How to invest in a Broadway show. Part II

Yesterday, we dispelled some of the rumors associated with investing in Broadway shows.  Today, we’ll step through my checklist of how to decide whether or not to invest in a particular Broadway or Off-Broadway show.

BROADWAY INVESTING RULE #1:  Have passion for the project.
Broadway shows are often referred to as the “children” of Producers and Investors.  Shows need the same type of care, hand-holding, and unconditional love.

So much love, that even when your kid F***s up royally, you (as the parent) will still love him, right?

Unfortunately, the odds are that your “kid” is going to disappoint you, so you better make sure that your bond is so tight that you won’t care either way.

This theory is based a bit on famed investment guru Peter Lynch’s theory of “invest in what you know.” Peter believed you should put money into companies that make products which you see and use every day (and products that you can’t live without).  I believe this should be adapted to entertainment investments as well.  Invest in shows that you can’t see NOT happening.  Invest in shows that you believe are important to be seen; whether that’s because it has a socio-political message, whether that’s because it features an amazing performance by an legendary actress, or whether that’s because it’s so much fun that the audience’s day will be better just by experiencing the show.Invest in shows that you love.

BROADWAY INVESTING RULE #2:  It’s all about who’s driving the boat.
Before investing in a mutual fund, Wall Street geeks will tell you to look at a variety of factors, one of the most important being who is managing the fund.  You’ve got to know who is making the day-to-day decisions.  What is their track record?  Where did they learn to do what they do?  How long have they been doing it.

These are all questions you need to ask before investing in a Broadway show.  Look at the Producer’s resume (you can find them all on the Internet Broadway Database (www.ibdb.com).  Have they produced shows that have recouped?  How many hits do they have?  How many misses?  Would you have produced similar shows?  Do you have similar tastes?Choosing to invest with Producers with a proven track record is one of the best ways you can reduce your risk when investing in a Broadway or Off-Broadway show.

BROADWAY INVESTING RULE #3:  Just like an actor, you have to know your objective.
What do you want out of investing in a Broadway show?

Different objectives will greatly affect what project you choose to do.  Do you want to make money?  Do you want to get access to opening night parties, etc. so you can network?  Are you looking to get inside access to agreements and figures, etc. so you can learn more about how to produce your own show?  Do you want to support the work of a specific playwright?

One of my favorite “objective” stories is about the investor who was thinking about graduate school as a way to learn how to produce.  They decided against it, and took the money they were going to spend on tuition and invested it in several shows.  They thought there was more to learn by playing the game.  Last I heard, they were doing pretty well and beating the odds. There are a zillion reasons to invest in a Broadway show.  Make sure you have at least one.

BROADWAY INVESTING RULE #4:  Don’t try and be a one-hit wonder.
We all want our first time to be perfect (I even wrote a show about it!), but often our first time out isn’t what we hope it will be.  Don’t expect to knock one out of the park your first time up at bat.  When signing up to invest in Broadway, imagine that you’re a baseball player playing a full nine innings.  If you strike out the first time (or even the second and the third) don’t worry, you could hit a homer in the bottom of the 9th and win the game. If your first show doesn’t make it, have a post-mortem with yourself (and with the Producer) and try and determine why it didn’t work. Learn from it, and apply those lessons to your next time up at bat.  Your odds of success should get better each time. Just don’t pull yourself out of the game.

BROADWAY INVESTING RULE #5:  Examine the lay of the land.
It’s impossible to time the market.  But, in a playing field as small as Broadway, with its limited audience, it’s important to take a look at your potential competition.  Are you doing a new musical at a time when six other new musicals are opening?  How do your stars match up against the other shows’ stars?  Are you the only classic play?  Are you the only comedy?  The big TV networks program their seasons so they can appeal to all of the appropriate demographics, without too much weight on one type of show.  Since Producers are mostly independents, we can’t program collaboratively, but as an investor you can look to see if your show is going to get lost in a sea of other similar shows, or if it will stand out amongst a lack of competition, without having to place $125k New York Times full page ads.

