CASE STUDY: On Celebrities and Crowdfunding

The recent crowdfunding campaigns for Veronica Mars, Zach Braff and James Franco brought one thing dramatically to light: it's good to be a celebrity when you're crowdfunding.   Celebrities tend to easily reach and even surpass their crowdfunding goals when they go online and ask for cash (James Franco is a rare exception - he only raised $328,329 out of the $500,000, still a sizeable number that a non-celebrity filmmaker would have a hard time getting).  Even though they are subject to criticism for not offering profit participation in their films, celebrities do offer a panoply of prizes and rewards for the contributions they receive.  I found that interesting since their prize lists are exhaustive.  Filmmakers should learn from these celebrity campaigns even if they can't always do all of the things celebrities can do with theirs while also being attentive to potential changes or improvements occurring with crowdfunding legislation.

Hollywood is watching and learning. Already, Spike Lee has made his debut on Kickstarter and he won't be the last.  Once the stigma that comes with rich and connected Hollywood filmmakers asking the public at large to donate money passes, there will be more of them at the spigot.  Although we may question the fairness of it all, it's not illegal for rich filmmakers to crowdfund.  Still, the transaction seems sullied because crowdfunding was initially meant to serve the person who had NO access to funds or guarantee of success.  When celebrities jump into the crowd seeking funds, they presumably already have access to funds and stand to profit from their project in a way that the typical filmmaker is unable to.

Is that why James Franco didn't reach his goals?  Because of a backlash against celebrity filmmakers using sites like Kickstarter and Indiegogo? If so, then it seems to not have affected Spike Lee's campaign so far.   Maybe it's just that Franco's project didn't appeal to the crowdfunding audience.  Or maybe Franco didn't advertise it enough.  Regardless, it's interesting to note that Braff and Franco had almost identical campaigns in terms of the prizes they offered and contribution amounts they sought.  And they offered just about every type of award possible, which leads me to lesson #1...

OFFER AS MANY PLEDGE AWARD TYPES IN YOUR CROWDFUNDING CAMPAIGN AS POSSIBLE.  In studying Braff's and Franco's pledge list I noticed that they used EVERY possible type of pledge award one can offer in a typical crowdfunding campaign.  Of course, they are able to offer these because they are rich and famous and have a readymade fanbase but the breadth of their pledge awards reveals proper planning and strategizing, too.  And that is something to strive for with your campaign to generate as much interest from your contributors as possible (they are your first fans and the foundation of your future fanbase).  I placed all the awards Braff and Franco offered within one of the following categories which covers practically every type of pledge award possible in a typical crowdfunding film/tv campaign:

• Exclusive Info Access - privileged access to news and information before the general public gets it  (ex. news updates).
• Tangible Online Award - a product that you can only receive by online delivery (ex. pdf script, streaming link of music playlist, etc.).
• Tangible Offline Award - a product that you can only receive by some form of physical delivery (ex. t-shirt, postcard, etc.).
• Exclusive Attention - an award personally addressed to an individual and meant to be read, heard, seen or experienced.  Can be delivered online or physically (ex. personalized voice/video greeting).
• Live Experience - an award you can only experience with a large group of similar award winners (ex. live group movie screening).
• Collectible - a tangible product of limited manufacture or hard-to-find nature that has potential value as a collectible (ex. anything signed, products with limited editions, etc.).
• Live Experience On-Set or Credit - an award that you can only experience on the set of the production (ex. walk-on role, group set visit, producer credit, etc.).
• VIP Exclusive Live Experience - an award you can only experience alone or with a small group of similar award winners (ex. private dinner and after party with cast and crew, set visit for 2, etc.).
• Production Contribution - an award that allows you to make a creative contribution to the production that is not credited as acting or producing (ex. name a character, your name on a prop or backdrop, post-production rough cut screening and corrections, etc.).

