Venture Capital Meets the Silver Screen: The Dynamics of Film Financing
In recent times, we have witnessed the growing interest from venture capitalists and angel investors in Nigeria's booming movie industry, which is valued at over $6.4 billion and is popularly known as the second most prolific film industry globally. With movie producer lists looking like a startup's cap table, we have seen tech investors back movies like Obara’m, Ile-owo, Gangs of Lagos, Brotherhood, and the recently released The Black Book. We have also seen VC funds and angel investors back production companies like Inkblot, distribution companies like Iroko Partners, and film financing marketplace, Talent x.
So, what has spurred this trend, and why are investors turning their attention to film financing?
Rise of Streaming Platforms: The rise of streaming platforms, such as Netflix, Amazon Prime Video, Showmax has created new opportunities for investors in Nigeria. The success of these platforms has demonstrated the viability and potential of streaming markets in Africa leading to increased interest and investment in streaming services. These platforms have a growing demand for original content and are willing to invest significant amounts of money in producing movies and TV shows. Savvy investors have recognized this demand and are seizing the opportunity by investing in film production companies or financing individual movie projects. The streaming platforms offer a global distribution platform, allowing movies to reach a wide audience and potentially generate substantial returns.
Diversification of Investment Portfolios: Investors are always looking for new avenues to diversify their investment portfolios. The movie industry offers a unique opportunity to invest in an entertainment medium that can generate substantial returns, complementing their existing investments in technology, healthcare, and other sectors. Furthermore, exit timelines for movies tend to be relatively shorter compared to startups. While startups can take an average of 5 to 7 years to be acquired, movies often have more concise timelines, primarily determined by their production duration to release date.
Potential for High Returns: Although the movie industry carries significant risks, successful films can yield substantial profits. A single hit movie can generate substantial revenue through box office earnings, licensing deals, and more. Venture capitalists are attracted to the potential for high returns. While it might not return a 10x multiple like a successful startup would, we have seen make 2x, 3x, showcasing its potential.
Investment Process and Parallels with Startups
To gain deeper insights into the film financing landscape and how it parallels startup investments, I had a chat with Editi Effiong, the producer of the recently released "The Black Book."
Just like pitching to investors is essential for startups seeking funding, Editi emphasized the importance of presenting the investment opportunity to friends and family who were early backers of the project. Despite the personal ties, thorough presentations were made, discussing not only the investment but also the film's narrative, exit strategies, and the team's ability to execute the project.
Much like startups, equity and debt instruments are the most common investment vehicles in film financing. In this case, equity was the instrument of choice for funding "The Black Book."
Editi said, “It was a purely equity play because it was the first play. I took mostly naira, and except for some of the guys who actually didn’t have naira, so it was primarily naira investments and would exit in USD. With the way Naira was, it was a good deal doing that”
Was an exchange rate agreed upon for those that invested in naira?
“Actually, we didn't do that. I guess in the future, those conversations can be had. The Naira was definitely not as shaky. But then again, because we were exiting in USD, there was no conversion requirement. Because if you put in USD, you're exiting in USD anyway. We weren't going to exit in Naira at all.” "
Investors in both startups and films seek experienced founders or producers who exhibit a track record of grit, resilience, and the ability to execute. Editi noted that his prior experience in film production, coupled with a clear investment strategy focused on exclusive deals with streaming platforms, played a crucial role in convincing investors. He opted for streaming platforms over traditional cinemas due to the potential for higher returns and a more direct route to recouping investments. He said, “I didn't want to go to Cinema. I do wish we had a cinema run for this, though. But I didn't want it to go to Cinema because I wanted it to be an exclusive deal. Exclusive deals are bigger. Original deals are bigger. It was a very expensive film to make. The number of cinemas in Nigeria is about, what? 68? I didn't see a scenario in which the cinema can make the right amount of returns. Cinemas can be very tricky. If I had gone to the cinema, whatever I make, I would have to split it three ways with us, the producers, with the cinema owners and distribution. I didn't want that. I wanted to ensure that investors get their money back first. That's the first thing I wanted. Because of the market peculiarities, there is a higher potential for returns with streaming platforms than cinemas.”
Editi showed resilience and grit, which became evident when he said, “Halfway through the project, we faced financial challenges due to various COVID-related issues. Consequently, I returned to the negotiating table with potential investors. Some individuals participated in the subsequent funding round, while others did not. In this instance, I backed my words with action. I vividly recall having to sell off a portion of my Bitcoin holdings—approximately two bitcoins—just to restart the project before securing any external investments. I was determined to move forward even if I had to do it on my own. This experience reinforced the importance of believing in and supporting oneself.”
