Written and researched by Colin Brown
​@filmonomics

Revised May 2015

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Yet another case of legalized gambling or a sophisticated tool that will help unlock more financing, manage risk and bring greater numerical transparency to a murky marketplace? That was the vexing question Congress had to grapple with five years ago. No, they weren’t just debating derivatives, nor collateralized debt obligations, synthetic securities, short-selling and all the other tarnished instruments of the mortgage-backed economic Armageddon. They were also trying to get their heads around the intricacies of an entirely new trading mechanism concocted by Wall Street: film futures.

To the horror of Hollywood’s major movie studios, as well as the large American theatre chains that showcase their films, the U.S. Commodity Futures Trading Commission had just granted tentative approval in 2010 to two online trading forums that provided speculators with a way to bet on expected box office receipts. Those proposed exchanges, developed respectively by Cantor Fitzgerald and Veriana Networks, would have operated in much the same way any futures market operates to reduce climate risks and other vagaries for commodities. Just as worried sellers of orange juice and pork bellies can lock in prices ahead of time, so film producers could sell contracts on movie projects that look doomed to bomb at cinemas. Anyone buying those contracts would reap enormous benefits should the film then do better than anticipated.

Lionsgate, not to mention several leading economists and film financiersincluding Schuyler Moore, all campaigned in support of the futures concept.“We believe a market in domestic box office receipts would substantially widen the number and breadth of financing sources available to the motion picture industry by lowering the risk inherent in such financing,” argued Lionsgate’s vice chairman Michael Burns in written testimony. (In his previous life, Burns devised the Hollywood Stock Exchange, an online multiplayer game that lets you place virtual bets on the performances of movies and their talents.)

In a fierce counter-lobbying effort, the Motion Picture Association of America played every fear card in its hand: Markets based on movie-ticket forecasts would be an invitation to manipulation; speculators would game the exchanges; and film futures surely resembled the very exotic instruments that instigated the global financial crisis. The MPAA “remains united in our opposition to a risky online-wagering service that would be detrimental to the motion picture industry.” Those casino arguments stuck. It wasn’t long before President Barack Obama signed into law a financial regulation bill that not only curbed derivative markets but also snuck in last-minute language outlawing any form of box office trading.

The lingering result is that the only two designated “commodities” whose futures cannot currently be traded legally in the U.S. are movies and onions. The ban on onions was instituted way back in 1958 following a national protest by farmers who accused traders at the Chicago Mercantile Exchange of cornering the onion market and creating tearfully low prices for their crops. In light of the extreme volatility in the pricing of onions since then, some of those very same large growers who fought for that ban now acknowledge "a futures market for onions would make some sense today." Will the same 20/20 hindsight apply to movie futures as well?

The answer to that question hinges on one’s view of informational efficiency. Broadly speaking, there are two contrasting philosophies at play in economist circles. Traditional “free market” theorists believe in some variation of theefficient market hypothesis, essentially a conviction that prices not only reflect all current information but also adjust immediately as new information comes in. The behaviorist school, on the other hand, contends that outcomes are the result of human decision-making and as such need intervention from policy makers and other experts to help guide markets and individuals where they are prone to fail.

If you believe in the efficiency of markets, you don’t try to beat the market by picking individual stocks or investment opportunities; you invest in index-style funds that mimic the trailing patterns of the market or sector as a whole. You are also more likely to believe that a film futures exch/ange could accurately and reliably measure the current market expectation of a motion picture’s box office success.

But if you don’t believe that those informational playing fields tend to even out, then you are more likely to entrust yourself to those better placed to anticipate market behavior, in all its quirks, and take advantage of any irrationality. You are far more likely to invest through the agency of registered brokers, fund managers and other professional intermediaries. You absolutely believe that the market is susceptible to manipulative and whimsical forces, and hope that those with an inside track can navigate you through to the hidden sweet spots.

In many ways this philosophical divide over whether markets or experts know best echoes the whole debate surrounding human curation versus predictive analytics. A company such as Google invests enormous faith in its iterative data-processing prowess, not just to perfect customer search results, but also to improve its own staff recruitment practices that are conducted algorithmically. Apple, by contrast, appears to place far greater stock on personal intuition, not only in the design and engineering choices for its hardware products, but also in the music recommendations it makes to customers. Google is a heavy recruiter of math majors and data scientists; Apple of late has been hiring radio DJs and producers whose reputations for discovering new talent will help revamp its Beats music streaming service - a music application that already uses human curators to make recommendations.