Granted, although many of these awards yield more contributions when it comes from a celebrity, you can still diversify your pledge award types with as many as you can include to make your campaign more attractive.  But celebrity power still counts which leads me to lesson #2...

A CROWDFUNDING CAMPAIGN IS HELPED IMMENSELY BY THE INCLUSION OF A CELEBRITY AND CELEBRITY-AFFILIATED AWARDS.  It shouldn't surprise anyone that a celebrity significantly raises the spotlight of a crowdfunding campaign and increases the chances of it reaching it's financial goals.  The general public simply attributes more value to a pledge award from a celebrity than from a non-celebrity even if the award is technically the same thing (ex. the film slate used during. This is because the award from the celebrity can raise the amount of "utility" (pleasure) a person can get out of the awards they offer.  "Utility is not a measure of usefulness or need but a measure of the desirability of a commodity from the psychological viewpoint of the consumer." (Vogel, 12)  "Individuals differ in terms of the sense of psychic gratification experienced from consumption of different goods and services." (12)  Celebrities can, by the very nature of their celebrity, add value to their awards that the average joe can not possibly manufacture.  So, what's an "average-joe" filmmaker to do? Incorporate a celebrity to your campaign or add celebrity-affiliated awards to the pledge list.  I understand it's not easy but then again the film industry isn't easy either and you're not letting that stop you.  There are a variety of ways to add celebrity magic to your campaign whether it's partnering with one to offering contributors signed collectibles.  The strategy is only limited by the relevancy of your celebrity to the project.

Lesson #3... USE A CROWDFUNDING CAMPAIGN TO TEST AND CREATE DEMAND FOR YOUR MOVIE.  Hollywood is paying attention to crowdfunding because it not only offers a way to raise funds without having to share profit but also because it is a marketing coup.  Crowdfunding campaigns are a combination of public awareness, buzz creation and market research.  This can give Hollywood the rare opportunity to create demand for a supply BEFORE it gets made.  With this knowledge they can determine whether it should be changed or even made.  This is different from the traditionally unknowable risk a production company must shoulder to make a movie.  When a company makes a movie, "the initial capital investment in production and marketing is risked without knowing how many units (including theater tickets, home video sales and rentals, television viewings, and the like will ultimately be demanded.  The possibilities range from practically zero to practically infinite." (18) With a crowdfunding campaign, the possibilities at least begin with the people who pledge (a ready-made market ) and the quickness with which the money is raised giving filmmakers feedback they can base their marketing research on.  BECAUSE OF THESE TYPES OF COLLATERAL BENEFITS, ONE CAN FORESEE THAT HOLLYWOOD WILL FIND WAYS TO CREATE CAMPAIGNS (STEALTHILY OR NOT) AS WAYS TO NOT ONLY LESSEN PROFIT PARTICIPATION BUT ALSO CREATE AND TEST DEMAND.  This is not necessarily a bad thing if it allows Hollywood to take risks and create projects that would normally be hampered by the current system of "better to play it safe and formulaic."  Projects like this, for example.

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SOME THOUGHTS ON HOW CROWDFUNDING LAWS CAN CHANGE IN RESPONSE TO CRIES FOR PROFIT PARTICIPATION IN FILM PROJECTS.  Are donors happy with simply contributing for awards or do they want to be profit participants?  Is it reasonable or ludicrous to expect to be a profit participatnt when you've only contributed $500?  Should people go to equity crowdfunding sites and find film/tv production company start-ups if they want a cut of a project?  There is no clear answer but traditional crowdfunding sites based on donations and pledges are undergoing scrutiny and it wouldn't surprise me if crowdfunding undergoes a metamorphosis.  At the moment, people still donate even if they are not profit participants. This could be due to the fact that there is no other alternative or they don't know better. "Rational individuals try to maximize utility -- in other words, make decisions that provide them with the most satisfaction. But they are hampered... because decisions are made under conditions of uncertainty, with incomplete information... and they end up maximizing expected utility rather than utility itself." (12) Maybe people prefer the awards because it is a sure thing compared to waiting for profits; for an x amount of contribution you get an award priced for that amount.  Profit-participation is a gamble since a potential profit is not a sure thing even if a celebrity is involved.  Plus the formula for profits are complex, there are tax and other financial issues involved, and there are no guarantees you will even get your cut in Hollywood; there are many movies that break box-office and still can't "afford" to pay profit participants their share.  But the dream to reap a reward lives on and it's possible to make an educated guess by studying and assessing the quality of a project and it's profit potential.  Plus, movies with a built-in audience tend to do well (for example, Braff's new movie seems likely to replicate Garden State's success).

