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Hollywood Loves A Good Con: Why We Need a System for Vetting Film Investors

By Colin Brown | Indiewire January 21, 2014 at 11:43AM

Slated Editorial Director Colin Brown is back with the final installment essay in his series on packaging films.
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"The Wolf of Wall Street"
Photo Courtesy of Paramount Pictures "The Wolf of Wall Street"

These are the inner circle film projects that have already secured some kind of early industry seal of approval. It's a dilemma that film finance and packaging consultant Stacey Parks noted in a 2012 blog post that remains relevant now: "As a new investor in the business one of my clients said it's really tough to get people to believe him and take him seriously when he talks about his film fund. What happens is that agents, lawyers, and managers have heard it all before, only to be burned by fly-by-night full-of-shit amateurs. So they don't just jump when someone calls and says 'I have money I want to invest.' It actually has to all go through the proper channels, which usually means referrals from trusted individuals."

Knowing who and what to trust in such a shadow-chasing world ought to require the same levels of common sense and due diligence involved in any kind of matchmaking. But passion projects can so often reduce even the most level-headed and business-minded types into fools for love or, worse, propel them into marriages of convenience without even the escape hatch of divorce. This is where Silicon Valley-style vetting can really play its part, particularly now that the SEC has lowered the drawbridge for millions of potential high-net-worth film angels.

"In the end, a flawed system for vetting investors is better than no system all."

As Ted Hope, the new CEO of Fandor, has suggested on a number of posts of his own, it's high time the independent film business institutionalized its own equivalent of "staged financing." How would this play out? In effect, a dynamic two-tier ecosystem of film investor would emerge. There would an elite cadre of early-movers, those educated and resourced enough to be able to evaluate projects, assess finance plans, recognize red flags and weigh up filmmaking teams before committing that all important initial slice of funding. The door is then opened to all other investors, acting individually or in syndicates, to take their cues from this third-party vetting process and decide whether to invest alongside them upon taking all the requisite legal steps.

The key here is 'skin in the game,' a nebulous phrase of indistinct origin that means ensuring interests are aligned based on everyone sharing a direct stake in the success or failure of a particular project. Such congruence of interests is critical.

As entertainment lawyer Mark Litwak has warned: "beware of investing in a project where other parties benefit when you lose." Over time, as we have already seen in the much younger tech world, newbie investors become seasoned enough themselves to serve as bellweathers of their own to other would-be financiers. Silicon Valley's diligence system is by no means perfect, of course. Even the most admired and influential angel investors, venture capital firms and tech accelerators can suffer from confirmation bias – as evidenced by the hot water that Y Combinator's Paul Graham has found himself in for making broad assumptions regarding both female coders and also foreign accents. Nor does it stop there.

An academic study by two economists that was picked up by The New York Times concluded that investors assign higher share values to companies run by attractive chief executives. Using a Facial Attractiveness Index to measure 'neoclassical beauty' – a symmetry-based scoring system under which Yahoo CEO Marissa Mayer was rated 8.45 out of 10, compared with 8.5 for Angelina Jolie and 8.46 for Brad Pitt – the study found that better looking bosses are paid more than less-appealing counterparts.

Shareholders, apparently, are as easily swayed by appearances as they are by numbers. While those with charisma have been shown to be better negotiators, basing decisions based on looks alone clearly has its problems. The same article points out, for example, that another study conducted last year about hedge fund managers found that those rated as more trustworthy, based on their head shots, actually perform worse and generate lower risk-adjusted returns when compared to those perceived as less trustworthy.

In the end, a flawed system for vetting investors is better than no system all. And they only get better as empirical data improves and business wisdom accumulates. The real point here is to recognize that investors themselves are as much a part of the packaging process as talent attachments. You can do your project irreparable damage by jumping at the first money that comes along.

Not only might that money come with too many strings attached, particularly in the area of creative autonomy, but they might also send out the wrong market signals to other investors, not to mention distributors down the road. Not all equity financiers are created equal; some are worth considerably more to your project than money alone, in terms of credibility and the advice that they can provide as business partners and creative champions. In his book "Thinking in Pictures" that helped inspired this series, filmmaker John Sayles says as much when reflecting back on his early studio-financed film "Baby, It’s You," on which he didn't have complete editorial control. "That experience combined with other misadventures in fund-raising has led me to believe that there is such a thing as the right money and the wrong money," wrote Sayles.


This article is related to: Filmmaker Toolkit: Production, Film Funding & Financing, Independent Film Financing, Film Finances, The Wolf of Wall Street, Megan Ellison