Why would anyone invest crores in an industry where most ventures bomb? Ask VCs gung-ho on Indian cinema projects
When Madhur Bhandarkar’S Heroine, made on a claimed budget of Rs 20 crore, grossed Rs 25 crore in India in its first three days of release (and over $500,000 overseas), among those celebrating its box office draw were the owners of a little known venture capital (VC) firm called Cinema Capital. Their bet had come good.
Cinema Capital is one among many VC firms investing in Indian cinema. The likes of Highground Enterprises, Magus Entertainment and Springboard Ventures are among the big names that have emerged as financial saviours of an industry long dependent on moneylenders who charged exorbitant rates and often used strongarm tactics to get their money back.
In the 80s and 90s, piracy was not the only scourge of the Hindi film industry. It was riddled with structural problems: disorganised, archaic production practices and lack of institutional funding. Moneylenders would finance films by charging annual interest rates of upto 40 per cent on loans. As a veteran director-turned-producer recalls, a single day’s delay in repayment could have thugs armed with sticks and guns at one’s door.
Just over a decade later, things have changed. So swift has the change been that it is hard to believe. Why would seemingly sensible and cautious venture capitalists risk their millions backing products in an industry known for high risks and volatile returns—and where only about a dozen of the 1,000-odd productions are commercial successes in any given year?
Yogesh Karikurve, CEO of Magus Entertainment, has a hearty mountain-top laugh when we pop that question. “Yes, some people think we are crazy,” he says, having just finished climbing the Almaty in Kazakhstan, where he is attending a forum on music and Indian cinema. “Most VCs don’t like to get in to film funding as it is a high-risk proposition,” he says, “If they do get into funding, they do so largely based on an assured director and star cast. Of course, there is a glamour quotient that tips the scale away from other industries. But to me, one of the key attractions is that the incubation period for brick-and-mortar businesses is [longer] and hence its cost-of-capital increases; in films, the risk is higher, but the period of returns is lower, typically three to six months at best.” In the case of Heroine, it took just 72 hours to recover the money, with more of it rolling in.
Adds Satish Kataria, managing director of Springboard Ventures, “Every VC fund has an investment objective, and VC funds that invest in movies have dedicated themselves to leverage opportunities in the media domain, irrespective of the risks involved. These funds were formed in India [on] inspiration from similar funds in international markets, and were [looking at how innovatively] Indian films could be funded. It was assumed that like in the West, the Indian film industry is evolving and there are ways to buffer the risk through multiple revenue streams.”
Much like other VC firms, film funders also look at the track record of a client, credibility of the business plan (the film’s storyline and star cast in this case), and market saleability of the product. While it is not very difficult to take a call on the first two, how does a film VC gauge market potential? Unlike a regular need-based business, cinema is all about fuzzy appeal. So how does one predict audience response? Even big-budget films on hot themes with hot stars directed by hot directors are known to flop, so how can a funder assure himself of success?
Kataria, who was earlier at Vistaar Religare, one of the early movers in the film VC arena, explains: “Primarily, it’s the strength of the script, the creative and production team behind a given project; how justified are the production costs and then the star cast? Some VC funds have structured benchmarks, which help estimate the kind of potential revenues a film will make, based on its team, star cast, budget and genre. That helps in an investment decision.”
Karikurve says that for him, “A film is based on a tripod: director, script and cast, in that order of importance. Internationally, the first thing that film VCs look at is a script. But I believe that if the director is good, then he can make even a simple script look great and extract the best performances from his cast. After all, it’s his vision.”
BIG BANG FOR THE BUCK
Despite the uncertainties, film VCs are gung-ho on the industry and certain that in the longer run, the moolah will flow right back to their coffers. “We have six films on our slate going forward,” says London-based Karan Arora, CEO of Highground Entertainment. “Two films, Kya Dilli Kya Lahore and Charlie Ke Chakkar Mein are in post-production stage and two more are under production, Chai Shai Biscuits and Let’s Talk Love. Another two yet-to-be-titled projects will be going on the floor early next year. In total, around Rs 30 crore has been pumped in from our end on these films.”
Arora adds, “In most cases, we expect a positive RoI (return-on-investment) within three to six months of release. Depending on the IPR (Intellectual Property Rights) deal/partnership, it may keep paying the investor for a long long time through royalties and re-sale of exploitation rights. We mostly retain the rights or share them in partnership.”
Cinema Capital too has its hands full after Heroine. The Abhay Deol and Arjun Rampal starrer Chakravyuh has just been released, and Chittagong, a small-budget film by the Silicon Valley returned Bedabrata Pain, has received critical acclaim. Vega Tomatia, manager, business development, Cinema Capital, even has a small role in the latter, but it is the RoI that she is keener on.
While VCs use set criteria to pick films for funding, the important thing for the industry is that they are willing to look beyond safe formula films with big stars. “For example, a movie like Vicky Donor, based on sperm donation and without a big star, would have been taboo a few years ago. Now such films are sure to get VC funds,” says Karikurve.
He, however, believes film funding in India is still at a nascent stage. “Thankfully, there are internationally aware filmmakers like Anurag Kashyap and Dibakar Banerjee, who have been very successful in raising funds through co-production. Also there are a lot of smaller production houses that have been pooling funds to make movies, and this augurs well for Indian cinema, as the risk [gets spread] and sales territories increase if a foreign co-producer is involved.”