 

So there you have it!  The above are the first five basic questions I ask myself when contemplating investing in a Broadway or Off-Broadway show.  There are countless others you should ask when you get into the details of the production after you examine the budget, find out who’s directing, etc., but these will get you started on the road to investing in a show. You’ll notice that a lot of the above rules and checklists are very similar to the rules and checklists for investing in the stock market or any market (invest for the long haul, know your objectives, risk tolerance, etc.).  And that’s the most important thing to remember. Too many people think investing in Broadway is a hobby, which it can be, and in those cases you’ll probably only hit a winner on the average 1 out of 5 times. Broadway is big business, and should be treated as such.  And if you apply the same principles you’d apply to other investment vehicles and do the due diligence, there’s no reason you can’t turn that hobby into something that is fun, educational, and yes, even profitable.

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How to invest in a Broadway show. Part I (Updated 2018).

I’ve gotten a lot of questions from readers all over the world expressing interest in investing in a Broadway or an Off-Broadway show.  Usually they are unsure about how to get involved and, more importantly, they want to know how to pick their first show.

Since this seemed to be such a hot topic, I thought I’d take a couple of blogs to dispel a few of the nasty rumors associated with investing in Broadway or Off-Broadway shows, and also give you my checklist of how to choose a show to invest in.

 

Today, we’ll deal with the rumors.  Tomorrow, the checklist.

 

Ready?  Here is part I of How to invest in a Broadway show:

 

BROADWAY INVESTMENT RUMOR #1:  Investing in Broadway shows is only for the super-rich.

Because Broadway capitalizations can range from $2 million for a Play up to $20 million for a Broadway Mega-Musical, many people fear that the “entry point,” or the amount of money required for an initial individual investment, must be astronomically high.

Not true.

 

While the average smaller investor in a big Broadway show is probably about $25,000, I have seen many shows where investors were able to get in for as little as $10,000, and even a few where the entry point was only $5,000!  There are a lot of publicly traded mutual funds that don’t allow you to get in at that level.  These lower investment thresholds are very common in the Off-Broadway arena.

 

What determines the lowest investment level?  Here’s how it works.  Capitalizations are divided into ‘units’, just like shares of a stock.  What defines a unit is up to the Producer.  Some Producers like to have a round 100 units per show, regardless of the capitalization. Some like to pick the lowest amount they can accept as an investment (some shows are limited to the # of investors they can have).  Some just make it up arbitrarily.

 

Here’s a tip.  If you’re considering a show and you get sticker shock when you hear the price of one unit?  Ask for a partial.  Splitting units ain’t like splitting an atom.  It can be done with ease.  Depending upon a variety of circumstances, including how hot the property is, who the producer is, and whether or not other investors took “round units,” it may be possible for you to invest in a smaller amount than the “ask.”

 

The key is, of course, never be pressured into investing more than you’re willing to lose.  If the entry point on one project is too high, don’t worry, there are others.

 

BROADWAY INVESTMENT RUMOR #2:  Investing in Broadway shows is only for the super-crazy.

So many people think that it’s bonkers to get involved with Broadway.

The fact is, if you’re an individual of a certain net worth, your traditional financial advisor will probably recommend that you allocate a certain amount of your investment portfolio (usually about 10%) to higher risk instruments or so-called Alternative Investments in order to diversify yourself (most Broadway and other AIs require investors to be “Accredited,” although this is not always the case for shows).  Look at the Smith Barney site here to see a description of the Alternative approach.

Why would Broadway, with its high risk but potentially high return, be excluded from that list?  In fact, it isn’t.  Check out the Wikipedia entry for Alternative Investments here.  Recognize anything?

Alternative Investments, including Broadway and Off-Broadway shows, are high-risk, without a doubt.
The commonly quoted statistic is that only 1 out of 5 Broadway shows recoup their investment (that ratio is even lower for Off-Broadway shows).  But it’s not the only high risk instrument on the market, by any means.  Investing in Broadway shows is a lot like investing in a restaurant, a piece of art,  or frankly, in any entreprenurial start-up.  Look at this statistic that puts the success rate of start-ups at the exact same percentage as I just quoted above – 20%!  See, it’s not as bad as we thought.

And, if you do proper due diligence, as we’ll discuss tomorrow, you can increase those odds.

Also, with big risk can come big rewards.  Even if you do end up performing according to the stats, the goal and hope is that the 1 show out of 5 ends up paying for any other previous losses (it’s a marathon not a sprint) and then some. Imagine what it would have been like to invest in Annie, West Side Story, Cats or Wicked.

