Don't Lose It At The Movies The Brothers McMullen and Blair Witch--yes. Waterworld II--no. A primer on indie-film investing.
By Peter Callahan

(FORTUNE Magazine) – You read about it all the time. Some independent film, made by young punks using credit cards and loans from Uncle Bob, goes on to earn millions at the box office. Soon they're on the cover of TIME, rubbing elbows with movie stars and lounging poolside in Beverly Hills. Sure sounds like fun, right? And all you, the average Joe, have to do to join the party is invest in the next Blair Witch Project or Clerks. Well, maybe. But before you plunk down your life savings on a film made by your cousin's nephew, fresh out of film school, here are five things to keep in mind.

1. Don't assume you're going to make a cent. Most movies, Hollywood or independent, big budget or small, lose money. For every Titanic there are loads more that perform as well as the actual Titanic. Profit margins for the movie industry are 10% at best. And for independent films, the numbers are even bleaker: No more than a tenth of the 1,000 or so independent movies made each year turn a profit. Still, the rare gem does make money, and your film might too. Just remember that you're far more likely to watch the Academy Awards from your couch than from the Dorothy Chandler Pavilion.

2. Don't ignore the script. As with any other investment, you should know the people who are holding your money--and how capable they are. Do the filmmakers have any experience? A whit of talent? One critical, if obvious, way to find out is to read the script. (Surprisingly, a number of investors don't bother.) Familiar red flags are scenes that include special effects, F-14 dogfights over the Empire State Building, or other ideas that may sound good on paper but are impossible to film on a shoestring budget. Instead, look for the basics: strong characters and a well-told story. You might not feel you can judge the merits of a screenplay, but if you think the script stinks, you're probably right. It's simple: Bad scripts make bad movies--and that's especially true in the indie-flick realm, where the dialogue can't be covered up with high-tech wizardry. But if the story sizzles and you feel the filmmakers are talented people who won't take your money and flee to the Caymans with a bevy of starlets, it's worth considering. After all, if the movie is a smash, you can all go to the Caymans with that bevy of starlets.

3. Don't fall for a big-budget mess. Just as important as the script and the talent is the question of where your film fits into the marketplace and how it's supposed to make its money back. A successful indie film typically follows the same pattern: It's an interesting story--a true departure from the standard Hollywood junk--that costs under a couple of million dollars to make, is well received at festivals like Sundance, gets distributed to select theaters around the country, and then moves to video and cable. Sounds simple enough. But merely getting into a topnotch festival is a lottery in itself, let alone getting good reviews at one. Sundance receives 3,000 submissions each year for some 150 slots. Even a third-tier venue like the Cleveland International Film Festival rejects hundreds of films. Still, festivals are the best place for most independent films to begin the perilous journey to profitland, and pursuing that course makes sense. What doesn't make sense is trying to beat Hollywood at its own game by spending tens of millions on a lame action movie.

4. Don't agree to a bad deal. If the project does make money, what's in it for you? Not much if you haven't asked for the right things up front. A savvy investor should demand nothing less than "preferred position" when divvying up the cash. In a typical arrangement, any revenue from the movie goes to paying back the investors first, plus a premium of 20%. After that, any cast, crew, or service deferments get paid off, and the remaining profits are split fifty-fifty between the filmmakers and the investors. If the filmmakers are desperate for money (and they almost always are), you may be able to negotiate better terms. A larger investment could give you a cool credit on the film, like "executive producer." Hey, throw enough cash around, and many filmmakers will rewrite the script and add a bit part for your talentless niece.

5. Don't assume it's a loser, either. "Nobody knows anything," screenwriter William Goldman once said. When it comes to the movie business, no one really knows what will or won't succeed. So if you have a little extra money and are approached by independent filmmakers with their hands out, you have to follow your gut, or maybe even your heart. You may not make a killing, but you may just help to make great art. And who can put a price tag on that?

PETER CALLAHAN is a writer-director who recently finished his first independent film, Last Ball. He insists that none of the negative aspects of investing in indie movies apply to his own brilliant debut. In fact, if you'd like to give him more money, he can be reached at