Would you like to raise investment capital from friends, family and people who don’t even know you yet?  This article will show you how we accomplished this quickly and efficiently for one of our clients.

Our firm was retained by a Northern California entertainment start up to set up and raise from outside investors up to $1.5 million.  The company had been in business for about one year and had completed their business plan along with the first phase of their product development.  There were three founding executives, each of whom had put in about $175,000 of their own capital.

Our first job was to restructure the company.  Like most small startups the founders had established the business as a Limited Liability Company.  The problem with LLCs is that the owners hold “membership shares” in the company, not stock.  Instead of selling stock we suggested that investors make “Bridge Loans” to the new “C” corporation that could be converted into common stock at a future date.  There is really no good mechanism to do this as an LLC, so we converted the original LLC into a Nevada based “C” corporation.  

Once the company was converted into a “C” corporation all sorts of options opened up for fundraising.  For example, “C” corps may have more than one class of stock.  You can have founder’s shares, common voting shares, common non-voting shares, preferred voting and non-voting as well.  Even the common and preferred shares can be priced differently depending on when the shares are purchased.  Example: “A” round common stock could be priced at $1 per share; and later “B” round common stock could be priced at $2 per share (or more), depending on the overall increased value of the company.  Note: the difference between common and preferred stock is that preferred stock always pays a fixed dividend, which must be paid to the preferred stockholders before any common stock dividend may be paid out.

Upon setting up the initial “C” corporation with 10,000,000 shares, we issued 6,000,000 shares to the three founding executives, plus another 225,000 shares, unevenly divided, among the first 5 employees, depending on their rank and length of employment.  An additional 1,275,000 shares were set aside as an incentive stock pool for new officers and employees.  A block of 1,500,000 shares of the initial stock was set aside for the Bridge Financing warrant holders.  The final 1,000,000 shares were put in reserve for new common stock holders and strategic partners.

Three important documents needed to be created to enable us to move forward:

• Bridge Financing Agreement – This is a seven page memorandum that sets forth all of the terms of the Bridge Loan, including the issue of warrants, valuation, rights, representations and warranties (if any), governing law, assigns, and timing.  The minimum loan amount allowed was $25,000;
• Warrant To Purchase Common Stock – A warrant is a right to convert a loan into common stock and establishes the price that the Bridge Loan can be converted, and when.  In this case, we established that after two years the Bridge Loans could be converted into common stock at the transfer price of $1 per share.  The Bridge Loan terms do not require that the loan holders convert their loans into company stock, but they do establish the mechanism and the timetable to do so;
• Promissory Note – This is the loan document.  In this case, the company agreed to pay the Bridge Loan holders 2% interest only, per annum, on their note for two years. After two years the note could be converted to common stock at the note holder’s discretion, through the exercise of the warrants.  The Note also establishes that “Maker may prepay all or any portion of the principal indebtedness without penalty at any time.” But also that “Maker shall not pay any dividends to its shareholders until all principal and interest on this Note has been paid in full.”

Once all the financing documents were completed, we were ready to meet with investors and accept checks and wire transfers.  My team, which included the three founders, was able to meet with about 36 groups and raised $1,115,000 from 24 investors.  The entire process took about 12 months to complete.  The two single largest investors were invited to join the board of directors as representatives of all the note holders.  As note holders, the investors had voting rights and some “super majority” rights that prevented the founders from making any business altering decisions that the note holders would not approve of (like giving themselves huge raises or changing the fundamental business of the company). 

After two years almost all of the initial 24 warrant holders converted their warrants into common stock.  The value of the initial stock went up from $1 per share to $2.50 per share for later investors. 

We are not saying that this is the only way to raise money for young, start-up companies, but it was an efficient one for these entrepreneurs.  What made this effort successful for this company was the fact that their project was based on a bestselling book by two of the founders, and they had already created a large and ardent following by the time they engaged my firm to do fundraising for them. 

Crowdfunding is becoming so (for want of a better word) crowded, and raising money from institutional investors often costs more and takes longer.  This method allows companies with a good business to raise fairly large amounts of money from investors in a way that benefits everyone.

If you too have a compelling venture and well thought out business plan, then this road map for raising capital may get you on your journey as well. 

Let us know if you need an experienced guide.

The independent movie distribution business is in something of a death spiral.  You know the one, where the fighter plane is in a flat spin, hurtling towards the earth.  With hands over our mouths we watch the intrepid pilot struggle with the controls to break out of the spin and regain control over his airplane before it smashes into the ground. 

Yeah, like that.

The death spiral that we are in is not nearly as dramatic, but it is real all the same.  Movie company X makes two films: One a $80,000 slasher film with no name actors, a predictable and derivative plot with lots of blood; the second is a $800,000 lovely, coming of age story, with recognizable actors, and some real production values. Movie production company X gives both films to their distributor.  Distributor takes both to the markets, getting MG’s for many of the major territories.  They generate $100,000 for the crappy little slasher movie and $250,000 for the coming of age story.  Having lost a bundle on the coming of age story, and having made money on the slasher film, which kind of film do you think the filmmaker will opt for next?

