Johnny Depp, the Mortdecai flop, and Power of Expectations for entrepreneurs and indie film-makers

I’ve written in the past about how investing in indie filmsis like investing in startups.  Although there are also many differences between indie films and startups, today I’d like to further that analogy by using a very recently released film and its not so spectacular success.

Although most of the buzz in the film industry thus far in 2015 has been about the success (and controversy surrounding) American Sniper, an equal amount of anti-buzz is being generated inside the industry about Mortdecai, Johnny Depp’s latest big feature.  In this, I thought there was an important lesson for indie film-makers (and perhaps some startups entrepreneurs too) about expectations and setting yourself up for failure or success.

The reviews are in and Mortdecai, is already being called “one of the worst films of 2015” (quite an achievement since we are only 30 days into the new year), and simply “mortifying”. One article in particular caught my eye, “The Anatomy of a Flop”.   Production budget estimates range from $40 million to $60 million; while that’s not astronomical in the world of Hollywood movies, given that the first weekend gross for the film was only $4 million, it’s pretty hard to see how Lion’s Gate will make a profit on this film.

The funny thing is, I recall being approached over a year ago to invest in this film.  A friend in the indie film financing  contacted me and asked, “ would you be interested in investing in Johnny Depp’s latest film?”  If memory serves, they were hoping to raise the final $10 million or so for finishing the film from outside sources.  As a very big fan of Depp, I said I wanted more details.  I never got many more details beyond the fact that it was called “Mordecai”, Gwyneth Paltrow was co-starring, and they thought it was going to be a big hit!  

My first hesitation was that I was being approached at all to help provide “finishing funds” for a film that was funded by a major Hollywood studios and starred A-level actors.  If there's one thing that Hollywood studios have access to – it’s money.  Why was I, who usually invested in and made very low budget indie films, even being asked? It was a red flag, but not a deal killer.

The second red flag occurred when I dug in more to find out what the film was about.  I didn’t see the wide appeal of the movie or it being the best vehicle for Depp’s eccentric acting.  "But it’s Johnny Depp and Gwyneth Paltrow!" repeated my friend enthusiastically.  As far as I could tell, this seemed to be the only reason to invest in the movie.

I politely declined, since the movie wasn’t really my cup of tea personally, and I felt weird being a very small investor in such a big Hollywood production.  

I had learned that Mortdecai was based on a set of cult novels from the seventies about an eccentric/rogue art dealer.   While I like cult novels in general, I couldn’t see how I, as an individual investor, could possibly make money from such an expensive production (by most indie film standards, spending $60 million is like renting out Versailles for a full year just to have accommodations for a weekend trip to Paris).  

Moreover, given my recent experience with Hollywood accounting and distributors (which I’ll write more about another time), I realized the only way an indie investor would see even a dime would be if the film was a huge, huge hit (of which I was doubtful).

When the trailer and TV spots began to appear last year, I recognized the project, and though I’m a big fan of Johnny Depp and Gwyneth Paltrow (two of my favorite movies of all time are Ed Wood and Sliding Doors), the trailers were terrible enough for me to say pretty confidently that I didn’t even want to bother seeing it.

It kind of reminded me of another Depp outing that involved some kind of spying opposite another Hollywood leading lady: The Tourist, where Depp played opposite Angelina Jolie.  That movie, even though it was a financial success, was forgettable enough (and in my opinion terrible enough) that I can’t even tell you what it was about even though I went to the theater and sat through the whole film! If I strain my memory, I can vaguely remember something about sitting on a train with Jolie in Europe, and Johnny Depp walking on the roof in his pajamas – that’s about it.  Oh wait – there was a surprise ending.  Or was there? Honestly it was forgettable enough that I can’t really tell you how it ended.

The Tyranny of Expectations

I bring up this experience not to say “look how smart I was not to invest in this project” (any VC or angel investor in Silicon Valley worth his salt has invested in enough bombs, and passed up on enough hits to know that it’s not entirely a predictable thing).   Nor is my point here about how terrible the film has turned out - in fact, there are probably a modest number of people who enjoyed the movie and it’s quirkiness.   Actually, the fact that Mortdecai is now being called “one of the worst films of the year” made me more likely to go see it (perhaps in tribute to Depp’s great performance as Ed Wood, who was voted the worst filmmaker of all time!)