Who will hold the upper hand in the coming years is one of the fascinating facets of our new measurement economy. If the scales have been tipping back in favor of humans of late then maybe it’s because we have been measuring the wrong things. It’s a false dichotomy in any case. The future surely belongs to those who can harness the ingenuity of both brains and binaries. In his 2005 book Blink, Malcolm Gladwell showed how people’s split-second hunches, based our subconscious abilities to arrive at astonishingly rapid conclusions, can get things right in ways that are beyond even months of number-crunching analysis. That is the power of first impressions. Three years later, the same author was arguing in his book Outliers that the key to success in any field is a matter of practicing a specific task for a total of around 10,000 hours. In other words, the amazing reflexes shown by the likes of fighter pilots, violinists and neurosurgeons, all of them reacting to hundreds of instantaneous variables, are reflexes conditioned by thousands of hours of training. If practice is indeed the secret ingredient of success, then it is only a matter of time before computers prevail based on their own unparalleled powers of repetition and simultaneous processing. But only insofar as humans are able to to input those computers with all the most relevant signals. Deprived of meaningful data, even IBM’s Watson is just a useful workhorse to support rather than supplant our cognitive guts.

Confirmation of this hybrid approach comes from none other than Netflix’s chief content officer Ted Sarandos, the media executive most keenly identified with data-derived content investments. In a revealing profile in The New Yorker in January this year, Sarandos conceded that for all of Netflix’s efforts to take the guesswork out of moviemaking and TV programming: “It is important to know which data to ignore.”When pushed to delineate the degree to which his decision-making is reliant on computational analysis, Sarandos ventured: “In practice, it’s probably a seventy-thirty mix. Seventy is the data, and thirty is judgment.” Then he paused, and said, “But the thirty needs to be on top, if that makes sense.” As the New Yorker writer concluded: There is indeed a sophisticated algorithm at work at Netflix—but his name is Ted Sarandos.

None of this will come as a surprise to sports aficionados. They have seen what happens when inspired humans and insightful data go to bat together. Anyone who has read Michael Lewis’ 2003 bestseller Moneyball – or watched the movie version – knows the story of how an impoverished baseball team was able to upset the odds in an “unfair game” by employing statistical models and data analytics to better identify undervalued players. It took an iconoclast in the shape of Oakland A’s general manager Billy Beane to ignore a century’s worth of conventional baseball wisdom and trust that on-base percentage andslugging percentage are better indicators of offensive success than historically valued qualities such as speed and contact. Beane basically exploited what economists would recognize as “market inefficiencies” to secure effective players on the cheap. That democratizing motherlode of data Beane mined from had been staring in everyone’s faces for decades.

The window on such “arbitrage opportunities” has rapidly closed in baseball – and in many other professional sports now - since every club now uses similar data analysis to measure player performance and value. But that leveling of the playing field shows the importance of knowing exactly what performance and predictive indicators truly matter. You can only value what you choose to measure. Not every business is as amenable to metrics as sports, of course. Corporate sales may well be adversely affected by such ineffable factors as low morale, lack of passion, poor communication between partners and associates and so on - yet none of these are likely show up in the numbers until it’s too late. But that doesn’t mean they are non-measurable. Eventually, computers will learn to spot the telltale signs of this decline from the data exhaust of companies even before the human nose gets a whiff. Similarly, in a film business susceptible to impulse, ego, desire, nepotism, opportunism, temptation and the powers of seduction, there may always be a part of film financing that will remain obstinately quixotic. But that alone doesn’t shut the door on predictive data. Right now, you would be hard-pressed to devise a black box for decoding such emotional and psychological traits. But at some point algorithms will be able to account for those Shakespearean dimensions as well. With enough hours of behavioral as well as informational mapping, the film market will become more effective, if not always terribly efficient.

With this all in mind, this fourth and final part in our White Paper series designed to deconstruct film investment has now been refreshed to reflect the changing market (and behavioral) dynamics that have occurred since its original publication in 2012. Much has happened since then.

Business legend has it that nine out of ten technology start-ups fail. This is not far from the probable truth. Business failure has many definitions but if defined as failing to see the projected return on investment, then research has indeed shown that more than 95% of venture-backed start-ups are unsuccessful. A similar figure is often used in connection with independent film, where the odds of turning a profit on any one project are said to be less than 5%. To put it another way: the probability of investors finding the next Facebook is about as remote – or random - as landing the next “Paranormal Activity.” So why is it that early-stage tech ideas can still draw on a robust and growing ecosystem of angel investors, whereas independent filmmakers continue to rely on a haphazard and oftentimes capricious collection of patrons? The answer has more to do with the contrasting investment cultures that separate the film and technology worlds than with any differences in the assets’ respective risk/reward profiles.

Even in today’s data-driven business climate, film investment is still primarily driven by passion for individual projects and selective production companies than with any methodical attempt to invest across the totality of the independent film spectrum. Passion certainly plays its own part in Silicon Valley, where entrepreneurs swoon over world-changing innovations. But no serious seed investor there, or in any other global start-up hub for that matter, would think to risk their money on just a couple of disruptive ideas, no matter how persuasive the pitches or the track records of the teams behind them. Instead, they distribute a portion of their capital across a wide portfolio – as many as 150 per year, in the case of David McClure’s descriptively named 500 Startups – and then look for measurable proof of early traction before investing further.

