confusion that will come about in the near future when these movies begin to go into production. That “gift” that John Doe gave, he thinks it’s really an investment security. When he reads that your little film had a gross box office of $50 million (don’t you wish!), he’s thinking that 10% of it is HIS! Of course he is! And he’s going to sue you for it. And what judge or jury would listen to the producer trying to make a convincing statement that it was simply a love gift? Producers are universally despised, and considered deep-pockets. John Doe is going to be awarded $10 million. Or more.

I really like Andy’s idea of pre-selling premiere tickets. That seems even more valuable than pre-selling DVDs. (I wonder if Andy has a blog? He sounds as if he’s new online.)

Somewhere, we need a hybrid that fits today’s challenge. We need a resource, a crowd, of accredited investors to whom we (indie filmmakers in the new world) can present our financial plans. A group of people who can see today’s film strata–$1 million or less, or $90 million or more–and be attracted to what can be done at the low-budget level. Maybe they could see their investment as being about the same as buying a foreclosed home…and much more exciting.

Lay out the reality and the potential. Spell out the possible drawbacks without fear. Talk to investors who don’t willy-nilly buy into the “movies never make any money” lie. THAT’S the crowdfunding I want to see.

Michael

@Martin – I didn’t mean it like the way it read – I shouldn’t be posting at midnight. What I mean is Jeff has clout with people as I mentioned gravitas. I meant it as a compliment because of his experience and credibility. Not that Jeff is a middleman, but that whoever was to operate in the gatekeeper role would need to be respected by both sides.

There are some people I know who are investing in a film just because I was asking and they had no interest in learning more than what was it about. Others totally kicked my ass even though I have known them for years. But I can only imagine the beating a complete stranger would have gotten from the ones that really asked a bunch of questions, and I know they wouldn’t have gotten anything from the ones that did it on my reptutation and trust alone.

So a person who was respected by both sides would have the best chance of getting a meeting/introduction to take place. But now this person in the middle won’t do it for free. That is why most deals have finder’s fees. But just because you have a finder’s fee won’t mean the gatekeeper will show your deal. Your deal can’t embarass him. Any legit person won’t represent your film deal if it sucks even if you are paying a big finder’s because of the damage to his reputation. Indie filmmakers are in a bind but as Jeff said 250k today is the 2.5M from the year 2000, the costs of filmmaking have dropped tremendously. But maybe people need to make that first calling card film out of their own savings. Maybe we need to stop thinking of a white knight and actually save ourselves by ourself.

Just for clarification Jeff is the best and I appreciate his generosity with his time and knowledge and please don’t misread my late night post as anything but admiration.

Thanks.

@Ben

Just for clarification, that was exactly my point about film vs other investments, which is why I made them. It was a response to Michael about foreclosure investing.

The great thing about films is that it is not a cyclicall product. What I mean is, unlike real estate, the economy etc which are cyclical meaning that over time it will have ups and downs.

With a film – if it is good – it doesn’t matter how the economy is doing. That is the fabulous part of it as an investment. But it seems to have a bad track record. Now if you split out the films that had a good team/script vs the bad team/bad script (and all other combos good team/bad script, bad team/good script) – I would imagine that the good team/good script would have a decent record. The problem is that when we try to manage expecations it comes down to “assume that the money is lost” and let me have shot – that seems to be most deals.

I absolutely agree about the other value. If you really step back and look at human behavior – we are trying to optomize what we believe is our overall happiness. It is happiness on our terms – meaning I don’t personally maximize my happiness by getting so hammered that I can’t think straight, or do drugs, but that may be what other people do to maximize their happiness. So from investing in a film it allows an investor to get some other benefit then clearly the proposition in their mind was happiness maximizing. So that makes sense but that criteria is different from everyone.

A great money raiser will know what each investor’s needs are and make the appropriate pitch – examples would be more business, more hype, etc. But much of what I have read (across many websites) is that it filmmakers want to make movies (which they all believe are good) – but when we objectively look a the deal it isn’t a good one. So I think filmmaker’s really need to objectively look at the deal they are pitching – is it good for the investor, not if it is good for you. So maybe the script you have worked on about love affair between–I don’t want to offend anyone so just insert something that would seem ridiculous but that you really want to make–isn’t ideal for an investor. Maybe work on making a movie that has legitimate chance of making some money and then use your profits to make your own pet project.

If people who are investing in your film are doing it just to help you out, that is great, but think of the selfishness of it if you don’t have a commercially viable movie. Basically you want to “throw” their money away (ya they get some tax losses great) – so you can do something. If they are wealthy great, but just think about how little you value their money and them if you want to make a movie that has little chance of making anything. Some people have movies that they need to make but know their is little chance of being commercially successful – I think those should just be made with your own money. This is just my opinion and I am not trying to start any trouble.

Sorry for the rant but I was at an event recently and people didn’t seem to care about the people who were putting the money in – just more about themselves and it troubled me, especially because I am an investor.

Please don’t get me wrong, I am on the side of making films. I am involved in a film at the moment. But I am doing everything I can to ensure its commercial viability including forcing the budget down so that it has a chance of earning enough to pay the investors back.