“Staged financing must become the film business’s immediate goal.”
– Ted Hope, Producer & Head of Production, Amazon Studios, September 2013
Crowdfunding’s lack of sophistication around risk
Much, if not most, of investment strategy is about dealing with risk. A backer of a project – be that an equity or debt investor who is hoping to see some kind of profit, or a crowdfunding supporter who wants to get their perks and see the finished film – has to predict risk. Normally, the closer a project goes from idea to release – from pitch to screen – the lower that risk gets; it's reducing all the time. To reflect this, in the majority of business investments, the first ‘angel' investors will normally put in the least and get the most equity, and as subsequent funding rounds continue, new investors put in greater amounts and get less relative share, but more value as the business is now worth more. As risk decreases, the cost of participation increases, just as there are far more ideas that get turned into scripts than scripts that get made into movies, or movies that get a theatrical release.
But crowdfunding, not technically an investment, is flat and treats all types of backer the same. At the start backers have to decide if a project looks viable and convincing, pay their money and hope for the best. It’s an investment of faith and confidence when 75% of all crowdfunded projects arrive late and a quarter over six months late (according to a July 2013 study). Some end up cancelled (examples here or here), which damages the whole space as they will doubtless put some people off backing a crowdfunding project again.
The problem is arguably even more of a challenge with flexible crowdfunding where projects can miss their target and end up raising far less than they need but still cash in. On Indiegogo, 80% of projects raise less than a quarter of their target, meaning often there isn't the money to deliver the project or to do it to the standard promised. This is a problem both for the creative, on whose shoulder the stress and reputation rests, and the backer, whose money is at stake. Meanwhile, the crowdfunding space depends on people having a good experience, backing a project and doing it again.
Yet the money is almost never all needed at the very start. For a lot of creative projects, some money is needed to pay some wages and overheads over the many months or years it will take on an ongoing basis – so it could trickle in. Indeed, the bigger costs might be towards the end during post-production or when 1,000 DVDs & DCPs are needed or the soundtrack has to be cleared. By that time the risk is considerably lower – if a book is ready to print or a film fit to screen, there's less risk about delivery, while it’s easier to assess the quality at that stage.
Rolling with it
Is there space for a rolling or staged crowdfunding that dripfeeds money into the project throughout its creation much as development, production, completion & marketing finance are already separated? It seems to resonate with how Ted Hope has been arguing the indie film world needs to adopt staged investor financing to get more people investing in film.
It would support the kind of structure where, say, of 1,000 scripts or ideas that got funding, 200 might be supported to to do pre-production & shoot a promo, 100 get shot, 50 get full post-production and packaging for delivery and 10 get extra marketing and distribution support. Investors at each stage would be taking a smaller risk and would be putting in larger sums of money – while the backer who’d taken a risk and made a good choice at the initial idea stage could stand to make a bigger share of any profits.