My point is actually a different one altogether.  The fact that this film, based on an obscure set of cult novels, was brought to mass market by a major studio spending $60 million dollars set up a certain set of expectations.  Anyone who has seen the previews and TV ads knows that Lion’s Gate must have spent a lot more on marketing – perhaps in the tens of millions – which means that to just break even the film would have to do well over $100 million! (not even counting exhibitor fees, distributor's fees, etc.).

Even for a passion project of Depp’s (since it was revealed that he was the driving force between bringing this one to market), it was marketed to the masses and released on thousands of screens because that’s the only way for it to match those lofty expectations.  This is the blockbuster formula used in Hollywood again and again – get the big stars, pay them a lot, market the hell out of the film with tens of millions more in TV marketing – and release it on as many screens as possible.

I want you to consider an alternate scenario:  what if Mortdecai had been brought out on a very small indie film budget, which is what happens to a lot of passion projects? 

Suppose, like most indie film-makers the film had been made for a few million dollars?  OK Depp wouldn’t have been able to afford to hire Paltrow or Ewan MacGregor, or even pay himself a multi-million dollar salary.   Suppose also that the film had done $4 million in total box office, bringing out fans of the novels and some subset of fans of Johnny Depp? 

The film, even if it was as terrible as it is now, would be a financial success and not, as many industry insiders are calling it now, “Johnny Depp’s fifth flop in a row!”  My point about this film (and many others) is that perhaps the film might have done better with lower expectations and found a niche audience of people who are into these kinds of movies?

Now I’ve never met Johnny Depp personally, so have no idea if he would do a film without his usual multi-million dollar payday, but the point is that there are some films that are never going to be “mass market” films. This is why there’s an “indie” film industry – for financing those passion projects that may not appeal to “mass audiences”.

I’ve seen the same phenomenon in the software industry in Silicon Valley, where investors pump millions of dollars behind teams that try to grow their initial small product idea into a big company very fast.  Many of these efforts fail, partly because of the amount of money they spend trying to “get there”. 

It’s not the investors who are to blame, it’s also the entrepreneurs who eagerly go out and try to raise millions of dollars to become the next “big thing”.

There are many startup product ideas which would work great if treated as a small, bootstrapped company; but, when they are treated as if they could be the next Uber or Twitter or Facebook, they ultimately fail.  By raising a lot of money in the startup world, you eventually end up spending it, and if the product hasn’t met the lofty expectations that you set when raising money, you’re suddenly out of money and the company dies. 

Moreover, because you raised VC money, you tend to have hired a very expensive team of VP’s and other key personnel to bring the product to market, who aren’t going to stick around when the money runs out. 

Hell, the founders have little incentive to stick around when the money runs out because of the way that VC deals are structured – they get their money out first, and unless the company/product is a stellar success, there’s no way that the founders are going to have it be a financial success.

These VC-backed companies, like Mortdecai, I would argue, are a victim of their own expectations.

In many ways, when you raise money for your startup or for your film, by setting a certain budget, you are implicitly (or explicitly) creating a set of expectations.

If I asked you to jump over a bar, and gave you the option of how high the “bar” should be set that you have to jump over, what would you say? If you wanted to be sure you would jump over it, you’d probably say to keep the bar pretty low and would easily step over it. 

However, as a startup founder or film-maker, when you raise money, you are basically being asked how “high” a bar would you like to set for yourself and your project?

Inevitably, most entrepreneurs and indie filmmakers will set the bar as high as possible and try to raise as much money as possible.  Most indie filmmakers would love to get a $40 million budget for their adaption of an obscure set of cult novels into film.  Similarly, most entrepreneurs would love to raise $5 or $10 million or more in their series A financing. 

In both cases, you’re creating a set of expectations for how well your film (or startup) will need to meet in order to  not be considered a “flop”.

So, Mr. Indie Film-maker, and Mr. Entrepreneur, ask yourself for your next project, how high do you want the bar to be set?

The Hobbit and Silicon Valley: Beware of VCs who get Dragon Sickness

I recently watched part 3 of the Hobbit, the final portion of Peter Jackson’s adaptation of Tolkien’s beloved book.  While there are many aspects of the Hobbit I could write about (it's one of my favorite books of all time), I’d like to explore one that caught my eye and applies particularly in Startup-Land:  Dragon Sickness.

