Approaching Private Equity: What Media Entrepreneurs Should Understand

Approaching PE

Media is hot right now.  It is also a high risk proposition that Professional Investors are traditionally wary of.  Media entrepreneurs should understand their proposition from both sides of the equation.

To paraphrase Sun Tze’s The Art of War, know your investors as you know yourself, and you will be victorious.  One of the things Sun Tze’s treatise implored was to understand the other side.  Not doing so effectively means a step backwards for every step forward; getting nowhere. 

Most entrepreneurs have experienced this while trying to raise capital for their business.  For media entrepreneurs, the advice is doubly important. 

Understand The Money

The arguments are endless about whether or not Private Equity and Venture Capital are the same thing.  For entrepreneurs, they are two sides of the same coin.  Private Equity fund managers like to think of themselves as the mature side of that coin.  Some will argue that Venture Capital is only for startup companies, while Private Equity is for later-stage companies with demonstrable revenues.  Both are true and there is a lot of overlap.

Both invest in the equity of private companies, as opposed to companies that are listed on publicly-traded markets.  That is the basic distinction.  They are both private equity, and they are both overly sensitive to the distinctions between them.  Be aware, and move quickly forward.

Read this related article.

Is Your Media Business Ready for Professional Investors?

For media entrepreneurs eager to go pro, there is no greater obstacle than lack of capital.  The Media C-Suite offers some advice, and a few investors, to help jump those hurdles. 

The real entry level knowledge for raising capital is understanding the difference between equity and debt.  Study this.  The internet is full of high-quality information from thousands of finance transactions over decades of deals.  Do your research and know what you are approaching investors with.

For most media entrepreneurs, raising capital for a business is about equity.  This can be confusing for the un-initiated, as investors in startup companies have become fond of what’s known as the “Convertible Note”.  This mechanism for venture capital investors is a form of short-term loan that converts to shares later on.

Do the research.  Understand the investors and you will be one step closer to raising money.

Understand The Business

For a hundred years, film-makers have chased investors for money to produce films.  The results have been both glorious and utter disaster.  Not in equal measure at all.  Most film projects never get made into anything resembling a completed movie.  Of those that do, most fail financially.  The reasons are many, complex and can be discussed at length elsewhere. 

Professional Investors are both experienced and well-advised.  They know that investing in the Media & Entertainment industry comes with real risk.  What they are keen to do from the outset is seize the opportunities and avoid the obvious pitfalls that have ruined many investors before them. 

What is obvious to Professional Investors may not be so obvious to less experienced investors.

First, a one-off film project is non-starter for professional private equity investors.  A professionally produced film project will raise the vast majority of its production budget from debt investors under very well-established principles of film finance.  Again, a topic for another article.

Second, media entrepreneurs are not necessarily film-makers.  Production companies may produce films and hire film-makers separately, and temporarily, for each project.  Those films are the product that Production Companies sell.  The business model for doing so is what Professional Investors are interested in.  Production companies acquire intellectual property, develop it into commercial projects that can be packaged for debt finance and then generate a combination of revenues out of its production and build balance sheet assets in the form of retained rights.

Third, film and other content production are not the only business within Media & Entertainment.  The industry is under tremendous pressure to grow and expand.  The change required for this offers opportunity for companies to innovate with technology, new business processes, new business models and new ways to engage larger, more diverse audiences.

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Entertainment Grows as Private Equity Pours Money into Disruption

Private Equity investors are fast becoming the number one source of capital for a US$2.4 trillion industry struggling to cope with unstoppable growth.

Professional Investors know this as much as the major Studios do.  And Professional Investors want as much of these other opportunities as they can get find.  Media Tech companies are in high demand from Professional Investors.  Production services, studio infrastructure, talent management and marketing companies are all finding open doors with venture capital and private equity investors, including fund managers and private family offices. 

To be invited through those doors, media entrepreneurs, regardless of their product or service, need only present themselves as a compelling opportunity, and ask.

