Film, Fine Dining, and West Side Story: A Warning on Risky Investments

Vanity Investments are All for Show

“Hamilton” drove the masses to Broadway in 2016 and brought epic returns to investors, making it seem like Broadway shows were the next exciting investment. Through 2018, hits like “Harry Potter,” “Hello! Dolly,” and “Frozen” were still bringing in record-breaking profits. The following year saw early final curtains for several shows, resulting in investors losing an estimated $111 million. And when the COVID-19 pandemic hit in early 2020, live entertainment venues shuttered for 18 months and limped along for a painfully slow recovery. In 2021-22, Broadway ticket sales were a mere 54% of the 2018-19 season.

Sharp fluctuations like these reveal the unpredictable nature of the industry and the risky investments that result.

Why Do People Invest in Entertainment If It’s So Risky?

Even the most qualified investors are tempted by the bragging rights that come with funding a Tony award-winning musical or a promising chef’s trendy downtown restaurant. These risky investments are justified by thoughts like: Even with excellent market volatility, everybody still needs to eat, right? And people still go to the movies during a recession, right? I’m diversifying my portfolio, and that’s always a good thing, right?

Sure, diversification is a good thing, and there will always be a market for great food and entertainment. However, these risky investments, often called “vanity investments,” are more akin to gambling. Even with the most promising projects, if you’re not well-versed in what you’re investing in, you should perceive these investments as passion projects rather than a means to generate a large return).

What Makes Film a Risky Investment?

Think about it for a moment. Most Hollywood films, Broadway musicals, or restaurants do not get to test their product before launch. The investors might be going on a hunch or following a trend, believing they have a compelling idea – sometimes without actual research or understanding of the target audience. It’s an issue that kills most startups (sorry, venture capitalists), and it also sinks many film investors. There are fewer metrics to predict the success of a film or restaurant than there would be with, say, a tested prototype for a new technology.

The Right Audience Generates Demand – and Profits

Truly knowing your exact audience is often overlooked when budding producers and investors delve into a potential film project as an investment. This is because the principals have already passionately attached themselves to an emotionally driven story that is meaningful to them personally.
Instead of being led by emotional attachment, investors and producers should analyze the specific audience-driven market that a particular story can deliver to theaters. Further, they should consider what the marketing plan would entail should the film beat the odds and achieve theatrical distribution after completion.

Whatever level of experience you have in entertainment investments, focusing on underserved or insatiable appetite markets is far more critical to an entertainment investment than a compelling story. Why? Because one of the most important questions most investors and filmmakers rarely ask before  committing hundreds of thousands or even millions of dollars is that when the product is complete (yes, this is a product), who will care? Who will pay to see it?

More Questions Film Investors Should Be Asking

There are other, even more critical, considerations before putting money into a film. What is the total cost of producing, marketing, and theatrically releasing the film? Will these costs be recouped throughout the various distribution channels? Most importantly, what is the likelihood the completed film will achieve a substantial return on investment? And when?

Return on investment depends on distribution, and independent films especially don’t have the best odds. According to Popflick, less than 10%  of independent films released in 2022 received a wide theatrical release, and only 3.4% of indie films generated enough revenue to recoup the investment of its release.

While video-on-demand and subscription and ad-based streaming services   have changed how films are made and consumed, theatrical releases are still the gold standard in measuring a movie’s success.

Vanity Investments in the Restaurant World

Who doesn’t want to fund the next Gordon Ramsey and get meals comped on the Vegas Strip? Hang on; it’s not that easy. Like the entertainment world, the restaurant industry is full of risky investments.

How many restaurants have you seen come and go in your area? That’s because, depending on what source you consult, 20% to 60% of restaurants fail or change ownership within their first year.

Restaurant profitability is often dampened by a number of factors, including low profit margins, high competition, labor costs, and food costs. And here again, the pandemic inflicted sudden, unforeseen, and lasting damage on an industry.

In 2020, the hospitality industry ground to a halt, with restaurants losing an estimated $240 billion in annual sales, according to the National Restaurant Association. The eateries that survived had to be nimble enough to adapt their business model quickly and get by with far fewer employees as food service workers left the industry at record rates. Now betting on the next Jamie Oliver or Grant Achatz may not seem like a fun way to spice up your portfolio.

Know Why You Are Considering A Risky Investment

If we’ve officially spoiled your fantasies of rubbing elbows with Brad Pitt or sitting in the VIP booth at a fancy steakhouse… good.

This doesn’t mean you should write off any risky investment if you truly want to fund something you are passionate about. It is just important that you know what you are getting into and have adequate risk tolerance. In addition, if you are familiar with the industry and do proper research, you may get lucky. But vanity investments are always risky, and you should treat them as such.

What to Look for If You Do Invest

If your due diligence is done, and you’ve decided to invest in food or entertainment, choose whether you want to be an active or passive investor.  Are you a restauranteur, executive producer, or financier of restaurant or film?

Whether you are investing directly as an angel investor or venture capitalist or through an SEC-registered crowdfunding site like Honeycomb, secure the amount and timing of expected returns on your investment.

Some investors prefer to be given a private placement memorandum, a securities offering that is not registered with the SEC. While this means that you won’t be given certain disclosures required of public offerings, such as stocks, you will still have a transactional agreement that can be reviewed by a lawyer and, in many cases, negotiated to align with your needs as an investor.

Depending on your financial situation and investment portfolio, always discuss your plan to invest with a trusted financial advisor.

Starstruck Investors: Beware!

As an investor, you must be realistic about your goals regarding risky investments like films, restaurants, or plays. Are you in it for the security or the promise of big returns? Then it’s probably not the right investment for you. But if you’re in it to support a venture that is important to you, and you have the investment cash, then let the marquee lights and farm-to-table menu dazzle and delight you.

We think you’ll also like:

1. Investing Basics for Beginners Installment #2: Investing Is Risky, But Not Investing Is Riskier 
2. An Investor’s Guide to Productive Assets, Physical Assets, and Other Tangible Assets
3. Show Me the Money! A Closer Look at Investing in Coins

[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. Earning Green by Investing Green
2. Goal Based Investing – Planning for Key Life Events
3. Basic Investment Principles 101 – From Asset Allocations to Zero Coupon Bonds

This is an updated version of an article originally published on November 19, 2019.]

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