PhaseTwo Strategies for growing business

How is the Hollywood Film System like the Entrepreneurial System?

I started my career in the Hollywood film industry.  I clawed and scraped just like any new, wide-eyed member of the Hollywood eco-system, working in various capacities (and by various, I mean any capacity that would hire and pay me!) -- spending time in production working in locations, the camera department, art direction, and eventually production management.  I then moved away from physical production and into the sheltered world of the studio system.  I spent time working for a highly prolific (and highly volatile) Paramount-based producer before working for a NYC-based studio focused on making mid-budget films.  After a relatively successful and interesting run in the film business, I made the decision to leave Hollywood and head back to business school.  

What?!?  Why would someone possibly leave the glitz and glamour of Hollywood to go to business school?!  Sounds crazy, I know.  But, here’s why:

1. First a foremost, I didn’t want to spend the rest of my life in LA.  While there are small opportunities to work in film outside of LA, the reality is -- if you want to be successful in the film industry, you have to live in LA.  Forever.  I hate LA.  I also hate limiting my life to a single geographical area.  Maybe I’m a bit claustrophobic.  I wanted the freedom to live and build a career anywhere I chose.  
2. While I loved the process of making movies, I didn’t love the people that I found myself working with on a daily basis.  I saw the model for “success” in the business and found that I couldn’t relate.  The ultimate quest for fame and recognition can do ugly things to people.  Now, this is not to say that there aren’t some very good people in the film industry (and a lot of highly talented ones).  There are.  Some of my best friends are still in “the biz.”  I just wasn’t fond of the overall environment.  
3. I realized that what I loved about the film business was...the business.  I loved the process of working with new, creative ideas and wrapping a business around them.  The film industry is an industry just like any other.  We have product development, production/manufacturing, distribution, marketing...oh, and finance.  From a business perspective, it’s just like bringing any new widget to market.    Same thing.  The clash between art and business is a bit more intense in Hollywood than in other industries, but I loved that part.  The other thing I stated to recognize during my time in “the biz” was its entrepreneurial nature.  I started to understand that every film project was essentially an entrepreneurial venture.  With each studio needing to put out anywhere from 7-15 new films every year, the business was actually  like entrepreneurship in hyperdrive.  Once I realized that this “entrepreneurial process” was what excited me most about the film business, I was ready to leave.  

Film as an entrepreneurial venture

So, what exactly do I mean by, “every film project is essentially an entrepreneurial venture”?  In order to understand this statement, one must understand:

1. The Hollywood eco-system; and
2. The movie creation process

The Hollywood Eco-system

There are essentially three main forces which drive the Hollywood machine.  I will talk about two here and the third one later.  

The first major force is the Talent.  Hollywood’s Talent is a large pool of individuals -- essentially independent contractors -- who create content.  These are the writers, directors, producers, actors, designers, cinematographers, etc.  For the sake of this argument, the two most important points to note about the Talent are: (1) they are independent contractors and (2) they create the content.  

The second major force is the Studios.  The Studios are the major corporations that drive the business of Hollywood.  Disney, MGM, Paramount, Universal, Warner Bros, and Fox are the major Studios and there are a slew of other, smaller players.  The Studios (1) find, (2) finance, (3) market, and (4) distribute movies.  It is important to note that they DO NOT CREATE movies.  This is a very common misconception about the Studios.  Many people believe that the people working for a movie studio spend their days dreaming up and “making” new movies.  They don’t.  The perception is that Studio employees are all creative artists.  They aren’t.  Studios FIND movie ideas, FINANCE their production then MARKET and DISTRIBUTE them.  

The Hollywood Movie-Making Process

The next thing to understand is how a movie gets made in Hollywood.  I am going to give a very “general” overview here with added detail later.  Essentially, here is how it goes:

1. Some Talent creates an idea for a movie.  For example, let’s take a writer who has written a script for a movie BAILE, the story of a dancing, Mexican superhero (sounds like a franchise to me!).  Our writer has spent 5-months in his basement apartment, working part-time at Starbucks knock-off, finishing this script.  This is his shot.  
2. Now with the script completed, our writer wants to get his move made.  In order for this to happen, he needs money.  And BAILE is no cheap venture.  It’s a special-effects spectacle that will surely attract a cast of A-level stars.  It’s going to be a $100MM budget.  In order to get the movie financed, our writer will need pitch the studios.
3. So, our writer starts to circulate the BAILE script to the studios (or, more specifically, to the Studio’s development executives).  If he’s lucky, some of the studios will ask for a meeting.  These meetings are called “pitch meetings”, during which our writer will try to quickly tell his story idea and convince the studio exec to buy the script and finance the movie.   
4. If the Studio decides to finance the movie, they will quickly assign it to an independent producer who will put together the rest of the Talent needed to actually make the movie (this includes everyone from the actors, to production designers, to camera assistants, etc).  
5. Once the movie is made, the producer and other Talent goes away and the Studio markets and distributes the final product to theaters (and then DVD, and then TV, etc).  This is how the Studio earns a return on their investment.  Depending on the deals made, some of the Talent (including our original writer) will retain “equity” in the movie, earning a percentage of its earnings.  The bigger the talent, the bigger the “back end” equity.  