I’ve often compared embarking on a startup journey to be a mythical adventure, not unlike those of Bilbo Baggins and his dwarvish companions. Though startup adventures usually last longer than Bilbo’s journey (which was a mere 13 months!), there are a lot of valid comparisons to be made.  

Like many mythical adventures, startup journeys are fraught with peril; each twist and turn can have life-changing implications; they bring out odd traveling companions and bedfellows (not to mention enemies and advisors); and there is often a seemingly unattainable golden treasure somewhere near the end of the quest!  More importantly, startup adventures can push you out of your comfort zone, and as Bilbo so aptly complains in an earlier part of the Hobbit, adventures can “make you late for dinner”! 

In a previous entry, Gandalf the Venture Capitalist, I focused on some of the positive aspects of having an investor/advisor who is wise like Gandalf with you on your journey.  Having the right investors, particularly those who have personal qualities like Gandalf can be very helpful on the startup journey, and get you out of many a scrape.

In this entry, I’d like to explore the opposite: when an investor turns out to be someone who’s extremely selfish, difficult to work with, valuing money above all else, and causes great difficulty on the startup journey.   

While you can easily get rid of an unhelpful advisor or employee, it’s not so easy to get rid of an unhelpful investor, particularly if they are a VC.  Moreover, many investments in Silicon Valley begin with convertible notes, which have their own special characteristics and once you’ve entered into them with an investor, you may be stuck with that investor until the end of the journey.

Believe it or not, I’ve seen investors (VCs) in Silicon Valley contract something that looks a lot like the “Dragon Sickness” in the recent film.  

In the film, the leader of the company of dwarves that Bilbo is traveling with, Thorin Oakenshield, falls prey to this sickness when the company finally achieves the quest they set out on: to reclaim their homeland in the Lonely Mountain, and more importantly the gold and jewels that it contains.  Their main obstacle is of course, the Dragon Smaug, who is a selfish but formidable figure and who has claimed the treasure for his own.

When Thorin finally achieves the Quest, in many ways because of the contributions of others (Bard from Laketown actually kills the dragon, and Bilbo Baggins rescues and saves the life of Thorin and the company more than once!), he starts to see things differently.  He starts to see himself as “entitled” to the gold, and won’t part with any of the treasure, in the process, forgetting every promise he had ever made to people along the way.

It’s called “Dragon Sickness”  because, as Bilbo tells us in the prologue, “…for dragons covet gold with a dark and fierce desire …”   And it leads to a certain kind of self-centered madness.  As the first the dragon say and later Thorin finds himself echoing:  “I will not part with a single gold coin.”   

It's usually typified by someone whose only goal is to “possess as much of the treasure as possible” without any context or caring how their relationship with others are impacted can fall pray to this sickness, just as Thorin does when he finally takes over the gold. In Thorin's case, it was his relationship with his companions, the residents of Lake-town, and even the elves.

Let’s summarize revisit what happened to Thorin and see if this might apply to anyone we know in Silicon Valley:  Achieve a treasure, largely through the efforts of others, claim as much of it for yourself as possible, and refuse to give up any part of it, ignoring previous agreements about sharing.

While some entrepreneurs definitely fall prey to dragon sickness themselves (I may do another entry on this another time), I personally have seen it more with investors in Silicon Valley than in founders.  They often forget whatever agreements were made in the past and decide to find a way to maximize their “take” right at the end.  

Since I moved to Silicon Valley in 2007, I have seen this first-hand several times, usually when a company is about to be sold.  I’ve had VCs say they want more of the gold than they are currently entitled to and want the founders to take less.  Of course, they don’t say it that way, like a sneaky, experienced dragon they speak in sweet tones and make it seem like what they’re proposing is “the right thing to do” even though it benefits just them and hurts others.

Moreover, while a company is not a zero sum game at the beginning, when a purchase price has been negotiated to sell a company, it does suddenly become a zero sum game – i.e. each dollar that goes to someone else, doesn’t go to you.  

They often, though not always, imply that they won’t go along with the sale unless they are "satisfied".  Now, many investors have vetoes over selling the company, and while VCs don’t like to use vetoes explicitly, investors can cause plenty of harm when a sale is happening.  This is doubly true if the company is being sold, or even if the company is not doing well and is about to run out of money, and needs to raise money quickly at whatever valuation it can get.