In the tech world, there is plenty of solid data to support such a systematic investment strategy. Professor Robert Wiltbank used research backed by the Kauffman Foundation, NESTA (a UK-based entrepreneurship foundation), the University of Washington, and his own Willamette University to compile what he describes as the largest existing dataset on angel investor financial returns. Armed with that statistical trove, he concluded the following:

The optimism with which these ROI scenarios are portrayed stands in marked contrast to the filmmaking world. There, for reasons that have been made clear in previous White Papers in this series, most of the stress is put on mitigating risk. Entire strategies have been built to deal with – or skirt around - a failure rate of 95% or more. In the tech world, entrepreneurs focus heavily on the 5% chance, or less, of finding those prized unicorns. Despite the almost existential difference in outlook, the forces that govern movies and start-ups are remarkably similar. As was made clear in this recent New York Times articleabout venture capital firm Andreessen Horowitz, both Silicon Valley and Hollywood follow what is known as a power-law distribution. Put simply, the overwhelming majority of investments lose money, a small fraction break even or become marginally profitable, and an even smaller fraction become wildly successful. Faced with such similar economic conditions, Andreessen Horowitz borrowed its pro-talent investment strategy from the Hollywood talent agency CAA. For their part, film investors would do well to mirror the portfolio strategies of Silicon Valley angel investors.

Exactly what kind of portfolio strategy depends on where you are perched in the filmmaking hierarchy. If you happen to be atop one of the major Hollywood studios or large independents, then you already base your financial stability on spreading resources across a large and mixed “slate” of productions. The portfolio returns generated by those slates are dependable enough to keep attracting institutional investors whenever the studios look for outside co-financing. Under such “slate financing” deals, a fund manager, for example, might partially finance the next 25 or 30 movies and split the profit with the studio after a distribution fee has been deducted.

Statistically speaking, as I explained in a 2011 article forFilmmaker Magazine entitled “How To Raise a Billion Dollars,” spending nine figure dollar amounts making movies is way more prudent than risking just one or ten million. Not only do the bulk of industry profits go to massively expensive extravaganzas, but the odds of losing your shirt shrink once you start spreading your investment bets across dozens of Hollywood-scale films with guaranteed distribution.

That is certainly what Wall Street persuaded itself during a four-year investment orgy that saw a combination of banks and hedge funds sink as much as $15 billion into U.S. studio production slates. The global financial crisis eventually turned that money spigot off in late 2008, but not before leaving behind a wealth of indulgently budgeted films and another footnote in the history of film financing follies. Today, slate financing is back in vogue across Hollywood but on terms that have been dictated by the lessons learned on both sides of the negotiating table.

What first spurred this flood of “smart money,” beyond the need to park a huge volume of institutional investment that was hungering after new asset classes, was that algorithm known as the Monte Carlo simulation. An outgrowth of theManhattan Project, this mathematical program was designed by rocket scientists who wanted to create random combinations of known variables in order to simulate the range of possible nuclear explosions. Little did they know that their probability analysis would end up being used sixty years later to predict different kinds of bombs.

That this scientific method was nicknamed after Europe’s most famous gambling mecca did not stop sophisticated investors from believing that film can be a predictable, data-driven business. Relativity Media’s Ryan Kavanaugh, the lynchpin behind so many of those massive slate financing deals, still professes to using regression analysis when deciding which film projects to invest in at his own independent studio. Variables such as cast, filmmakers, genres, release dates and ratings are fed into his back-room computers. The project is then run through ten thousand scenarios and a percentage figure spat out for how often – and to what extent – that movie will likely be profitable. While Kavanaugh continues to trust in the numbers - “We probably have ten times the data on our films than any TV pilot has had in history” he told the 2013 MIPCOM television convention – those numbers are used more as a rejection tool than as an infallible green light.

At the height of the slate financing craze, institutional investors were gulled by their “quants” into believing they all would share in the 13%-18% annual rates of return that studios enjoy. Not everyone did, of course. At the 2010 Film Financing Forum in New York, Kavanaugh offered a more realistic assessment. Yes, you might still see a 25% return on your investment, but you can just as easily suffer a 10% loss. "You can lose a little, or make a lot, or lose a lot and make very little. It comes down to timing. The longer you are in the business, the less volatile it becomes." Judging by the volume of institutional and private money that has now returned to the film co-financing, both from the US and particularly Asia, one would imagine those swings have ironed out somewhat - and that the players involved are indeed playing the long game.