Although the decline of revenue for the average indie film has been occurring for awhile, it basically came to a grinding stop overseas in 2013, for the vast majority of recently-produced feature films, which did not have any theatrical exposure. Why? Consumers no longer rent DVDs in any great numbers -- with the exception of Redbox here in the U.S. (and Redbox does not exist overseas.) Kiosks exist in certain foreign territories but not for video rental—only sell through. Unfortunately, unless you have a film which has been released theatrically and/or has a well-known cast, or great audience pre-awareness, very few consumers still purchase hard copies of independent films, unless they’re in the $5 discount bin at Wal-Mart.

I suppose that we are all hoping to be the next Jason Blum. 

Since Blum, 45, hit big with Paranormal Activity in 2007, his "microbudget" model has upended the horror movie business. That film, which Blum discovered and pushed after filmmaker Oren Peli made it for $15,000, grossed $193 million worldwide and has spawned four sequels for Paramount.  Studios, faced with increased pressure to cut bloat and release more profitable films, salivate over the three franchises Blum has launched in the past four years: Insidious (a $1.5 million price tag) grossed $97 million worldwide; Sinister ($3 million) grossed $77.7 million; and The Purge ($3 million) grossed $89.3 million. The Hollywood Reporter 2/27/14

Since those financial successes even Blum and his distribution partner Universal have struggled to find a market for the low budget horror/thrillers he is turning out with regularity. Like Roger Corman, or Ed Wood before him, Blum is a victim of his own success. A success that gets harder and harder to sustain. 

When the overseas film buyers are not paying that much more for good films, as they are for crappy films, how do the producer and sales agent break out of the flat spin, and regain control over their flight? 

Answer: Stop buying bad, meaningless films that just bring the market value down on all films. 

Here’s your dilemma: You’re probably not very proud of the “art” that you have to peddle these days, but, you can’t sell from an empty cart either.  Your distribution company has to acquire films that they can make a profit on.  That brings up another problem.  At the bottom… the commissions are so low as to make it hardly worthwhile.  Even if you’re charging 15% - 25%, on a total buy of $100,000 that does not cover your cost of attending AFM, EFM, Filmart, Cannes and all the other shows that you have to be at to do your job.

The obvious solution for all film distributors is access to more capital. Better capitalization gives distributors the ability to pass on the truly bad films and concentrate on the better ones.  Filmmakers rely on the foreign distributors to be able to raise up to 60% of a film’s production budget from offshore buyers.  But when your new releases look just like everyone else’s, all you get is minimum buys. 

The demarcation line is no longer is it a good movie or a bad movie, it’s “is it commercial”.  A North American theatrical release, even as low as 150 screens, will give any film a big lift overseas.  It gets reviews, it gets press, its gets access to film festivals and more.  Or as one veteran sales agent put it to me, “…since very few genre films are being pre-sold, buyers are waiting to see the final film before making a decision. At this point, they simply do not care what the budget of the film is compared even to obviously smaller budget films in the same genre. As one buyer told me recently, “I don’t care if the producers spent $1,000,000 or $100,000 on the budget of a film. It’s not my problem. If it’s not going to be released theatrically, or have an obvious television sale, one particular film is worth virtually the same to me as another – regardless of the budget.” Simply said, the current marketplace is not rewarding better production values in films – unless they’re released theatrically.”

That is of course the impetus behind so many day-and-date releases in conjunction with Netflix, Redbox, Amazon, Blockbuster and others. It gives your film credibility.  Note however that foreign buyers are now savvy to the game of limited US theatrical releases and will ask how many screens, what the P&A spend was, and what the US audience numbers were. Just because you “four-wall” the film in 5 or 6 cities, that does not a theatrical release make.

I’ve financed films before and I know how hard it is.  There is just no substitution for a great story, backed by a well thought out distribution plan, with P&A money to support it… and that’s what gets films made, into theaters, and into our DVD collections. 

You can’t sustain a restaurant selling bad food, you can’t sustain a retail store selling bad merchandise and you can’t sustain a distribution business selling bad films. Sooner or later the customers will simply stop coming.

There is a major consolidation of film and television distribution taking place – being brought on by the loss of disk revenue, challenges of digital distribution, and the growing problem of collecting money owed from customers.  Let’s face it, foreign distribution is not what it once was; there are new players, new technologies and new financial hurdles that every film &TV distributor has to be concerned about.  Even if you have good films/shows, you're probably not getting the sales out of them that you once enjoyed. Not to put too fine a point on it, there are just too many foreign sales organizations chasing too few good films.  And, too few foreign buyers that actually pay their bills on time. You go to MIP, you go to AFM, you go to EFM, and what do you have to show for it?

Paper and promises. 

If you ask the other foreign sales agents... they will put on a brave face and tell you that they are doing just great, and point out the one or two films that they are actually getting decent MG's on.  But at its core they know that the market is rotten.  Whole catalogs of past films are going unsold in major territories and too few company owners are looking at the underlying reasons. 

