By Micah Rosenbloom, Managing Partner
We’ve written a number of stories about the dangers of raising too much venture capital, demonstrating that raising more money doesn’t make startups more successful, and that $100M exits are worth celebrating, but implementing this idea of “efficient entrepreneurship” can be difficult. Early stage startups are frantically trying to figure out how to get traction while established startups feel locked into a burn rate and a course of action.
It might be a useful exercise for founders to think of themselves as auteurs rather than entrepreneurs. Filmmakers and founders are both creative professionals, but directors have to contend with a world where capital is a fixed sum, not a seemingly endless stream.
Directors must have a vision for their product, a rough understanding of what it would cost to realize that vision, and then execute within those constraints. Contrast that to startup founders who always have the possibility of raising another round of funding.
Strict limitations for filmmakers have led to slew of indie projects, made on shoe-string budgets by unknown creators, that go on to rival star-studded Hollywood blockbusters. For instance:
This list is far from exhaustive and doesn’t include movies like Slumdog Millionaire and The Kings Speech which had $15M+ budgets and mid-nine-figure grosses, due in part to better known stars and directors.
These are career making projects that put stars, and catchphrases, on the map. All were made — at most — with a series A level of funding. What makes these low-budget films so successful? There seem to be a few common themes:
Target underserved niches
Schlocky horror movies don’t win Academy Awards, but they are consistently profitable and represent half the movies in this sampe. In the startup world, Veeva raised $4M to focus on a SaaS tools for a relatively small group of life science companies and have been rewarded with a $5B market cap.
Embraced Constraints
The creators of Paranormal Activity didn’t have many resources. Still, the movie’s high concept made up for the lack of star power. Compare that to entrepreneur, Jon Oringer was a software engineer by trade and a hobbyist photographer. He didn’t have easy access to venture capital but he combined his hobby and academic training to build Shutterstock, a $2B company without raising any outside funding.
Prove Creative Marketing Wins
The Blair Witch Project took advantage of a nascent online population to sow doubt about it’s reality. Outcome Health, currently valued at $5.5B, was founded by a pair of broke college students. They couldn’t buy ads, so instead they placed TVs in doctor’s offices and sold ads on them.
The most important takeaway from these movies is a reminder that capital is not determinative of success. In 2003, the same year Open Water generated a 100X ROI, the Ben Affleck/Jennifer Lopez vehicle Gigli made its debut. The latter had two of the biggest stars on the planet at the time (remember “Bennifer”?), a $54M budget, and still only managed to make $7.3M world wide. This year’s Get Out, made with a $4M budget and a little-known cast will earn more profit than the recent big budget, celebrity-filled spectaculars Baywatch, Ghost in the Shell, and Teenage Mutant Ninja Turtles — combined.
The auteur model can be an amazing deal for entrepreneurs. Filmmakers get one shot to build their product, but startup founders can iterate endlessly once they reach profitability. Moreover, movie studios often take the bulk of a successful film’s profits from the creator, especially neophytes. Successful founders who embrace an “art house” budget can earn outsized financial rewards when they produce something that resonates.
The VC model still works best with blockbusters, but it’s not clear that a much larger budget will lead to better returns in films or finance. How might one run their startup if they knew that only could raise $5M dollars to build a company before an IPO?
VCs Could Learn a Lesson from Indiana Jones
Hollywood also has lessons for VCs. Before VCs started trying to corral unicorns, movie moguls chased blockbusters. Huge amounts of money were spent trying to prop up franchises only to see them flop on opening night.
Michael Eisner, the former CEO of Disney, was famous for being budget-focused in a world that celebrates excess. At one point, he greenlit the first Indiana Jones movie, which had a larger than normal budget and became a hit — the Unicorn of its day. He didn’t want people at his studio to think that this one movie’s success marked a change in his strategy. He wrote what became a legendary memo explaining how to think about investing in films while serving as President of Paramount Studios, which was excerpted in the book DisneyWar:
Eisner prided himself on keeping costs modest; some thought it bordered on obsession. For Eisner, the quality of the story was all-important, not high-priced directors and stars. He looked for stories with compelling characters, clear conflict and resolutions, three easily identifiable “acts,” and universal themes that could be summarized — that is, marketed — in a sentence or two. This approach, dubbed “high concept” in the parlance of Hollywood, spawned many imitators, but few were as successful as Eisner and Diller.
Despite his frugality, Eisner was on occasion willing to take financial risks. After two other studios balked at the high projected costs, and even Diller opposed the project on financial grounds, Eisner signed Star Wars writer George Lucas, director Steven Spielberg, and actor Harrison Ford to make Indiana Jones and the Raiders of the Lost Ark. With $240 million in U.S. box-office receipts, it became a “franchise,” a huge hit that spawned a series of highly profitable sequels.
Nevertheless, Eisner was fanatical at keeping costs low to earn a profit, a curiously iconoclastic view in Hollywood, which had a long and deeply entrenched tradition of rewarding talent, agents, managers, and studio executives before anyone gave much thought to shareholders. After the huge success of Raiders, Eisner recorded his philosophy in a twenty-one-page manifesto distributed to Paramount executives. In it, he noted that nearly all of the studio’s profits from 1981 had come from Raiders, an expensive anomaly in the Eisner canon, and he didn’t want anyone at Paramount to get the idea that he was veering from his time-tested strategy that combined high concepts and low budgets. “Often the big win comes with a single smash movie,” he wrote. “The intoxication of a blockbuster hit can lead to an easy sense the luck will keep striking. Over the past five years, Paramount has either been number one or two in the motion picture business. Success tends to make you forget what made you successful, and just when you least suspect it, the big error shifts the game. Will success lull us into the fatal bad play?”
“The intoxication of a blockbuster hit can lead to an easy sense the luck will keep striking.”
Eisner proceeded to make his own priorities clear. “We have no obligation to make art. We have no obligation to make history. We have no obligation to make a statement. But to make money, it is often important to make history, to make art, or to make some significant statement…In order to make money, we must always make entertaining movies, and if we make entertaining movies, at times we will reliably make history, art, a statement, or all three. We may even win awards…We cannot expect numerous hits, but if every film has an original and imaginative concept, then we can be confident that something will break through.”
“We cannot expect numerous hits, but if every film has an original and imaginative concept, then we can be confident that something will break through.”
Replace the word “film” with “startups” and swap “Unicorn” for “Blockbuster” and Eisner’s advice actually maps pretty well onto the world of startups. He’s basically advocating for a portfolio approach to filmmaking, and it paid off brilliantly (for a while.)
This idea of frugality is borne out in the startup data as well. Six of the 20 best startups of the last half decade raised <$50M. One raised nothing. If more entrepreneurs and VCs followed Eisner’s advice, perhaps we’d have fewer startup horror stories and more happy endings.