TRANSPARENCY AS TRUMP CARD
Banks and institutional lenders take an industry seriously only if it meets established norms of transparency and honesty in all dealings, something that could not have been said of the film industry till some years ago. Here, VCs claim to have catalysed a transformation that was underway. Says Karan Arora of Highground, “There has been marked improvement in the funding environment over the past decade. It started with corporates joining hands with the film industry, and now with India’s growing rich community, many [High Networth Individuals] want to be film financiers. The image of film funding has also gone through a radical change; whereas previously, this was an area of controversy, it is rarely the case nowadays, and probably for most now it adds a glamour quotient to their profile.”
Yet, problems abound in film financing. Arora says, “There are a lot of fly-by-night shops opening up who use the glamour element to entice a pool of funds and try to announce a slew of films without much knowhow on film production and its dynamics. A sincere, organised and consistent funding model is still missing in India.”
Kataria is more hopeful. “It is good to see that the film funding environment in our country is getting increasingly transparent,” he says, “with listed production houses and regulated film funds, which have incorporated daily cost-monitoring mechanisms and have reputed auditors backing various film accounts. However, a lot is still to be done. While transparency is [going up], the funding as such is limited and is still largely driven by studios in India. The emergence of concepts such as crowdfunding will aid further transparency and will open up funding opportunities for promoting talent.”
It is a rare film that makes back its money within its first week, but even other films that succeed are quick with their returns compared to other business sectors, taking no more than a year to turn in profits. “For any movie, the thumbrule is that about 60 per cent of revenues should be recovered in the first year of release,” says Karikurve, “In the case of movies not meant for a theatrical release, the dynamics might change and the ‘long-tail effect’ will come into play.”
Adds Arora, “The returns vary from project to project… development funding, LIFO (Last In, First Out), P&A (Prints & Advertising) partnership, etcetera, unless there is a slew of films being funded where an exit policy is customised on the basis of a long-term perspective riding on IPR valuation. But, hopefully, we make money by the end of 12 months.”
Kataria too says the payback schedule depends on the kind of project it is. “Some common structures are LIFO, wherein [VCs] invest in the last leg of film production but expect [their returns] from the first tranches of box-office revenues, or on a pro-rata basis, where both the production house and fund [get money back] from revenues in proportion to their investments. But the standard payback time is 18 months.”
However, like in any other business, VCs do not always strike success. In fact, in bad years, there may be more misses than hits. “In the initial years,” says Kataria, “thanks to satellite television, music rights and the marketability of Hindi films in overseas markets, we had multiple revenue streams to buffer losses in any one area. This seemed true till two-three years ago, when satellite rights and home video rights of Indian films were growing. However, in the recent past, these rights have not grown to match the revenue ratios of Western films—as Indian films still predominantly remain dependent on theatrical revenues. This perhaps also explains a slow phase for Indian media funds, as they adopt a wait-and-watch policy and become conservative in their investment outlook.”
FOR THE LONG HAUL
In spite of the Indian market’s peculiarities, VCs are in no mood to pull out. The future as they see it is bright. As Arora says, there are several other secondary players who take stakes in a film’s success, from music and satellite partners to national and international brands that have partnerships for in-film/co-branding deals. They typically put in their money before a film’s release. This lowers VCs’ risk exposure.
“Overseas, pay-per-view and other new forms of exploitation rights, especially related to the internet, are increasingly adding up to provide a cushion-effect, so filmmakers are not totally reliant on box office figures. Further, ‘soft money’, also called a ‘global film production incentive’, is being leveraged by many VCs for films being shot overseas. This sometimes substantially mitigates a producer’s exposure. There are various forms of incentives available across the globe in different countries with different qualifying criteria. Usually the effective benefit of such incentives varies from 15 to 40 per cent of the total budget of the film.”
Another trend popular in the West is gaining traction in India: crowdfunding. The concept is not new. It was pioneered here by Shyam Benegal’s Manthan in 1976. Some 500,000 dairy farmers of Gujarat contributed Rs 2 each to raise capital for the film and then arrived in truckloads at cinema halls to watch it, making it an instant success. Crowdfunding has seen a second birth with films such as I Am, for which National Award winning filmmaker Onir and his co-producer, actor Sanjay Suri, collected over Rs 1 crore from 450 small VCs and film enthusiasts by putting up fund requests on Facebook, Twitter and other social networking platforms. “We got 49 investors and almost 350 other well-wishers who contributed amounts ranging from Rs 1,000 to Rs 5 lakh,” recalls Onir.
Kataria says that crowdfunding is still in its infancy, but is proving to be strong. “India will soon see its first and most rewarding crowdfunding platform, Cinebutor.com, which will be launched in less than a month,” he says, “Film funds here are still in their evolutionary phase and hence are conservative. However, with increasing transparency, their activity may rise.”
Onir, however, says crowdfunding can only be seen as an “able ally” of VC funds in India. Taxation and other laws restrain filmmakers from sharing profits with contributors to a crowdfunded project (such a model could be seen as a chit fund), though efforts are being made to find a legal way around this. But, all in all, everyone is better off for legitimate financiers. Don ka paisa dangerous hi nahin, unnecessary hai.