Filmmaking is Fun: But Is It a Worthy Investment?

The number of films produced per year in North America nearly tripled from 478 in 2000 to 1270 in 2023. So, the number of independent films looking for financing is also on the rise, meaning there are more opportunities to invest in movies than ever before. But should you invest in filmmaking?

Investing in Filmmaking Isn’t for Everyone

In keeping with our general philosophy on investing, the answer to whether the average investor should get into movie-making is no. That is unless you can afford to lose your entire investment.

Smart investors start with basic blocking and tackling. This means building a well-diversified portfolio of publicly traded securities. Then, as one’s wealth grows, it becomes prudent to diversify among different classes of assets (i.e., to engage in asset allocation). It is in the process of asset allocation that you can consider including alternative investments, such as investing in a film.

Even then, however, you need to view such an investment as a vanity investment.

Assuming you are interested, after taking into consideration all of the above, then here’s some information you need to know.

How Films Are Financed

Most independent films are financed in a variety of ways, such as pre-sale licensing and distribution in a foreign country, grants, tax rebates, family, friends, and private equity investors. Unless a film is being produced by a major studio such as Disney, Warner Bros, or Universal, where the film is financed by the studio itself.

Your investment in a film is similar to an investment in a company. The goal is to make a return on investment once the film gets distribution and turns a profit, much like when an investor makes a return on a company that sells.

Film investors often get executive producer credits, and depending on the type of agreement, the investor may have some say in the production itself. This requires the investor to clarify their role in the production and whether they will actively or passively invest.

Choosing a Film Investment: What to Know

The most important question to answer before investing is this: who is your audience?

Audience Matters — And So Does Story

Knowing your audience is generally overlooked when nascent producers and investors delve into a film project. Whatever level of experience you may have in investing in entertainment; focusing on highly underserved or insatiable appetite markets as a starting point is important, but investors should not forget the reality that compelling stories are what’s going to drive audiences to spend more of their money and time on the final product and help you recoup your investment.

The summer 2023 Barbenheimer phenomenon is a perfect example. “Barbie” made over $1.4 billion at the box office. The reason behind this is not just because it was serving an unmet need in the marketplace (highly feminist and women-centered stories). The success of the film was also due in large part to the story itself being original and compelling, which drove audiences to the theaters to see it. “Oppenheimer” was in the same boat to some extent.

The key is to find films and projects where that underserved need and a compelling story intersect.

Passive Investment in Film Production

If you are interested in passive investing, then you should be offered a private placement memorandum (PPM) to legally and safely purchase a percentage of the production. Even investments from family and friends are considered a security sale, so this is necessary for financers (including filmmakers). PPMS provides important information you should consider in making your decision.

So, what should you ask before signing the dotted line?

Audience and Marketing

• Who is the target audience for the film?
• How is the audience best reached through marketing?
• How frequent must the marketing be, and at what cost?

Costs

• What is the total cost of producing and theatrically releasing the film?
• Will these costs be recouped throughout the various distribution channels?

Success and Return on Investment

• What is the likelihood the completed film will achieve a substantial return on investment?
• Have any commercially popular principals signed on to the film that may increase its chances of success? (Or, have similar films been released that may predict success?)
• Is there a contingency return or a plan if production goes past the schedule?

Is Hollywood Glamor Worth the Risk?

There are seemingly popular blockbusters that fail, and there are small indie films that soar beyond expectation. Investing in film is risky, and there is no foolproof way to predict a film’s success. So, is investing in Hollywood even worth the trouble? And how do investors currently approach the risk? Investments.

A lack of understanding about the film industry can impact investment behavior. A study conducted by the Center for Economic Policy Research found that IP (intellectual property) can have a substantial impact on mitigating risk for investors:

“Our study suggests that intangible assets, including intellectual property (IP), play a crucial role in film financing deals, particularly for independent producers and SMEs who may have even fewer tangible assets to offer as collateral.”

Investors should consider diversifying their investments within the entertainment industry itself or invest in slates of films rather than individual projects, this will then further manage risks. However, with great risks come great rewards, and the stable demand for entertainment remains an appealing reason for investors to enter the game.

The Upside to Investing in Film

This is worth repeating: the film industry should only be considered by those investors who are comfortable with significantly high risk. That being said, if you are comfortable with that degree of risk, here are some of the reasons why investing in the industry is a good idea:

• The industry continues to experience a long period of growth.
• Film has the potential to deliver venture capital-style returns.
• Films enjoy years of income, what with movie franchises, etc.
• Film investments do not correlate with the stock market, so making a Hollywood investment can help to diversify your portfolio.
• You have the opportunity to be a part of culture that you don’t get with other investments.

Utilizing a managed risk strategy can make this alternative asset an opportunity for any investor. Amidst numerous strikes throughout Hollywood, the 2023 box office was up over 29% percent. So far, 2024 is a mixed bag. For instance, “Dune: Part Two,” budgeted at $190 million, broke even only at $708 million. But there’s hope, with 31 wide-release titles set for summer 2024.

Film Investor Choices

Smart, risk-taking investors can really dazzle their portfolios by investing in film.  The fact of the matter is that the industry, while continuing to experience long periods of growth, has the potential to deliver massive returns.

However, it is important to remember that the second aspect here is that even great, well-made films sometimes flop. There’s an element of risk with the outcome of any artistic endeavor, and not recouping your investment from a failed film is very possibly what will happen in ‘The End.’

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[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can view at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1. Buying & Selling IP
2. Tech Talk: Current Opportunities for Investing
3. Why Green Investing?

This is an updated version of an article originally published on December 23, 2021.]

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