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During a bat mitzvah in New York, I had the privilege of meeting Arnold Kopelson, a noted Hollywood film producer and financier of various movies with Steven Segal, the actor, and well known movies such as Platoon, Fugitive, Outbreak, among others. His academic training like many film producers in Hollywood was in law, as a New York law graduate. The bat mitzvah sponsor was his former legal partner in entertainment law. I asked Arnold directly, how do you initially finance production of your movies? And he answered that he sells the international distribution rights prior to production, but with the script ready (of course, with protected IP) and a cast. That is when I realized that, when one can link IP with distribution rights, you can create value. This approach is not restricted to the entertainment industry – it can apply to any other IP related product in other fields for a startup.
I found out a similar approach in the pharma world. A startup pharma company developed a male hormone pill undergoing extensive and expensive FDA clinical trials in the millions. I met this company’s CEO, who revealed that his company sold some international distribution rights to continue to finance its FDA trials and operations. Those pre-sold geographic regions were smaller markets, but garnered at least $80 million in distribution rights.
Unfortunately, many startups believe that the traditional road to financing their companies are limited to VCs, Friends and Family, or SBIR grants, etc. Yet I also use Hollywood approaches that apply other strategies – from pre-sold distribution rights, local urban grants, etc. One similar approach I employed in the telecom industry was selling franchise rights defined geographically by country. One has to have the right international contacts, some experience, and be able to set up the right kind of deal, both legally and financially. Again, it pays to use the right advisors and team members.
A movie is not much different from technology in the sense that both revolve on unique IP assets. And, where a technology team plays an important role, so do the names of the actors signed up for the movie. (In case of Kopelson, it could be the actors, Harrison Ford or Steven Segal.) And, like anything else in any industry, previous track records help. It helps that Arnold’s films have won academy awards. So his credibility is higher than a unknown individual. Kopelson had sufficient reputation to pull these muli-million dollar financing packages. And Arnold's legal experience pointed out the appropriate legal documentation.
Now I thought of Arnold’s approach again when I met with a NorCal startup group developing biotech organisms to use in the oil industry. Of course, this startup is going through the usual financing routes of VC firms and SBIR grants. But to me, this company could have sought financing in the Middle East through preselling the distribution rights to regional oil companies. It had the right kind of product lines to attract foreign companies. And by selling the distribution rights for the EMEA region, they could attract financing much cheaper and faster than the conventional approaches. Unfortunately, it is a different strategy and does require a certain expertise to close on such deals. You encounter different cultures and legal frameworks. However, I do believe it can be a source of cheaper capital. And money is money wherever you get it. All parties benefit from such a transaction.
Yet, I see some resistance in the NorCal industry. QB3 companies, a biotech group, recommends two solutions: grants or VC money. It might include corporate investment, but nothing else. In fact, the QB3 program has instructive programs for grant applications. But like any quasi-governmental approach, grant applications are time consuming with considerable paperwork. Secondly, I find that many of these biotech companies do not walk away from that comfort level – and to their detriment. I have noted that, when that quasi-governmental source taps out, they struggle to find private money.
Again, the concept of financing can benefit by looking at other industries on how they find capital for their initial projects such as the entertainment industry. I find it interesting that many startups in Silicon Valley seek the same old, traditional routes. Maybe it pays to visit SoCal and see how do they do their financing models. Again, both focus on IP. A film has its copyrights. So their assets are no different.