Again, this is a very simplified version of the Hollywood process, but it serves the purpose of providing a good high-level view. 

Hopefully, it is fairly easy to see how I can make the claim, “every movie is an entrepreneurial venture.”  It’s also easy to see how a strong analogy can be drawn between the Hollywood “system” and the Entrepreneurial “system”.  In Hollywood, the Talent is a group of individual contractors with creative ideas for movies.  They conceive of the movies and they also make them.  They are the Entrepreneurs.  The Studios are the entities that look for the best ideas and fund their production.  They are the Investors (most likely, VCs).  

The analogy between these two worlds is even more extensive, but in the interest of time, I will not go into the details here.  The general point has been made.  

The Third Force in Hollywood -- Agents

In the last section, I described two of the three major forces in Hollywood.  I only addressed these two forces because they were most analogous to the forces powering the entrepreneurial system.  Now I will describe the third Hollywood force that has become just as (if not more) powerful than the Talent and Studios.  This Force is the Agents.

The Agents serve a very important function in the Hollywood system.  They sit between the Talent and the Studio and while they officially represent and work for the Talent, they add value for the Studios as well.  There are many Agencies in Hollywood -- the biggest and most powerful being CAA, ICM, AMG, UTA and WMA.  

What do Agents Do?

As mentioned above, Agents work for Talent.  They sign up writers, directors, producers, actors, etc as clients.  Their ultimate job is to help their clients find work.  For their writer clients, they work to get the studios to buy and finance their scripts.  For their actor clients, they help to find studio projects for them to act in.  Etc.  Agents make their money only when their clients make money.  They take a percentage (usually 10%) of their clients’ earnings.  The daily life of the Agent consists of:

• Searching the world for great talent and finding ways to meet and sign them
• Pitching their clients to the Studios 
• Negotiating contracts on behalf of their clients
• Counting their money

Why are Agents so Valuable and Powerful?

Agents have become a very powerful force in Hollywood over the past 20-25 years by connecting the Talent and Studios and adding value for both.  

For the Talent (their clients), Agents:

1. Find work:  First and foremost, Talent need Agents in order to earn money.  Agents are constantly hustling on behalf of their clients in order to  find them work.  The Agents have connections and access to all the important members of the Studios, which the Talent does not have.  Because of their access to the Studios, they have good information on current and upcoming projects.  This is information that the Talent just can’t get.  This access and info help Agents find work for their clients.
2. Provide counseling on new projects:  Because the Agents have the best information on the Studio’s activities, likes/dislikes, etc, they are able to effectively counsel their clients on the best way to shape and create their projects/careers.  They often give notes on their clients’ scripts and concepts before sending them out to the Studios as well as provide counseling on the proper steps for building a career.  
3. Negotiate deals:  Hollywood Talent are artists.  They do not know how to negotiate business deals.  Agents negotiate contracts on behalf of their clients -- not only insuring they don’t get screwed by the Studios, but also insuring that they get the best deal possible (how do you think the $20MM/movie deals happen?!?!).  This is an ENORMOUS value-add for the Talent.    
4. Provide support:  Talent generally have strong relationships with their Agents.  Agents become a significant source of emotional support for their clients and help advise them throughout their projects and career.  It’s important to note that the Agents work for and support the Talent.  They do not work for the Studios.  Many Talent trust their Agents more than anyone else in the business.  