While it is common for most startups to have a lead investor at a later stage round, with this project Editi was the lead investor. He said, “What mattered most to me in that situation was an unwavering dedication to the project. In every round I've been involved in, and it’s not many, I've been the primary investor. I believe it underscores the significance of having a personal commitment to the project. Having a substantial stake in the venture was crucial, and I ended up shouldering one-third of the total investments.” This personal commitment was vital in building trust among investors.
Just like startups go ahead to raise a seed round after a pre-seed round, with films in case of a sequel or a spin off I asked if the current investors get some benefits from it. He said, “No, however, they do have a first right of refusal to participate in the next round. Because they don't own the IP. In our case, IP is owned by Anakle Films and myself. So they're investing in the outcome, not the IP.
When building, regular updates are required to sustain the trust from investors. Editi said, “Back yourself, keep people updated. I wrote over 50 investor memos every week, at least once, mostly twice. I'll write a memo so everybody knows what is going on. That is a big deal, I guess, for them. I didn't realize how big of a deal it was until when we exited. We sold to Netflix and everyone is happy now, and most people want to do it again. But I guess that comfort they had in the investment comes from having been carried along across the entire project duration.”
Just like with startups, during the due diligence phase, a reference is typically provided to convince investors. Netflix conducted their due diligence diligently. They reached out to various industry insiders to validate the project's viability. One key reference was Moses Babatope from Film One, a respected figure in the Nigerian film industry. Moses's vote of confidence was instrumental in the process. His stance was clear: "If Editi says he's going to do something, he'll do it. Just follow him." Editi pointed out that the vote of confidence came not just from personal trust but also from a track record of successful projects, particularly his work on "Up North," which had garnered acclaim in Nollywood. “Because people knew me from Up North and Up North was quite a solid body of work according to Nollywood standards. The Black book is like ten steps higher.”
Just as valuation is paramount in assessing startup deals, it is similarly crucial in film financing. Editi emphasized that valuations are made based on various factors, including the actors involved, the story's strength, the director's reputation, and the team's ability to execute the project. The experience gained from "The Black Book" has led to a more refined valuation process for subsequent projects.
Investors are also interested in the legal aspects of their investments, whether in startups or films. Editi revealed that while agreements were drawn up for investors, his ownership of the film's intellectual property (IP) meant that he didn't need to sign agreements with himself. Agreements were primarily focused on actors and other collaborators, and mutual trust played a significant role.
In some cases, successful early-stage startups can generate returns of 10x or more over a few years. For the ROI, how high can an ROI be on a film investment? Editi said, “There's been 3x, 2x, 1.5x, 1.2x. It all comes down to how much you spend producing and how much you're exiting. We did almost 2x with up north, to be honest. We are trying to find ways to ensure that we can reduce the cost of production and increase exit values.”
What's the best way for investors to invest? Will it be in the film production company like Anakle, or directly in the film? Editi shared his perspective, “We're currently raising a seed round for the company. And so you get to own a part of a company because the most expensive thing is the project. It makes no sense for the company to invest. Even in Hollywood, major studios don't invest 100% in film. In fact, studios mostly own 30% of films. Sometimes it compounds between money and IP. IP traditionally consists of about 10% of the value.”
What are the trends and opportunities in film financing are that investors should be aware of? He said, “DFIs. There are a lot of DFIs aiming to support film projects in Nigeria. I've advised a couple of them in the last couple of weeks.”
For investors looking for movies to finance, where's the best place they can find them? How can we source for films? Editi said, “Currently, the prevailing strategy is to align with individuals boasting a proven track record. I believe this approach is effective. Nigeria's film festival circuit isn't particularly extensive, so it's not the best route to take. There aren't many people who can execute at a high level, so it's wiser to identify the individuals you wish to engage with and initiate discussions accordingly..”
In conclusion, as venture capital and angel investments continue to flow into Nigeria's film industry, the silver screen holds the promise of not just cinematic excellence but also exciting investment opportunities. It's a world where storytelling meets smart investing. As a Nollywood enthusiast myself, I am eagerly looking forward to witnessing a growing wave of venture capital investments in top-quality movies. The potential that emerges from this intersection of creativity and finance is boundless. Just as the tech industry has flourished with the backing of venture capitalists, the Nigerian film industry, with its unique storytelling prowess, cultural richness, and immense talent, stands poised to achieve even greater heights.