There is always the danger that such systems are merely mathematical smoke screens. This is not a problem unique to the film industry. Benign-sounding tools such as cost-benefit analysis allow businesses in general to shroud themselves in a veneer of pseudo-science that also insulate them from ethical issues such as job cuts or financial chicanery. But imperfect benchmarks are better than no benchmarks whatsoever especially in industries like film where meaningful comparisons are so hard to come by. More to the point: how can you possibly diversify your portfolio unless you have some mechanism for evaluating and contextualizing the different film-story ideas that make up that slate?

In many respects, a co-financed Hollywood release slate is roughly the equivalent of a diversified film fund, one that also happens to be managed by some of the industry’s most powerful gatekeepers. But unlike managed funds that operate across many other industries, the barrier to entry is an extremely high one for private individuals who want to get a piece of the Hollywood studio action. Even though slate financing funds are sliced into smaller senior, mezzanine, or equity tranches, these are invariably acquired by institutions able to offset those hefty tabs. The fact is, when it comes to directly investing in Hollywood movies, only billionaires, big financial firms, potentates and Chinese internet giants need apply.

For everyone else, the answer is to turn to feature films financed outside those Hollywood studios and yet still able to secure distribution in the global marketplace. This requires a very different investment vehicle than is currently available in the marketplace. For sure, there are a number of film funds already in existence, and there are numerous production companies with private equity money behind them. But there is still no portfolio that can offer the same financial accessibility, project breadth, and investment diversity to which the tech angels in Silicon Valley are accustomed. Good luck trying to find a suitable instrument for investing $10,000 per film, for argument’s sake, across a slate of 50 films spanning all cinematic genres and geographies.

Broadly speaking, investing can be done in one of two ways. Investors can choose the passively managed index fund in which the manager tries to mimic the returns of, say, the S&P 500 by purchasing all of the constituent equities in that index. Or, there are the alpha-seeking actively managed funds in which the manager uses in-depth analysis in an attempt to outperform such benchmark market indices. In the particular case of film investing, such a choice has been largely moot: unlike other alternative asset classes such as fine art and finer wines, there are no industry benchmarks to gauge the performance of the film sector. Acquiring shares in the Hollywood studio conglomerates might seem like a good proxy until you realize how heavily weighted those stocks are towards other businesses such as television, cable, theme parks, and publishing that are also part of those media empires. There are a handful of pure-play independent film & TV studios that are listed around the globe – prominent examples include both Lionsgate and India’s Eros International on the New York Stock Exchange and China’s Huayi Brothers on the Shenzen Stock Exchange. But there are not enough independent film companies trading publicly to comprise a diversified basket of shares that can represent the indie marketplace as a whole.

Until index-based film investing becomes a viable option – something that this Part IV of our White Papers will address towards the end – the best conduit remains an actively managed fund. For investors, the big benefit is that these professionally run funds allow access to numerous opportunities that individuals would not be able to ferret out on their own. Investors have a way to invest in independent films in much the same way that the Hollywood studios invest in their own productions. By pooling money with other investors, both large and small, it is possible to invest in a volume and breadth of film assets that might be too difficult, time-consuming, or expensive to access as individuals. Such funds address a number of the challenges inherent in filmmaking. For one thing, they help streamline and simplify a process characterized by complexity, reams of paperwork, and the need for considerable due diligence. Film is a collaborative enterprise involving any number of financial and creative partners, which means that those involved need an assured way of vetting all counterparties. Selected properly, professional managers can provide a way to navigate these complexities. Furthermore, in a business as relationship-focused as film, veteran players are the ones who get an early look at the most promising upcoming investment opportunities. But, above all else, funds ensure much-needed diversification. Just as this helps to iron out the uncertainties associated with start-up technology investments, it also reduces the impact of any fluctuations in film market behavior or audience taste.

Such audience fickleness is not even consistent. In the past, a film that performed well in one major territory could be relied upon to work in most others. Not so now. An extreme example of such regional discrepancies occurred in 2010. “Toy Story 3” may have been the most successful film worldwide that year with a global total of $1.063bn, but it didn’t even make the top ten list in the United Arab Emirates, still one of the fastest-growing box office territories on the planet. The world’s second highest grossing film, that year’s “Harry Potter” sequel, also failed to make the list. On the other hand,“Salt,” which ranked 21st that year in the US, was a hit in the Arabian Gulf countries and finished seventh, just ahead of Bollywood blockbuster “My Name Is Khan.”