For the Studios, the Agents:

1. Vet Talent:  Hollywood is filled with Talent.  There is an overwhelming number of people attempting to get a script made or become the next Julia Roberts.    Every cab driver, bartender and doorman in LA is an aspiring writer, director or actor.  The Studios simply don’t have the resources to vet all this Talent.  The Agents do this for them.  For the Talent, getting an Agent in Hollywood is not easy.   Most Talent spend years just trying to sign on with an Agent.  Agents are very selective -- their business is usually only as good as the Talent they represent.  This means that the Studios know that any project that comes to them from an Agent has already been vetted, qualified and prepared well.  In fact, the Talent-vetting that the Agents do has become so powerful that the Studios won’t (actually can’t) look at any unsolicited material (material that is not sent via an Agent).  
2. Provide access to Talent:  Studios don’t have direct access to the Talent.  The Talent doesn’t really trust the Studios (probably rightfully so).  They rely on their Agents to protect their interests.  Because of these feelings and relationships, the Studio must go through the Agents in order to gain access to the talent.  
3. Package projects:  This is a relatively new, but hugely important, agent practice.  Mike Ovitz and his cohorts during the early days of CAA really made packaging an art.  Packaging is the practice of attaching a group of talent to a specific project before pitching it to a studio.  Remember, the typical Agency represents all kinds of talent “categories” -- writers, actors, directors, producers, etc.  As an example, let’s go back to our earlier script -- BAILE.  Let’s pretend that the writer of BAILE is represented by an agent at CAA.  BAILE, being a big project, is a classic “packaging” candidate.  So, before sending the script out to the studios, the CAA agent will call on his fellow CAA agents to “package” the project.  These agents (usually in a Packaging Meeting) will attempt to attach their clients to the various roles in the project.  One agent may represent Anne Hathaway who would be perfect for the female lead.  And another will represent Pedro Almodovar who is in between projects and looking for a picture to direct.  And another will represent Mark Wahlberg, who (of course) would be great in the role of the hispanic dance instructor.  Now instead of just a script from a random writer, CAA has a project with two A-list stars and a celebrated director.  Now it’s time to go to the studios for money.  This practice of packaging does two things:

• For the agency, it is self-serving.  Instead of getting work for one of their clients, they’ve landed work (ie--revenue) for four of their clients.  At the same time, they’ve insured that the competing agencies aren’t able to get their clients work on the project (which will eventually help the agency land more clients).
   
• For the studio, it lowers the effort required to launch the project as well as their investment risk.  With a packaged deal, Studio executives don’t have to spend as much time looking for Talent for the project.  At the same time, their money is safer because the Agency has lowered the “talent risk” of the project.  Traditionally, a Studio does not want to lay out $1MM+ for a script that may not attract any other legitimate talent.  It happens all the time, but it’s not a safe investment from the studio’s perspective.  Studios are much more likely to buy into a packaged project than one that is not.   

As you can see, the Hollywood Agents have become very powerful because of:

The obvious disconnect between the goals and skills of Hollywood’s Talent versus those of the Studios; and

Agents’ abilities to add value on both sides of the equation  

So, why doesn’t this third Force exist in the world of entrepreneurship?  Is there an opportunity here?  Hmmm.....

Web 2.0 Expo -- Great case study -- Apttus

 

One of the best case studies I heard at the Web 2.0 Expo came from a small company called Apttus, a provider of SaaS contract management solutions for large, enterprise clients.  Apttus is a start-up which launched about year ago and built its solution on Salesforce.com's new Force.com platform.  While it is still early to call Apttus a runaway success, their story is impressive thus far.  The most impressive part of their story to me was their ability to execute a strategy WITHOUT TAKING VC MONEY.  

That's right.  They're a software company which decided, from the beginning, NOT to raise money from VCs.  They made this decision because:

• Raising VC money takes a lot of time and energy.  They did not want to have to dedicate the time and energy required for courting VCs.  They wanted to build a product and get to market quickly.
• They did not want to give up control to a VC group.  They were very confident on their ability to execute and did not need to "answer" to a VC board.
• They didn't want to give away a large chunk of their equity.  
• Most importantly - they were focused on building a strong, sustainable company.  They understood that often times, raising VC money is the worst thing one could do to build a sustainable company.  They did not want to have to cater to VC pressures, which often hammer entrepreneurs to deliver on unrealistic goals.  These pressures don't help to build, long-term sustainable businesses.  They help to drive one of two things -- home runs or strike outs.  They leave little room for anything in between...despite the fact that many great businesses can be built out of "doubles."   (and by the way -- any good baseball hitting coach will tell you that as soon as you start swinging exclusively for home runs, instead of solid contact, your likelihood of a strike out will increase considerably).

Ultimately, this last point was what resonated with me.  They set out to build a great company and felt that taking VC money would hurt their chances of doing that.  This took courage.  It took courage to go against the grain and resist the temptation to join the crowd of cool, hot, VC-funded companies.  It also meant that they had to make some different, difficult early business decisions in order to develop their product by bootstrapping.  

