Sillywood, Part 3: All The Money is in Sequels
"Star Wars" made $800 million worldwide, nearly 50% more than "Empire Strikes Back". However, at $33 million, "Empire" had more than twice the budget.
That seems logical, since series was already a hit by then. Star Wars, on the other hand, was a big risk - George Lucas had only one minor hit and one major miss to his name. Taken as a group, movies in that category lose money. Studios make most of their profits from successful sequels. They now negotiate the sequel rights at the time the first movie is filmed to lock in their option on all the actors and characters.
The same principle applies to Silicon Valley.
Personal Sequels
In "Believing Makes It So", I previously observed that Silicon Valley is like Hollywood in that a project never gets off the ground without support from many sides (employees, financiers, customers, suppliers, partners). In "Perceived Success Breeds Success", the logical extension is that people judge likely success based on past track record.
That leads directly into the notion that you will get a better deal when you are doing something again. You are only partially compensated for what you do; in a fast-paced, high-risk startup environment, you are primarily compensated for how much you can increase the perceived chances of success. Thus, on a personal level you will make the most money for "sequels" to your past positions. For those who like to take on new tasks and learn new things every job, this can be frustrating, since you will compensated best for repeating what you've already done.
VCs as Studios
Much venture investing is also based on sequels. Of course there is the "personal sequel" type, where we invest in the next company from the same team. That's like investing in Steven Spielberg's next film, even though it's a brand new idea.
VCs also invest in the equivalent of movie sequels. The Silicon Valley equivalent of "Empire Strikes Back" is called "Series B". (Please no Darth VC jokes)
Financing for companies comes in multiple stages. As many investors discovered in the aftermath of the bubble, investing in just one stage is a very difficult road. Investors are actually buying an option: if a company does very well, VCs can put more money to work at much lower risk in the next round. Funds often make more money from follow-on investments in their own success stories than from early stage investments.
The trend has been reinforced by the number of billion dollar funds. With each partner responsible for investing hundreds of millions, an early stage investment is only made in anticipation of much greater future capital investment. As a result, there has been frustration among some entrepreneurs who feel that investors have forced money on them.
In Silicon Valley, most venture returns come from follow-on investments. In other words, in both Hollywood and Silicon Valley, all the money is in sequels.
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What about the general rule of sequels usually being worse off than the originals in Hollywood? I think most of us can list a bunch of movies whose sequels either destroy the branding or was complete crap.
Of course you do get wonderful sequels like Godfather 2 every now and then. (3 was a decent movie until you rank it with the first 2 and boy does it pale then)
I guess I'm hoping if you can shed some light on whether sequels does better in Valley than it's dismal track record in Hollywood.
Similar behavior happens in Wall Street, where people don't just invest their money in stocks that have higher Expect Return. Instead they favor investments with higher Risk Adjusted Expected Returns. That's why Wall Street bankers demand higher cost of capital from those unproven, volatile companies than from those established, stable ones. This may sounds unfortunate or unfair to many, but so far investors still haven't found a better way than looking at the historical track record.
I liked James Zhao observation of Risk Adjusted Expected Returns. IMHO, VC's companies are now mainstream. Unlike a decade ago, they have track records and criterias to guide VC investment. Today, many VC's never founded a company. They just have brillant degrees and resumes that qualified them for a job with a prestigious VC firm. They are similar to highly qualified lending officers in a bank, except they work with different rules, - refined in the last decade, - in the venture capital market. I think the winners will be those who diversify investment in what is perceived as "high risk" by VC's classic establishment standards.
I don't knows if this is a factor for VC's but in Hollywood, I think it really comes down to fear. Hollywood execs are in a constant state of fear because they don't want to get fired for being the guy who greenlit "Ishtar" or "Saving Christmas". Although, that probably seemed like a great idea on paper.
It's much easier and safer to crank out something with built-in branding than to take a chance on something new. As soon as the major studios became another item on the balance sheet of larger corporations, their creativity was marginilized and became just another revenue stream.
It's a shame. I really like movies. Oh, another sequel that was better than the original: "The Empire Strikes Back."
Later.
Only problem with Movable Type is that you can't publish to your blog using email. This would allow you to add thoughts to your blog from handheld email devices like Blackberry.