The latest research by the European Audiovisual Observatory, drawing on its Lumiere database, provides another illustration. There were a record-high 1,603 European feature fiction films and documentaries produced for theatrical distribution last year by the 28 European Union member states. Such films enjoyed a 33.4 market share of admissions across the EU, the highest percentage that European films have recorded since the Observatory started collecting data in 1996. Elsewhere in the world, however, their collective market share is no more than paltry 3%. Even within Europe, those homegrown successes did not experience uniform success. While “Paddington” and “Ocho Apellidos Vascos (A Spanish Affair),” Spain’s biggest grossing film of all time, were continental-wide hits, most European blockbusters did the bulk of their business in their own lingual back yards. Such parochial successes include British sequel “The Inbetweeners 2,” the German period drama “The Physician”and the French culture clash comedy film “Qu’Est-Ce Qu’On A Fait Au Bon Dieu?” whose $174.1 million put it 27th on the global list of highest grossing films in 2014.

One way to override such geographical variances is to have pieces of every market pie, achievable only through a diversified global portfolio. A daunting proposition. In the past, industry wisdom suggests that a large-scale, independent studio making 12 films a year will probably get eight losses, two break-evens, one pretty good performer and one sizeable hit that will help ensure overall profitability. This is backed up by research. In a 2010 NYU paper looking at the ROI of independently financed films, Benedetta Lucini kept randomly selecting portfolios of 8-10 known films in order to see what the overall returns might be. Here is what she concluded:

“In this particular randomization, the number of portfolios with positive returns outweighs that with negative, both in number and size. There are 38 portfolios with negative returns and 44 portfolios yielding more than 20% return. Therefore by allowing diversification there is a larger probability of actually achieving a positive return, rather than on single investments, because of successes covering for the effects of losses. When repeating the random selection of portfolios for 150 iterations, it is interesting to note that the number of negative portfolios will rarely be 50% and never above.”

But since then not only are films seeing sporadic returns across the globe, but there has been a sharp ramp up in production. Not just in Europe, but everywhere. This combination is changing the table stakes in that portfolio arithmetic. “It’s funny,” observed producer Mynette Louieat one of our FILMONOMICS TALKS last year, “for the longest time people have used this stat that only one in every 10 films makes its money back. I think it’s more like one in 20, one in 50 now, because there’s such a glut of films out there because of technology.”

Paradoxical as it might sound, assuming a larger equity position in a film project is one way of reducing one’s risk exposure on that film investment. The greater ownership control you exert over the production, the higher up the pecking order you can be when it comes to distributing any revenue streams. As Hollywood entertainment lawyer Bill Grantham explains:

“It became increasingly clear that the obvious way of reducing risk — investing less — put the funds actually invested at greater risk, since the investor putting up 20 percent or even 50 percent of the production budget could only rarely establish a share of the returns and the priority that would predictably lead to a bare recoupment of the amount invested, let alone a profit. The alternative, to put up a much greater amount of the funds required — perhaps the entirety apart from the soft money — largely eliminated the risks arising from poor interparty or intercreditor positions.”

Needless to say, the amount of capital required for such investments are beyond the means, and indeed tolerance, of most individual investors, especially if those individuals are looking to build that diversified portfolio. Thus, to protect themselves from being forced by concentration constraints into overly subordinated positions, investors need to invest as part of a larger collective. This not only mitigates performance and execution risks, it also helps to alleviate the unusual cashflow characteristics of the film business. Industry estimates suggest that on average roughly 60% of film “first cycle revenue” is generated within 12 months of release, and 80% is generated within 24 months.

But there are other exit possibilities that can turn such averages on their heads. A well-received festival film could see an instant profit should it be sold for a multiple of its production budget to an eager distribution company fending off rival bidders. No one can predict which films will end up the happy beneficiaries of such auctions; there are too many incalculable factors that come into play. The timing of cashflows is therefore irregular, leaving individual investors to deal with unexpected cash shortfalls or windfalls. The growing influence of streaming platforms and the release window experimentation that has accompanied their arrival has only complicated matters further. A logical response to all is to mimic what financiers do when confronted with endless variables in other sectors that are no less afflicted: syndicate risk. By investing aggregated capital across a portfolio of films, funds can insulate investors by achieving diversification, commanding sufficient capital to eliminate the possibility of over-subordination, and regularizing cash distributions.

The tech world already serves up one innovative new model for collective investing: AngelList’s Syndicates. Launched in 2013 by the online fundraising platform, this syndication service allows any accredited investor on AngelList to raise venture-sized rounds of money by allowing small-time backers to pool their resources behind a leader who’s investing in start-ups. AngelList Syndicates formalizes what so many angels already do in Silicon Valley: find and invest in companies they like and then persuade their friends to invest alongside them. Just as you might decide to put money in a particular mutual fund, based on the track record of its management, so you can apply to any syndicate and put money behind the crowd-gathered investments of its designated Syndicate Lead. Suddenly, you can invest small amounts across a wide array of opportunities.