And the best news -- Apttus was able to build and release their first SaaS product within 6-months (by utilizing Salesforce.com's new development platform), land their first group of customers and become profitable within their first year!  A software company becoming profitable in year 1.  Quite impressive...

I was very excited to hear Apttus' story.  I have no doubt that this team will be able to build a great business -- even if it ends up being just a "double" for those potential VCs they didn't end up talking to...

DS
  

  

Naverus - Flight Navigation Solution with great Value Proposition

I first saw this business mentioned in Fortune Magazine (July '08). This is a business that developed a GPS-based software product that allows airlines to design more direct, and therefore, more efficient flight plans for each route.

When I saw this company, my first thought was, "Airlines aren't using GPS to design flight plans?!?" Apparently, they are not. They are still using an archaic system of flying between ground-based radio towers -- a system that does not allow for the most direct routes between airports. What?!? I have a GPS unit in my car that allows me to find the most direct route to the grocery store, but American Airlines isn't using the best available technology to design flight plans?!? I assumed the airlines were way ahead of me, but I guess they weren't. Obviously, there is a reason for this, but I can't think of one that makes sense.

Anyway, once I got over this point, I was able to wrap my head around the great business proposition that Naverus' product presents. It presents a good lesson for all entrepreneurs as they develop their products and business plans.

Naverus claims that if their product can trim just ONE MINUTE off the average flight time for an airline the size of Southwest (a mid-sized airline), it would save the company $25MM per year just in fuel costs! That is a huge value proposition and one that is very clearly and easily articulated to potential customers. For all you entrepreneurs, I highly recommend that you spend a good deal of time attempting to distill a similar value proposition for your business. Let's analyze this value statement a little more. The statement is:

At Naverus, we have a product that is guaranteed to lower your flight times, Mr. Airline customer. If we can lower your average flight time by just ONE MINUTE, we can save your company over $25MM per year...just in fuel costs alone!

Here are the things I love about this statement:

1. It's simple and quick. This is very important. Anyone who has ever tried to sell anything knows the value of a short, concise sales pitch. Customers just don't allow for a long hook. You need to get them quickly. Many entrepreneurs get into trouble (when pitching to potential clients as well as investors) because they want to tell you EVERY GREAT THING ABOUT THEIR BUSINESS AND VISION. This results in a two-hour initial sales call/investor pitch that bores your audience and, quite frankly, makes you look like a longwinded blowhard. For the audience, it's like taking a seat on a red-eye flight to London right next to that excitable grandmother who simply must show you every picture ever been taken of her grandkids over the past 12-years. Naverus' statement is incredibly effective at delivering the most important parts of the pitch in a short, sweet package. No excessively proud grandma here...

2. It actually quantifies its value. Just because it's a quick, simple statement does not mean that it didn't take a good deal of work to create. The company did a good job of finding the information necessary for completing the cost savings calculation that produced a real dollar figure. They didn't say, "If we trim your flight times, then we'll save you A BUNCH of money!" They said, 1 minute/flight = $25MM savings. Without a specific figure, your sales pitch sounds ambiguous and a bit suspect. Ambiguous sales pitches are ineffective and will actually make your sales staff appear too "sales-y" (ie--sleazy). Find your product's actual value!

3. It offers a monetary savings. In the B2B world, a product that saves the customer money is the easiest product to sell. If you can save your customers money -- you are on the path to a closed sale. However, not all products are designed for direct dollar savings. There are many "efficiency" products designed to save time. If this is the case with your product, I recommend converting that time savings to actual dollars when you design your sales pitch. For example, if your product saves an IT department 15 hours per week, then show the customer how those 15 hours translate to over $60K+ in payroll and consulting costs for your IT department over the course of its first year. Trust me, your customer will remember that number over any of the product's other features and will think of you every time he looks at his P&L...

4. It doesn't show you the whole movie to sell you a ticket. This value statement is a great "teaser." It's value proposition only projects PART of the savings it can offer your company (...save you $25MM in fuel costs alone! That doesn't include all the other savings related to faster, more direct flights...). It's like a movie trailer whose goal is to whet the audience's appetite enough to get them back to the theater to see the movie. In this case, Naverus' value proposition is exciting enough for the customer to want a second meeting, but not so exciting that it takes two hours to go through the initial sales call, thus killing the prospects for a second meeting (see #1).

Overall, I give this value proposition an A+. If this were Hollywood, it would win the Oscar for Best Value Proposition in the Sales and Investor Pitch category. Bravo to Naverus!

DS