Understand the Ask

What Professional Investors are being asked to do is to strike a bargain; money for shares in a company.  That company is likely to be relatively young and in need of money.  Why the company needs money is fundamental to a Professional Investor’s initial reaction.

For early stage companies, money is needed for development.  That might be development of films and television projects.  It might be for development of software or AI applications.  I could be for development of infrastructure.  Regardless, development is high risk.  Most companies that have not yet developed their product or service will fail.

For companies already making a mark, money may be needed to expand or to accelerate acquisition of market share before the competition does.

Intangible Matter

The Insanely Lucrative Ownership of Intangible Matter

This year alone, media executives and corporate shareholders will feast on the leftovers of more than US$2.5 trillion in annual revenues from a product literally willed into existence.  Such treasure is made manifest by the exercise of creative imagination and its transmutation into intellectual property.

Professional Investors willing to consider one company, are likely considering many companies; spreading the risk of failure.  Those that do not fail must become valuable enough to make up for those that do.  That value needs to be reflected in the price of the shares investors hold in exchange for the money they provide.

Professional Investors make their money from shares that increase in value from growth in revenues, balance sheet assets or both.  Companies that can demonstrate growth in value, attract other Professional Investors.  The ability to sell shares at a higher valuation than first purchased is the answer that most Professional Investors are looking for. 

Understand the Process

Demonstrating an understanding of what a private equity investor wants to see will likely get a media entrepreneur through the door.  Speaking with confidence, sincerity and humility will likely start a great conversation.

But with thousands of companies asking for money, Professional Investors rely on process.

In almost every instance, that process will start with a document and end with a document.  The first document will almost always be a short presentation that contains the ask: How much money?  In exchange for what? 

If compelling, that document will lead to the next document.  Likely a business plan that spells everything out over the next three to five years.  This will include the company’s objectives, its strategy to achieve them and the financial projections that result.

Next will come due diligence.  Checking and double checking every aspect of the business plan from the company’s formation to the credibility of the management team. Contracts that secure the company’s balance sheet assets and revenues will be examined, agreements with services providers will be questioned.

If everything checks out, an investment term sheet will likely be produced by the investors.  Successful negotiations will lead to an Investment Agreement that binds both sides to terms and conditions for the receipt of funds and the issue of shares. 

Understand the Need for Advice

Professional Investors will always be well advised.  Media entrepreneurs should follow suit.

With money on the table, and the future at stake, knowing what other experts see and predict can help clarify strategy and align the interests of both investors and entrepreneurs.

The investment process followed by most Professional Investors has become relatively standardised over the years. Lawyers and accountants have studied deals gone wrong, and resulting lawsuits, for decades with investment structures and contracts reflecting which terms and conditions tend to work well and which simply don’t. These terms and conditions can be complex and easily misunderstood.

From the presentation of initial pitch materials to negotiating the final terms of a post-money shareholders’ agreement, getting the commercial, financial, tax and legal elements to line up is the best way to avoid snags that can derail a deal.

In most cases, the more a Professional Investor believes that an entrepreneur is well advised, the smoother the process is likely to be; and faster. In addition, the costs of professional advice in the production and negotiation of documentation leading to capital investment can be counted as equity contribution or can be agreed as a reimbursable expense after closing a deal. 

At the end of the day, Professional Investors understand that what’s good for the entrepreneur will likely be good for business.

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The Professionalisation of Investing in Film

For a long time, many one-off independent film projects have been received as poorly conceived investment proposals. But a growing number of film-maker entrepreneurs are building professionally managed, sustainable businesses with increasing scale and valuations.  Professional Investors have taken note.

1 Comment

  1. Aside from being passionate about their projects, It is essential that a startup or small production company or anyone looking for investment for their movie understands the financial processes, so they not only understand what the Investor needs, but also can find aways to give them what they need. Its the ‘risk – reward’ model that must be properly understood.

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