In theory, AngelList’s syndication platform allows average investors access to opportunities that they would not normally be privy to – or have sufficient market expertise to evaluate properly. They call this deal flow. And such is the tech world’s obsession with proprietary deal flow that investors go to great lengths to steal a march on competitors and differentiate themselves in the marketplace for ideas. Referral grapevines are cultivated, industry events aggressively mined and positional think-pieces constantly offered up on websites, all in the quest for an inside track. Early-stage tech investor Mark Suster says he first relied on lawyers as his own advance warning system, since they are the ones entrepreneurs turn to in order to get their company registrations done. Today, he views blogging as his “best source of high-quality deal flow imaginable.” We know this because Suster blogged about it a couple of years back.

Film investors don’t tend to be so open about sharing their investment strategies, let alone disclosing their investment positions. Just compare tech’s open courtship displays with what happens in the movie business. Other than the occasional yacht party at Cannes, film investors are leery of even announcing themselves, far less tweeting about their financing strategies, for fear of being swamped with pitches. They just trust that the industry’s inner circles will beat a path towards them and deliver the goods.

Of course, a proactive investment stance does not necessarily translate into greater deal velocity. For all their come-hither posturings, it is not unusual for VCs and angel groups to fund less than 1% of the hundreds of business plans they review in any given year. But by virtue of sheer volume, they can lay claim to ever-greater deal-making intelligence. Having sifted through a mountain of proposals, Silicon Valley players have developed an exquisite nose for what constitutes the real deals – and, just as crucially, a strong stomach for failure. The fact is Silicon Valley is way more crucible than it is cradle. More than 90 percent of start-ups flame out and yet setbacks are embraced here, not so much as friends, but as teachers.

Counter-intuitive as it might sound, investment history has tended to side with those who have made those bold, early leaps into the dark. Their secret sauce, at least according to the various VC general partners I have interviewed, has been based around “pattern recognition.” Certain characteristics are common to even the most life-altering, game-changing, mold-breaking ideas. We can say the same about moviemaking. Look at foreign film sales, for example. To the untrained eye, licensing films to international distributors is really just a matter of price and salesmanship. Talk to the sales agents themselves, however, and you will learn that the best among them are highly attuned to the herding patterns within the market and act accordingly. Top sellers know that some territorial buyers are more influential than others; they serve as market barometers. Sell to them first, even if at discounted rates, and they can be sure that other territory sales will soon follow at higher rates, bringing along with them wider distribution. But only constant scrutiny will tell them who these bellwethers really are. In some cases, knowing which buyer didn’t buy a film is as instructive as knowing who did.

Experience is also vital to avoid being blindsided by industry showmanship. Someone’s IMDb film credits might well confirm their involvement in a particular film, but not the degree to which they were responsible for that film’s market performance. That can only be determined through background digging done by qualified professionals discerning enough to know what information to trust and how to find it. The same goes for any claimed distribution deals, financial partners, or talent attachments. It takes experience and proper due diligence to establish their veracity, as only the most experienced will tell you. In an article that appeared in the industry newspaper The Hollywood Reporter, a handful of top dealmakers outlined six of the stages that an independent film needs to navigate in order to optimize its commercial prospects. What’s striking is that even five years later, many of the recommendations apply to today’s marketplace.

"It is critical to assess the global market's appetite for a package in advance of budgeting and shopping it to financiers. Presenting an unrealistic package or budget can kill a project's momentum." - Micah Green and Roeg Sutherland, CAA

"Seek out financiers that share the same vision as you on the script, cast, final cut, even the tone and genre. When calculating the cost of financing, make sure the timetable for returning production equity (like a bank loan) is calculated properly -- sometimes filmmakers expect returns in 12 months, for example, when a realistic time frame is 18-24 months. Get a realistic schedule for production, delivery and collecting funds from the distributor -- this will help you avoid unexpected interest costs or a lender foreclosing." - Graham Taylor, WME Global

"Highly structured, multiparty deals can appear attractive because they may provide more creative freedom, a higher budget and/or more economic upside. However, these deals can fall apart when one piece of the financing falls out, leading to hefty transaction costs to put Humpty Dumpty back together. A single equity source or a co-financing with a distributor is often the more prudent option." - Andrew Hurwitz, entertainment lawyer, Frankfurt Kurnit Klein & Selz

"The tax credit situation in America is volatile -- some states are running out of money for their programs, and vetting them is a whole business in itself. You also have agents desperately trying to do pay-or-play deals for their clients, so you need to know the point when you can commit to key actors without 5 being on the hook for a lawsuit. Surround yourself with as many professionals as possible -- attorneys, equity financiers, tax credit buyers and international sales agents." - Cassian Elwes, film finance packager

"Oftentimes a filmmaker will come to us excited about a $4 million offer, but it's not real until it's in the bank. Since you sometimes can't vet a financial source, you should put their money in a safe escrow account overseen by a solid, neutral attorney. Make sure the funds are designated for the film and can't be removed just because they change their mind." - Rena Ronson, UTA Independent Film Group