I had one entrepreneur tell me that he thought that what the VC was doing was basically extortion. While I wouldn’t call it that, I would say that someone whose only desire is “purely financial” or "purely transactional" will do whatever they can to make sure they get “as much gold as possible”, no matter what.

There are of course many ways that a bad investor can be destructive to a startup, but this is one of the most frustrating ways.  It’s like a serpent that you've let into your house, which starts to eat the company and the team from the inside.  This usually happens in two instances: when the company is doing really well financially (and everyone is getting greedy), and when the company is not doing well and the company needs to either do a fire-sale or raise money quickly.

This is why it’s important for entrepreneurs to vet investors in the same way that VCs vet entrepreneurs.  Many entrepreneurs are so happy to be getting “money” that they don’t consider the ramifications of who they’re bringing into their adventure.

I’ve often said that it’s pretty easy to tell if a co-founder that you don’t know well is easy to work with in a place like Silicon Valley.  Because people here usually start multiple companies, you just see if that person’s co-founders started another company with them. If they did, then that person is probably relatively easy to work with (or at least acts reasonably when things get tough).   Of course, if their co-founders didn’t start another company with them, it doesn’t absolutely mean they are hard to work with, but it’s a pretty good indication.

Similarly, you can do the same kind of research on VCs by interviewing founders of companies they have invested in before.  Of course, you have to interview more than one – preferably one whose company was financially successful and one whose company failed – you will probably learn much more about the investor from the failed company than you will from the successful one! Each situation provides a ripe environment for the dragon to come out, even when they seem entirely reasonable and on your side when you’re getting your financing.

So, how can you spot an investor who’s likely to fall prey to “Dragon Sickness” well before you get to these stages?  It’s not easy, but here are things to look for in both your own company and others founders experience with investors.

•       Look for investors who are looking for an advantage over everyone else.  I’ve seen some investors who not only want to invest, but they want a better deal than the other investors they are investing alongside them.   Now, don’t get me wrong, if an investor is doing services for you beyond just the money, it might make sense to give them more (perhaps warrants or just pay them for their services).  But when an investor, at each juncture, co investing with others, tries to get advantages over the other investors in his round, asking for rights they don’t have, that’s a sure sign that they may turn out to be slimy when push comes to server.
•      Every discussion is like a zero-sum game.  When startups first get going, they are not a zero sum game.  That's why it makes sense to take investors in the first place, by giving up shares of the company, you are theoretically expanding the pie for everyone. When every part of the negotiation to do a deal feels like they are playing a zero sum game - not willing to give in to anything, you're starting to see their personality seep out.  If they are like this when there's plenty for everyone, what will they act like upon a sale of the company, where it really does start to look like a zero-sum game?
•  Doing what’s right for them vs. what’s right for the company.  I’ve seen many investors push companies to do deals that are right for them but not right for the company.   On the flipside, I think having board members who are on other boards in the same industry can be extremely helpful, but the key is whether they “insist” on doing things their way even if it doesn’t make sense from the founders and other investors perspective.  It’s more about the way they do this – again speaking in sweet tongues and making it seem like something is “best” for the company when it’s actually “best” for them.
•  Not Participating.  If a VC Fund puts in money at the beginning, or while the company is doing well, but are unwilling to support the company in any way financially when the company is not doing well, this is a sure sign that they will be a tough investor to work with and will try to manipulate events so that they get “more out” than their fair share by withholding consent.  Like a "fair-weather" friend, the a "fair-weather investor is the worst kind to have.  Now, VCs have obligations to their general and limited partners, so they can't always put in more money when they personally want to without their partners consent.  But any serious VC Fund, which has set aside money for follow ons, should be willing to put in their pro-rata into subsequent rounds, even if  they aren't investing a lot. When VCs don't do this, it scares off new investors and actually hurts the company's chances of raising more money.  The new investors start to think, there must be something seriously wrong with the company.
•   Beware of well-known investors with big egos.  Sometimes, an investor, because of their firm or reputation is known as a "big wig" and has developed a big ego.  There’s of course nothing wrong with bringing in well-known investors, it is often a benefit to your company, but sometimes their reputation and how much money they’ve made in the past belie the specifics of how they acted behind closed doors.  Most hollywood stars, for example, are nothing like their public personas in private.  Many comedians aren't funny and many super-likable TV stars are not really nice guys behind the scenes.  The same is true with VCs.

