It’s a Hits Business: Silicon Valley and Hollywood Share More than Ashton Kutcher

Google "Silicon Valley Hollywood" and you’ll get a bunch of articles about how Hollywood stars are “investing” in tech startups and how entrepreneurs have become celebrities themselves. There’s even an event called Hollywood Meets Silicon Valley. However, these two industry hubs have more in common than Nas writing blog posts on TechCrunch and Justin Bieber getting equity in Stamped - the models of both are grounded in a simple mantra: “It’s a hits business.”

VC investing in Silicon Valley is virtually identical to the way in which Hollywood approaches making movies. At the most basic level, both industries rely on picking a few big winners to carry the day. Major studios rely on “event films” - these are the summer blockbusters, the $100M+ budget movies that are supposed to generate outsized returns. In fact, these event films usually account for 80% or more of a studio’s annual film revenue. This model is virtually identical to the early stage VC model as a similar or greater percentage of a fund’s returns come from a few anomalous successes. 

The evaluation of whether to invest in a startup and the decision of whether to greenlight a film are also startlingly similar. From a diligence perspective, financial projections are primarily reviewed for the purpose of a sanity test. Do the financial projections coincide with the likely business model of this startup? Do these numbers reflect the audience’s likely reception of this film and our level of marketing? And when it comes time to pull the trigger in both instances, the ultimate decision usually comes down to a gut instinct given the unpredictability and subjectivity of analysis in both industries.

Additionally, the pitches for a startup and a movie and how VCs and studio execs get comfortable with investing are the same as well. Many startups have adopted the “blank for blank” pitch (e.g. “Pinterest for dogs”). There’s even a website that makes fun of such startups. However, VCs occasionally appreciate this syntax because it helps them understand the startup and the market its approaching - firms tend to flood sectors by backing many competitors or similar sites going after the same basic opportunity. Similarly, when seeing a movie trailer, how many times have you heard, “It’s like blank meets blank!”? In fact, I even came across a website making fun of this, as well. Studio execs, like VCs, tend to follow the trends (e.g. vampire movies are hot so we should go with one of those) to try to appeal to as wide an audience as possible. Ultimately, this market gets flooded as well, and there can only be so many winners.

Both VC firms and studios are probably best served to adopt Peter Thiel’s Venn Diagram referenced in Paul Graham’s recent blog post, “Black Swan Farming.” The diagram in question shows the slim overlap between “bad ideas” and “good ideas” - and this sweet spot is where VC money and studio budgets should likely flow to a certain extent. PG cites AirBnB as his example in the startup world and YC, in particular, and many in Hollywood would cite The Passion of the Christ as the paradigm - a highly controversial film with no star actors playing roles being distributed by a minor player in Newmarket Films that happened to have expertise in the indie space. But it proved to be one of the highest grossing films of all-time, raking in over $600M worldwide on a $30M budget.

Moreover, the overall industry dynamics share two key traits. First, the returns for each sector are generated by a few key players. In film, the several major studios routinely account for 90-95% of annual box office revenue. Meanwhile, in the venture business, between 1986 and 2005, 29 firms accounted for 51% of the total distributions in the industry despite the fact that these firms had only raised 14% of the capital during the period they were actively investing (1986 to 1999). These metrics imply top tier funds had turned $21B into $85B while all others had turned $160B into $85B. Additionally, another study revealed the top 50 firms of 1200 studied (this is pre-mass consolidation as we currently stand at about 500 VC firms likely shrinking to 300) were responsible for 77% of the value of VC-backed companies going public from 1997 to 2004. 

Finally, the second critical similarity is that both are relationship businesses. The majority of VCs and entrepreneurs grew up together. Whether it was at Stanford or Harvard, Google or Microsoft, or Facebook or Twitter, most investors and founders are quite familiar with each other, and the decision to invest is as much about the strength of the relationship as the strength of the business model. Likewise, in Hollywood, studio execs and producers and directors grew up together as well. It may have been at UCLA, USC, or NYU or in the mailroom at UTA, ICM, WME, or CAA, but the entertainment business is as much about relationships as the startup world.

And given these similarities and the continuous blurring of lines between technology and content / media, I wouldn’t be surprised to see more pronounced overlap between the two industries in the near future.