"Filmmakers should seek to negotiate into the financing and distribution deals clear milestones which, if not achieved by a certain date, allow the filmmaker to terminate the agreement and reacquire his rights in the film free and clear." - Andrew Hurwitz, entertainment lawyer, Frankfurt Kurnit Klein & Selz

Their advice underscores the complexities of independent filmmaking and why it is a business that has been left to the informed insiders. The film industry, as we are constantly reminded, is a relationship business. Connections, reputations, and talent instincts are its most prized assets – hence the considerable time the film industry spends networking in an effort to cement such trusted contacts. It is also why film investors should ally themselves wherever possible with professionals who are plugged into those relationships and who are seasoned enough to read the industry signals. Investors’ probability of success will improve substantially under veteran guidance - despite the self-fulfilling dangers that come with that such heavy reliance on prior industry ties.

Drawing on the expertise of a professionally managed film fund goes some way to achieving that inner guidance – provided such a fund is able to access or mirror the market know-how exhibited by the kinds of packagers and dealmakers quoted earlier. This is where the online film financing platform Slated enters the equation. From its onset, Slated’s goal has always been to illuminate the path by which projects are packaged and financed for sale to distributors. As with the film industry itself, Slated is a momentum-driven platform where interest breeds interest. The most successful projects on the platform tend to surround themselves with influential champions and as much “social proof” as they can muster in terms of compelling videos, social media mentions, and any available metrics demonstrating film comparables, global book sales, YouTube hits, fan-base followings, and other evidence of early traction and a predisposed audience.

By shedding light on this byzantine process, using the familiar organizing and network-building principles of social media, Slated has tried to make it as simple to invest in films as it is to buy shares in a listed company – or a start-up. Accordingly, Slated started out by offering film investors the same tools for measuring early traction as tech investors already enjoy through platforms like AngelList. It’s a holistic picture of the movie marketplace. Rather than draw from the experience and tastes of one chosen fund manager or handpicked advisory teams, Slated relies instead on the collective experience and tastes of the entire independent film market - as expressed through the widest array of global sales companies, production facilities, and prominent film support organizations to ever embrace a single online business-to-business marketplace. Taking advantage of its tracking feature, Slated users can see which projects industry influencers and powerhouses are putting their resources behind. Just as sales agents happily take their cues from the market behavior of their buyers, so film investors now have a conduit for using the industry’s most experienced packagers for their own guidance system, reducing some of the information asymmetries that present a key risk to new film investors.

More radical still, Slated has ensured that every film company, every project package, every film executive and artisan, gets “scored” on the platform. Unlike the tech world where you can lay your hands on all the valuation and comparative data you might possibly need, the evaluation process in film is far less open book. All manner of moving parts are weighed up to anoint those talents and projects most likely to succeed. And yet we have little sense of what matters most. Anticipation of audience tastes plays just one part in that hidden decision-making matrix. Also in the mix are a host of business-to-business metrics that include performance data, track records, market dynamics, awards recognition, budget/genre considerations and an accumulation of collective industry wisdom regarding team combinations, execution potential and talent credentials.

Historically, all that institutional judgment has been siloed away in industry heads. By exposing that process through numbers, Slated’s scoring system is the first ever attempt at creating a points-based system designed to reflect how the industry evaluates what’s being pitched to them at any given time. The scores are indicative, not absolute, and keep flexing up and down as new informational data-points flow constantly through our automated system. The end-goal is not to put a final number on any member’s individual worth or potential value, but to incentivize better packaging practices based on how things might be measured by their business peers.

This is no easy task. As executives, we lean on our years of interpretative experience and then seek corroboration from supporting data and the opinions of our trusted networks. Valuable as the resulting information can often be, it also creates a climate of inconsistency and uncertainty across the industry. Temperature readings on talents and their ideas are so variable and subject to change that even those at the heart of the gatekeeping business resort to games of industry whispers and second-guesswork. If only we could create a more systematic and reliable first read of the relative strength of film projects at their very inception as screenplays, rather than wait to be held hostage by the whims and vogues of the packaging process. That era is about to begin with Slated’s imminent move into data-driven script analysis, an algorithmic leap that also opens the door to a whole new class of film finance, index-based funds.

As irresistibly argued by Colin Whitlow in his guest Filmonomics post, adapted from think pieces he wrote as a fellow at New York University’s Cinema Research Institute, the film industry is weakened by the absence of an objective measuring tool for would-be film investors. Many mature industries have created an index to help the investment community get a read on their sector’s financial climate. The Dow Jones Industrial Average, a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq, serves as a real-time proxy for mainstream financial market activity and economic health. The Case-Shiller Home Price Indices, calculated and kept monthly by the statistical rating organization Standard & Poor, are well-respected indicators of real estate performance in the U.S. Even esoteric asset classes have their own benchmarks. But the film industry has no such like-for-like barometer. For better or worse, film “comps” are the currency by which film projects are evaluated – and yet statistically valid comparisons are becoming ever harder to mine. Independent cinema is in urgent need of greater plasticity and transparency. It is into this informational void that Slated is now jumping.