BROADWAY INVESTMENT RUMOR #3:  Investors in Broadway shows belong to an exclusive ‘club’ that doesn’t accept new members.

While it is true that there are a lot of investors in the Broadway world that have been in the circle for a long time, it’s not as closed door of a club as you think.  While it can be hard for a new investor to get in on the hottest shows coming to town, it’s not impossible, and sometimes, Producers will let you get in on a ‘sure-thing’ (which doesn’t exist, by the way) if you also agree to come into something a bit more risky.

However, it is a relationship business, and preferential treatment is often given to investors who have been doing it longer, and to those that have been faithful to the Producer.

So what does a new investor do?

Start the relationship.

Call a Producer.  Email them. Fax them.  Simply state that you’re looking to invest in a specific show (if you know one that they are about to do), or ask to be put on the list to be called about their next show. It’s not a commitment for either party, and I don’t know any Producer out there who would mind putting you on a “potential” list.  Just make sure you are serious about your interest.

Those are three of the biggest obstacles potential Broadway and Off-Broadway investors tell me prevent them from taking the first step and joining the ranks of Broadway investors.  Tomorrow, we’ll talk about just how you choose a project to invest in, once you’ve decided that investing in Broadway is something you definitely want to do.

Click here to read How To Invest in a Broadway Show:  Part II.

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Interested in more information on Broadway investing? Then head on over to my post 10 FAQ about Broadway Investing, to get some inside knowledge on what’s actually necessary to be an investor.

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Why investing in Broadway or Off Broadway is better than investing in the stock market.

Whenever you are selling anything . . . from tickets, to why a star should sign on to your show, to a vacuum, you have to remember that you’re never selling IN a vacuum.

There is always something that your “consumer” could buy instead.  They could always get tickets to another show (or, God forbid, a movie).  The star could always sign on to another show (or, God forbid, a movie).  And they could always get a Swiffer (or, God forbid, they could just leave their apartment a mess and go to the movies.)

You not only have to sell why your product is worth whatever price they are paying, you also have to sell why your product is better than the other products that are out there.

For example, when raising money, one of the common questions that I always have to be ready for (and one that you should be ready for when you start raising money) is, “Why should I throw money into such a high risk venture when I could throw it in the stock market instead?”

Hmmm, good question, right?  Actually it’s a great question.

There are of course a bunch of reasons why someone would invest in the theater as opposed to the market:  opening night tickets, high risk but big upside potential, house seats, billing, potential tax write off, or just because they believe in you.

But most of those are indirect comparisons.  When you’re selling stuff, you need to find direct comparisons between the competition, like . . .

Yes, investing in the market is safer, without a doubt.  And you should encourage your investors to do so, to create the most diversified portfolio possible.

But when you buy a stock, you not only have to know when to buy . . . you also have to know when to sell.  Stocks go up, but they also come down.  You could invest in a blue chip a year ago that everyone was recommending and a year later it could post almost a 10 billion dollar loss.  And no matter how much your stock went up over the last year, if you didn’t get out in time, you lose.  You may have made a smart decision a year ago, but if you’re not a expert market watcher, then you could end up with a tax-write off anyway.

Here’s the thing about shows . . . once they get over that humungo hurdle and actually recoup, they never go the other direction.  Once you’ve got a winner, you’ve got a winner, and your gains only increase.  Sure, the gains may be small, or they may slow down when the Broadway show closes and when your show is only being done in high schools, but you never have to worry about selling.  Returns diminish, but never reverse (barring some sort of extreme circumstance like litigation).

When you buy a stock, you have to be smart twice.  When you buy Broadway, the pressure is on only once.

Ok, that’s not true.  You also have to figure out what to wear to the opening night party.  (And there’s another reason why people invest in the theater instead of the market – you don’t see Citigroup throwing parties for investors when they buy 100 shares, do you?)

Would the traders at Goldman Sachs punch holes in the above theory and find direct comparisons of their own to prove why investing in the market is better than a musical?  Probably.

That’s just as much their job as it is yours.

Then again, they were also recommending Citigroup last year.

So don’t sell in a vacuum.

(Insert your own Davenport-style “sucking” reference here)

 

If you are interested in learning more about investing in Broadway shows, click here.

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