It all comes down to the law of supply and demand.  Demand has fallen off in almost every major foreign (and domestic) territory, while the supply of low budget flops and unscripted pabulum just keeps coming.  So, what happens when supply (of even bad entertainment) does not abate, and demand falls through the floor?  Prices evaporate and companies crumble, that’s what.  It's happening, right now, all over the industry, and all over the world.

Those companies that have the financial resources should be looking to buy up their competitors, and grow their companies in the process.  The entire industry would benefit from shrinking the some 200 foreign sales companies down to less than 100.  Those surviving companies would have better market reach, better film catalogs (by dumping the junk) and more power with the film buyers. 

Your firm may have had an excellent EFM, and I hope that you did, but that does not change the fundamental weakness in the current film distribution marketplace.  We saw it last year at MIP; we saw it at AFM; we saw it at NATPE; and we just saw it again at EFM.  Consolidation is the only solution to a chaotic marketplace.  We need fewer, stronger, better financed distributors, able to purchase quality films, and let the flotsam and jetsam sink to the bottom, where they belong. 

There is no industry more populated with wide eyed optimists than the entertainment industry.  We are a hit driven business and we can always convince ourselves that the next movie, the next documentary or the next television serial will be the one that makes everything alright.  Is it getting harder and harder to believe that old yarn?

Have we learned nothing from what happened in the music industry and more recently the book industry?  Those companies that acted early, with dispatch, have survived; while hundreds of their slow reacting competitors have disappeared.  Both of those industries have gone through a major upheaval that the film industry is just now waking up to.  Filmed entertainment is a commodity, just like every other consumer good.  It obeys the laws of supply and demand slavishly, and the companies that are smart and are aggressively doing something about their situation are going to be the winners. 

There is no "business as usual" in the film industry anymore.  The game has fundamentally changed and the players will soon be dwindling down to the few. .  It's not about getting by in 2014, it's about still being in business in 2016.  Ask yourself, with honesty and clarity, if your company has the staying power, and is taking the necessary steps to survive the challenges that are wracking havoc in the film industry

If the answer to this question is "no" or "I'm not sure", let’s get together and see what we can do about that.

Stephen J. Kerr
President
Business Marketing Consultants

No matter whether your company gained or lost in 2012 you probably need to tighten up that flabby bookkeeping, shape up those bulging business records and pump up your net margin.

Unfortunately, just like exercise…getting your business in top form takes hard work.  Are your intellectual property rights well protected, are your accounting standards being followed, is your ship of state leaking cash?  Maybe this is the year to shed some unwanted IP baggage, toxic employees or inventory? Get rid of a costly distribution relationship, dump  non-performing properties, shed those high interest notes, beef up your marketing program and get your assets working again. 

Getting a business valuation done is a lot like getting on the scale.  You might not want to know what you weigh, but if you don’t look now, you’ll never know if your program is working.  We recommend to all our clients that they get a business valuation done every five years, to know where they are at now, and how they can improve the picture next year. 

Think of Business Marketing Consultants as your personal trainer as you work your company back into shape.   We will design a custom program that can help your management team tackle problem areas that may have been hanging on for years.  If you need capital…we can get it.  If you need to make acquisitions…we’ve got them.  If you need to get your debt down and your margins up…we’re on top of that too.  Sometimes we all need a personal trainer to get us back on the right track.  Count on BMC, we're here to help.

Changing Your Trajectory

The changing marketplace for consumer entertainment has left many companies with flat or declining sales, with little prospect of a turnaround.  I’m here to tell you that it doesn’t have to be that way. 

Even though you may be in an area of the business, whether it be production, post-production, or distribution, that has been eroding and you have not been able to keep up with (or afford to invest in) the technological changes affecting your business… there is still time to reverse the trend and pull your company out of the mud.  And, it doesn’t matter whether you are in Hollywood, Houston or Hoboken.

How to effect the BIG BOUNCE.

You need more than just new customers… what you need is a new vision of your business.  A vision of what your company does; a vision of your place in the industry; a vision of who your customers are; a vision of how to attract business, and a vision of what is possible. 

The biggest hurdles that most business owners’ face are their belief that change is not possible and that they can’t get there from here.  There is one thing for certain.  You cannot do it alone. You need a new vision and you need money.  One tends to follow the other.  To change any static property from its state of stasis to a new form, it takes a catalyst.  Whether that is the introduction of another element, heat or cold... a body at rest tends to stay at rest.  Or to quote Newton’s First Law of Motion: a body remains at rest or in motion with a constant velocity unless acted upon by an external force.

There are other people and companies that need your help, and in turn can help you.  They need access to your customers.  They need to put their cash to work.  They need your special know how.  They need to better serve their customers.  Those strategic partnerships and investors in your business can be the catalyst for change that you are looking for.  There is no shortage of money in this world.  There is no shortage of work.  There is no lack of demand for your services.  There is only a shortage of connections.

Collaboration is your key to effecting change at your company.  Upgrade your vision; open up your company to cooperation through strategic alliances; and open up your mind to the possible.  That’s when you will make the Big Bounce.