Why Do Film Funds Fail?

anthonysalamon

10 minutes ago

6 min read

Film funds usually fail for structural reasons rather than creative ones.

The most common is an untested assumption, the standard fund model treats project outcomes as independent of one another, when a slate frequently carries shared exposure to the same distributor, buyer environment, genre cycle, release window or management team. When those shared factors bind, several losses arrive together and the fund runs out of capital before its stronger projects have reported. The failure is rarely that the films were bad. It is that nobody stress-tested what the films had in common.

The deck everyone has seen

Ten projects. Two perform well, three roughly return capital, five lose money. Blended IRR lands somewhere respectable. Everyone in the room nods, because the arithmetic is correct.

The arithmetic is correct. It's correct if those ten outcomes are independent of one another.

That assumption is almost never stated, rarely tested, and does most of the work in the model. It's the load-bearing wall nobody inspects.

Are film outcomes independent?

Sometimes they nearly are. Films fail for reasons entirely their own. A performance that doesn't land, a director who loses the edit, a script problem that survived development and became visible only in the cut. Those failures tell you nothing about the next project on the slate. That's genuine idiosyncratic risk, and it's the basis of a real diversification benefit.

But a slate can also carry shared exposure that never appears in the model:

The same buyer environment. If the acquisition market tightens, it tightens for every unsold title at once.

The same distributor. Concentration with a single distributor means their financial distress, strategic shift or simple loss of interest affects multiple positions simultaneously.

The same genre cycle. Genre appetite moves in waves, and a slate weighted toward one cycle inherits that timing as a single bet wearing five costumes.

The same release window. Congestion, a competing tentpole, or a platform reshuffling its calendar can compress several titles into the same bad quarter.

The same management team. This is the one least often modelled and possibly the most important. If the fund's selection process has a systematic blind spot, it applies it ten times. The errors aren't independent because the judgment producing them isn't.

The same production infrastructure. Labour disruption, insurance markets, a shared physical production partner.

None of these are exotic. Most are visible in advance if someone looks.

The failure isn't correlation. It's that correlation was never tested.

This distinction matters, and I want to be precise about it, because the opposite overclaim is just as wrong.

It would be equally lazy to assert that film outcomes are always correlated. They aren't. A genuinely diversified slate, different genres, different distributors, different windows, different creative teams, produces real diversification, and research on portfolio construction in film production supports that the effect is available.

The problem is that most fund models don't take a position either way. They assume independence by default, silently, because that's what a simple model does when nobody specifies otherwise. And the assumption is invisible precisely because it was never argued for.

So the question to ask isn't "are these correlated?" It's "what does this model assume, and what happens if the assumption is wrong?"

What changed when we rebuilt our own model

The improvement wasn't a better forecast. Forecasting individual film performance is hard in ways that don't yield to effort, and a model claiming otherwise should be distrusted for exactly that reason.

What changed was two things.

Scenario architecture instead of point estimates. A single blended IRR is a statement of false precision. A range of scenarios with explicit assumptions behind each is less satisfying to present and considerably more honest.

An explicit shared-exposure section. A page that asks directly, what do these projects have in common, and what happens to the fund if that common thing goes wrong at once? Same distributor? Same window? Same three-person selection committee? Then model the case where the shared factor turns against you, and see whether the fund survives it.

Neither is sophisticated. Both are routinely absent.

The uncomfortable implication

If a meaningful share of concentration risk sits in what a slate has in common rather than in any single title, then how you construct the portfolio matters at least as much as which projects you select.

That runs against how these funds are usually sold. The pitch is nearly always the slate, the quality of the projects, the calibre of the attachments, the track record of the team. Portfolio construction gets a paragraph, if that.

It also cuts against how the people running them prefer to spend their time. Project selection is the interesting, creative, socially rewarding part of the job. Deciding that you already have too much exposure to one distributor and must therefore pass on a project you like is the tedious, unglamorous part. Nobody gets into film finance for the second one.

I'd add a caution against the opposite overcorrection, a well-constructed slate does not repair weak underlying economics. Diversification reduces dependence on any single title. It doesn't turn bad deals into good ones, and cross-collateralisation across a slate can obscure title-level performance in ways that make problems harder to see, not easier.

What to ask before committing

For anyone evaluating a fund rather than running one:

What does the model assume about the relationship between project outcomes, and where is that assumption written down?

What do the projects in this slate share, distributor, genre, window, creative team, production partner?

What happens to the fund if the shared factor turns against it in a single year?

Is the fund sized such that a cluster of early losses ends it before the later projects report?

That last question is the one that decides most outcomes and gets asked least. A fund can hold a portfolio of genuinely good projects and still fail, if the timing of losses exhausts capital before the wins arrive. Sequencing risk is not the same as selection risk, and it isn't solved by picking better films.

The point

Most film funds don't fail because the films are bad.

They fail because of an assumption nobody in the room said out loud and because the part of the job that would have caught it is the least interesting part of the job.

Frequently asked questions

What is slate financing?

Slate financing is an arrangement where an investor funds a group of film or television projects rather than a single title, typically with returns pooled across the group. The intended benefit is reduced dependence on any one project succeeding. The trade-off is that cross-collateralisation can obscure title-level economics, and shared exposures across the slate may reduce the diversification benefit below what the structure implies.

Does diversification work in film investment?

Partially. Diversification across genres, distributors, release windows and creative teams reduces exposure to title-specific failure, and that benefit is real. It does not eliminate shared exposures to the broader buyer environment, platform strategy, labour conditions or the fund manager's own selection process. Diversification also cannot improve weak deal economics on the underlying projects.

How many films does a fund need for meaningful diversification?

There's no reliable threshold, and a specific number offered without reference to what the projects share should be treated cautiously. Ten projects concentrated with one distributor in one genre may carry more correlated risk than five that are genuinely independent of one another. Composition matters more than count.

What is the difference between selection risk and sequencing risk?

Selection risk is the chance that the projects chosen are poor. Sequencing risk is the chance that losses arrive before gains, exhausting capital before the successful projects report. A fund can select well and still fail on sequencing, which is why fund size, reserve policy and capital call structure deserve as much scrutiny as the slate itself.

Starting and running a film fund, like any other fund should be measured and well planned. A mix of the right projects, the right distributors or platforms and the right sequencing all play a part and all play into the success or failure of the fund.

I am currently advising a company on this exact thing. Raise a fund, or sell some equity in the company to raise money for their slate. I told them to do both. A small equity round followed by a well planned, managed fund. The one piece of advice I haven't given them yet, but I will, is to read this article and then have another conversation with me about their fund structure.

Do you agree with any part or none of these statements? I'm always open to learning new things and finding new ways of structuring investments. Reach out if you think I'm missing something or you have an out of the box idea.