In the film the Hobbit, to help break through Thorin’s Dragon Sickness, Bilbo, the "junior member" of the company,  does something to try to get Thorin to do what’s right for the Quest and to others that Thorin had made promises to.  He willfully gives up most of his share of the treasure!

I’ve often had investors ask founders to take less than their percentage of the company so that they could have “more”.  Usually this comes out of pure greed, which is pretty common in Silicon Valley investors (and even in some entrepreneurs).  But it also comes from ego, which is sometimes even more common.

Luckily, I and other entrepreneurs have seen situations where, like Bilbo, some founders are willing to give up a chunk of their piece of the treasure upon a sale, in order to make rogue investor or founder to go along with a sale that the founders wanted to do.   They are doing it not as a reward to the investor, but for the greater good - they want a deal to get done and no longer want to work with the investor inflected with dragon-sickness, so they're willing to give up something to make it happen.  This isn't necessarily a sign of weakness (though dragon-sickness infected people might think so) - it's being practical and thinking of others as much as yourself.

So, when talking to investors, do your own due diligence on them. Find founders of companies that they do not recommend you talk to, you can usually get to them through friends of friends.  

The real question you need to ask yourself is: are you getting a Gandalf, or are you inviting Dragon Sickness into your little startup?  I’ve had both, and it’s much more fun to have Gandalf!

Zen and the Entrepreneur: The Startup Files

I just celebrated my birthday last weekend and as always, I found it a good time to reflect on the past year and the upcoming year. (Perhaps this is a good idea for all of us, since December 17 was also the day the war in Iraq was finally, finally over, and also the same day that Kim Jong Il, the leader of North Korea, keeled over).

A birthday seems to me like a more natural time to make resolutions for the next year, so that's what I did. One of mine was to write more. Which brings me here.

When I started this blog years ago, my plan was to write mostly about startups, along with some occasional tidbits about zen, meditation, science fiction, or anything else which popped into my head since the last entry, as long as I could somehow relate it back to the experience of starting and growing a company.

Like most things in life, it’s pretty easy to get dragged off track!

Two obvious examples: when I spent at year at Stanford Business School, this blog became about what life was like at the GSB (which led my classmates to have a running joke - whenever anyone said anything really funny or controversial, they’d to turn to me and blurt out: “Don’t put that in the blog!!”).

And, just last week, when I’d restarted the blog after a 1.5 year hiatus, I felt compelled to write about the Daily Show’s (wildly inaccurate) portrayal of my interview with them (See The Top 10 Things that the Daily Show with John Stewart Got Wrong About Tap Fish).

Of course, I'm sure there will be plenty of controversial and off-topic posts in the year to come (I promise!), but for now I want to shift the blog back to where I started. In this spirit, I thought I’d re-link to some of my favorite posts about… you guessed it… entrepreneurship (this is, after all, called the Zen Entrepreneur blog).

I’d like to dedicate these posts to those fearless individuals who, in the past year or in the upcoming year, despite the terrible economy, are willing to leave their well paying jobs, work long hard hours for little (if any) immediate reward, to take a risk and start a new company. In the process you will literally be creating something out of nothing, hopefully creating lots of jobs in the process.

I won't deny it can be stressful (if you've never had employees depending on you for their paychecks, month after month, or a mortgage of your own to pay without any paycheck coming in, or had investors and/or customers literally yelling at you ... well, welcome to the everyday world of a startup founder). But it can also be very rewarding on the days when things go right. And there are definitely some of those days too!

Here's to you:

• The Curious Case of Steve Jobs: Intuition and the Entrepreneur

  one-liner: “Don't let the noise of others' opinions drown out your own inner voice. ”

• Social Entrepreneur: From a Wacky Idea to the Nobel Prize

  one-liner : “Even the wackiest idea can make a huge difference. This happened when most of us had no idea what micro-loans were.”

• The Bootstrapper’s Dilemma

  One-liner: “When you got no cash, the real question is: To Focus or Not To Focus??"

• Build it Fast, But Make it Last

  0ne-liner: “Is your Agile really better than his Waterfall for a new software product? Is there really any good methodology for building software in a startup?”

• Poetry for Entrepreneurs: Love My Startup More Than You.

  one-liner: "Silly poem I wrote to the tune of an old jimmy when I was kicking around unemployed in Silicon Valley."

Here's to an interesting year ahead for all of you who are already on, or about to jump onto, your own entrepreneurial journey!