Malcolm Silver specializes in multimedia financing and investor service. He is the president of Toronto-based Malcolm Silver & Company.

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Many film and television producers making their initial forays into the world of multimedia make the mistake of thinking the two worlds are the same in respect to financing. While there are many similarities, the financing of multimedia is different, and the distinctions are important to understand if you want to succeed.

The similarities

It’s a creative business: the key to successful multimedia productions is the same ­ a great story. But in multimedia, the creative process g’es even further. The multifaceted storyline is usually much more complex, and uses software in a way that a film producer can only fantasize about.

It’s a financial business: multimedia must earn a profit. This is the first and the last rule.

It’s hit driven: only a small percentage of multimedia productions make their money back.

There are tax advantages: for multimedia investments it’s currently 100% over two years.

There are similar financing aspects: elements of the film/television funding equation can be applied to multimedia. Losses can still be flowed through to investors, and the liability can be limited to the amount of the investment. The producer’s mantra of using ‘other people’s money’ applies. Banks will not loan money on an unsecured basis to fund production.

The differences

There is a different business model: there is a frantic search for a business model that works and a track record of proven success in the tough retail arena. Distribution advances are rare to non-existent, making financing a challenge to an aspiring independent producer. The budget size is also a great deal smaller; a cd-rom computer game costs about us$1 million to us$1.4 million to produce, and most non-game titles have budgets of about $200,000 to $400,000.

The multimedia business model is also quite different because there is no market after the retail launch. There is no equivalent to pay-tv and syndication markets and there are few specialized cd-rom distributors. However, this is changing. The industry is a child of convergence; new entrants can be expected, coming from the computer software, book and film distribution industries.

There is a different culture and process: the terminology used by film/television producers is quite different from the lexicon used by multimedia producers. For a multimedia producer, ‘development’ means the actual production of the project.

Multimedia is growing rapidly: due to the expanding base of computers, cd-rom drives, video game units, and Internet connections, rapid growth has fueled a lot of excitement in the industry ­ but it has made many investors cautious.

Multimedia investment options

If you are looking for money to finance your production, consider the following methods:

– Tax shelters: on this basis an investor g’es into a deal with a down payment of about 20%, and signs a note (usually for 10 years) for the balance. An independent valuation justifies the total value/cost of the production. This gives him the right to deductions of 100% over two years.

The investor has to be sure there will be revenues sufficient to pay off the note. This is a structure of which Revenue Canada is wary. They have stated their intention of looking at all these deals very carefully, especially the grounds for the valuation.

– Business Driven: the investor pays for his investment with all cash and no note, but he has the same deductions as with a tax shelter. There is no need for an independent valuation. The investor is completely reliant on the sales revenues to deliver a real return to him. This can be done on an individual or pooled basis which helps alleviate the risk.

An investor will clearly need to see the sales projections, the distribution arrangements, and a business plan. This is the old-fashioned way which has worked for many years and will continue to do so indefinitely.

– Corporate investment: investors who prefer to invest in a company rather than in a production have a wide choice, ranging from shares in publicly traded companies, labor-sponsored venture capital funds, to specialty funds which invest in multimedia.

– Bank driven: investors can also participate in bank-driven financing below $250,000, but these types of investments are rarely seen by the average investor.

As a producer, you must look at all of the financing options, and decide which method will attract the quantity and quality of investors you require. In many cases, the structure you use for financing will determine the success of your project.

To receive a free copy of The Silver Guide to Multimedia Investing, call (416) 488-3393 or send an e-mail to malcolm@msilver.com.