As film executives so often like to say: It is all about the story. Create something special and people will line up and bust blocks around the world. Nothing else should matter. But anticipating what will strike a chord with audiences has proven elusive to film producers and studio bosses since the dawn of cinema. For the longest time, executives had no choice but to rely on their honed intuitions and the added protection of a well-diversified film slate. These days, they are leaning more on technological wizardry to supplement those hunches with more objective data analysis. Netflix uses collaborative filtering algorithms to predict customer preferences; others have turned to brain scans and biometric data to pinpoint levels of audience engagement with trailers, scenes, and characters. And yet for all this predictive science, box office “sleeper hits” still happen and films that flopped in one medium end up as enduring classics in another. Such surprises are part of cinema’s very appeal, of course – proof that, hey, you never know.

Until now, the response to this audience uncertainty has been to switch focus to what the film industry likes. Until such time that producers become their own publishers, reaching their paying audience directly through their own distribution mechanisms, there has been no crying need to understand the impulses of the ticket-buying public. Because for all intents and purposes, that public isn't a filmmaker's true audience anyway; the real audience is the packagers, sales agents, and distributors who will guide a film idea's complicated journey towards the screen. After all, unless the film industry responds well to a particular project and buys it for distribution, there simply won’t be any box office or VOD revenues to predict.

By focusing on realistically budgeted projects that are packaged around their sales appeal to distributors, investors have the best chance of crafting a diversified portfolio that has a decent shot of withstanding the volatility of individual film performances. That at least was the risk-mitigating argument originally laid out in these White Papers two-and-a-half years ago. Compelling as that might seem, it is an investment strategy now in need of a New Act. There are just too many adverse and contradictory forces at play: The increased volume of filmmaking means that distributors can afford to be so much more selective these days; in an effort to appeal to these increasingly choosy buyers, every project is chasing after the same shrinking pool of bankable stars who can trigger pre-sales financing; and yet production slates have to be so much larger now to compensate for the shrinking odds of a blockbusting success. Unless you have the capital to fully finance an extensive slate of films, preferably one that speaks multiple languages and appeals to a diversity of demographics, the investment picture is becoming ever riskier - even as more money is pouring in.

An alternative response, to return to an earlier theme, is to find a way to invest across the entire independent storytelling spectrum, or at least a substantial portion of that spectrum. All the trends in media and entertainment point one way only: To a world of ever-increasing consumer demand for high-calibre content. Not just films showcased in theatrical venues, but premium television series and stories that premiere on online distribution platforms. Put those together and you have a very attractive asset class indeed. The problem comes, of course, in identifying which film projects will make the grade and finding a way to invest behind the tailwinds of their combined success. Even if it was practicable, investing a small amount in every one of the more than 4000 film projects submitted to Sundance makes no sense from a financial return point of view since such a small percentage of these will secure some kind of paying audience. But if Slated’s new script analysis and projection tools come even close to establishing which ideas have the strongest likelihood of commercial viability - based on their global audience appeal at retail level as opposed to their discounted sales value to distributors - then the foundations have been set for an independent film benchmark or series of benchmarks. Those like-for-like measures will not only serve as an invaluable reference tool for investors but create new trading possibilities that mirror the market fluctuations of the sector as a whole. For investors, any passive index fund that emerges out of this will have the added bonus of minimal expenses compared to actively managed funds.

If index funds – and by extension some kind of independent film exchange of measurable projects – sound far-fetched then once more at what is happening in the sports world. In October 2013, a San Francisco outfit by the name of Fantex launched the first trading platform for stock linked to the value and performance of athletes. Laughed off at the time as an elaborate gimmick, Fantex has already signed up seven football players, each of them lured by a one-time fee in return for a set percentage of all future earnings. In the case of Chicago Bears receiver Alshon Jeffery, that paycheck totaled an upfront $7.94 million, a sum that Fantex covered through the equivalent of an IPO. His “stock’ is currently trading at implied valuation of $70.7 million. There are many solid reasons why this sports exchange won’t translate directly to film investing, not least of which might well be that ban on film futures. But it does show the appetite for alternative forms of investment and the desire of entrepreneurs to keep experimenting with new financing mechanisms. Unless they do, the film world will be stuck in a fearful rut where no one dares break new creative ground. Someone, somewhere, has to find a way to bring back risk within a business model that works for film. Cinema is a risky business - which is precisely what makes it so special.

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