I am torn between the camps trying to change the crowdfunding laws to allow some form of broader investing and those who want to keep things as is.  Although I think it's unfair that celebrities can, by virtue of their fame, raise more funds than the average without having to share any of their profits, I am also wary of weakening the disclosure requirements that are supposed to protect investors from the hucksters who are waiting to take advantage of any loosening of the rules.  Current Securities and Exchange Commission (SEC) laws generally prevent crowdfunding sites and campaigns from offering equity, financial returns and/or solicit loans.  And so project creators keep 100% ownership of their work. As Kickstarter says, "backers are supporting projects to help them come to life, not financially profit.  We hope you love your reward for helping bring this project to life."

But I still can't help wonder, do the people value the awards as they stand because it's all they can get or would they prefer profit participation? I would love to see that tested out and I think that would, ultimately be the fair thing to do.  It would also be one way to bridge the 2 camps regarding crowdfunding laws. 

And so, here's my suggestion: AFTER A THRESHOLD AMOUNT OF PLEDGE FUNDING (for example, a contribution of $500), LET PEOPLE CHOOSE BETWEEN ACCEPTING THE EQUIVALENT PLEDGE AWARD OR CHOOSING GROSS PROFIT PARTICIPATION FOR A FILM PRODUCTION WITH A BUDGET OF $500,000+. My idea is mainly for the purposes of film crowdfunding campaigns and would work out in the following ways:

1. Projects intended for commercial distribution AND with a $500,000+ budget can allow a person to use their $500+ pledge as a stakeholder participating in profits or as a donor pledging to receive an award. (Btw, I chose $500 because I notice that there is usually a big dropoff in numbers from the amount of people who pledge that amount or more and that seems like a number that would matter to an average person.  However, I am not beholden to that dollar amount.)  If they choose the profit participant stakeholder route, then they get a position from any gross profits (not net profits) the picture makes. (Whether the profit is from theatrical only or there is additional contingent compensation can be evaluated for fairness to all parties and is outside the scope of this article.) If they choose the pledge award, that is all they get; no profit participation.  A person can't have both unless they make 2 different pledges for $500+ (one for the award and one for equity).
2. Those that pledge to become equity stakeholders have to then submit additional documentation as required by the SEC, the IRS, etc.  The crowdfunding campaign would also be subject to disclosure requirements and more, as needed.
3. Only pledge awards for pledge amounts of $499 or less are unaffected by the above.

Maybe people will prefer to go with the profit participation route whenever a celebrity is involved? Or maybe some people will forgo the profit participation route because they will prefer the sure thing in the award or because they value the experience with the celebrity more than a couple potential extra dollars.  What do you think?  What would you suggest? Feel free to share in the comments section below.   

Also, note that the SEC is open to public comments (regarding crowdfunding laws through the JOBS Act and other things) between now and October 31.  If you want to submit your comments to the SEC you can do so by clicking here.  If you want to read other comments, they are published online.  (hat tip to crowdfundingblogs.com)

Source:
Entertainment Industry Economics: A Guide for Financial Analysis, 6th Ed., Vogel, Harold, Cambridge University Press, 2004 

Bonus - here's a handy chart from Reinventioninc.com on crowdfunding types and tips:

http://www.reinventioninc.com/zach-braff-veronica-mars-and-the-5ps-of-crowdfunding