It’s the killer question: how do you get funding for your experience?

If you work in experiences and want to build your own, it’s not enough just to have a brilliant creative idea. You have to also understand the financial model that will get investors on board and open the door to getting your experience made – and hopefully thriving.

David Shulman is a CFO with a creative streak and a business-minded artist who’s been in the creative industry for 14 years and has a background in corporate finance, spanning VC-funded startups, public and private companies, nonprofits and foundations. 

He’s also CFO of Sierra Whiskey Entertainment, which produces live and virtual events and serves as a strategic investment partner developing original properties for television, location-based, and cross-platform entertainment. 

Launched last year by creative and production company Soren West, Sierra Whiskey looks to mitigate risk, have a stake in the outcome of the work, and ultimately help build a pathway for new experiences to get them reviewed, financed, produced, and distributed – something that doesn’t yet exist in the Experience Economy. (See also Feature Immersive Entertainment: How To Build A Sustainable Immersive Business.)

In this Campfire – a masterclass in how to get your experience investor-ready and build an investment strategy – Shulman will reveal how to:

• Prepare for a funding round
• Position your offer in the spectrum of offers investors are looking at
• Decide on your financial model
• Find the right investors
• Structure a deal
• Prove to the investor that they will get their return

Preparing For Funding

Before you embark on the fundraising journey, it’s essential that you first:

• Know what you know – and be confident in it.
• Know what you don’t know – and be confident in that too.
• Know what you need to learn.
• Be ready to answer questions.

You’re selling a dream that’s going to succeed or fail in part on your ability to deliver. Your funding prospects are investing in you and your team. If you are credible, grounded, and well organised, your project probably is too. 

If you’re not, the best answer to any potential question is to show the investor what you’ve done so far. And if you haven’t or you can’t, the next best answer is that you’re aware of that issue, but haven’t tackled it yet. Don’t bluff either way: it’s not worth it! Instead, show that you don’t have all the answers and you know it.

Know Your Project

This might seem like an odd statement, but knowing what your project is drives the deal structure and key assumptions about it.

These assumptions drive the revenue model, which drives cost structure and the overall financial model. Ask yourself: how many guests can I have at any one point in time? What are my ticket sales going to be? What’s the adoption rate for merch spend and the dollar amount? What about F&B?

The answers will drive things like venue selection, staffing and tech rental expenses, marketing expenses, and so on. These all contribute to your financial model, which helps you set internal expectations from your team and external expectations from investors.

Then ask yourself: is your project a show, a touring experience, or a brand? Is it based on original IP, or IP that you’re going to licence from someone else? The answers will help you determine the structure of the business people are investing in and the kind of investment.

The taxonomy of a project helps organise our thinking on these assumptions. Is it a touring or fixed location? Is it free roam, pulsed entry, or seated? Each of these have a cascade of implications when it comes to your throughput capacity, your staffing model, and so on. And all these decisions affect the bottom line financial results.

Then beyond the big idea, how are you going to get it to market? You need to be able to talk about budget, timeline, production, and customer acquisition strategy. Who are your audience, and how are you going to reach them? As the industry grows, there’s more noise in the marketplace: how are you going to differentiate yourself and drive sales? 

This is more complicated than you might think – if you’re building a single show in a fixed location for a fixed amount of time, you’re probably not building a whole marketing department, but more likely leveraging a fixed partner like Fever or Ticketmaster. But if you’re building a business based around a touring show that’s going to go global, you’re probably going to have an internal team to develop content and coordinate with marketing and ticketing partners.

Build Your Model

A good financial model is essential to help you raise funds and understand your business, and ties creative, production, operations and marketing together. Everyone needs to be aligned and on board with the assumptions you’re making because they all affect the output of your model: will this thing make any money or not?

Your model illustrates your understanding of the business and tells your investor audience that you know how the business runs. You know where the levers are that you can pull and push to dial in the experience, and it helps you make intelligent, informed decisions.

Start by doing a sensitivity analysis – ask “what if?” What if I spent a million dollars more on the production? What if I spent half a million dollars more and bought all the equipment rather than renting it? What if I’m able to sell 95% of my venue capacity every day of the week? That “what if” is what lets you understand the specific levers and helps you focus on the essential thing you need to manage from a business or risk standpoint.

Your financial model will also give you the investment metrics. Different investors are going to ask different questions, so you need to be fluent in them:

• MOIC / EM = Multiple On Invested Capital / Equity Multiple. A ratio that tells you how much cash an investor gets out versus how much they put in.
  
  
• CoC Return = Cash On Cash Return. In a lot of experience projects, particularly those based on licensed IP, there’s no sale or exit down the line. The CoC Return is a percentage rate of how much cash they get out in a given period divided by the total cash they put in. 
  
  
• NPV / IRR = Net Present Value / Internal Rate of Return. This is an interest rate that measures risk. If I put in a million dollars, do I get my money back, and above 0 or not?

These metrics are what allow an investor to compare competitive opportunities and decide where to put their money.

Know Your Risk

Investors are interested in the opportunity, the return, and the risks – but not necessarily in that order. Going into any project you need to know the risk and own it. This is a risky business: not every project is going to be the same, some are going to fail – some spectacularly – and others are going to middle along, generating a return but not really exciting investors. Understanding and being upfront and honest about the risks with yourself and investors is essential to engage them.

These risks generally fall into three categories:

1. Team risk: having the right people around you will mitigate a lot of risk, and having the wrong people can be disastrous. This extends from the production partner who’ll operate your show on the road to the promoters you choose to work with and your marketing and ticketing partners. What kind of deal do you get from them? What services do they provide? It also extends to real estate and routing: where to take your experience and the venue have a material effect on the success or risk of your project.
2. Execution risk: this relates to timeline, budget, and production. Can you get the project done on the timeline you said you could, and open when you need to be? If the theatre and talent are booked, the experience has to be ready by that date. And particularly when you’re using someone else’s money, you have to be able to deliver on time and on budget. Nothing hurts more than having to go back to an investor to ask for a little bit more.
   
   When it comes to production, are you doing all the work yourself and can therefore control every aspect of the fabrication, custom design, lighting design, and so on? Or are you outsourcing it to a third party? If so, do they have the experience, skills and proven track record to execute? Do you have a working relationship with them?
3. Creative risk: this is the hardest risk to control. This is a hits business: it’s going to work or it’s not. Some people will workshop it, some prototype it, and some just go for it.

Know Your Investors

Investors come from all walks of life, but we can put them on a spectrum. Depending on the type of project you’re trying to bring to market, you’re going to be a better fit with certain kinds of investors than with others.

On the one hand we have friends and family, who are investing to support you. 

Then there are high net worth individuals and family offices.

Getting bigger in scale, we have brand and corporate investors and institutional money. Financial investors are looking for straight up money and returns. Corporate brand partners are looking for fan and customer engagement – it can be a marketing expense for them. And institutional investors are those like Goldman Sachs, who are looking to build and drive entire markets with big investments.

In between, there are passion and strategic investors. Sierra Whiskey is a strategic investor: we like to invest because we think we can add value and help mitigate some of the risk of projects that we invest in. Some strategic investors are looking for you to add to their portfolio, because they invest in certain sectors of the market.

Structure & Terms

All these terms are negotiable, and they all dictate how you make money on your project, how your investors make money, and how you share the risk.

The term sheet is the outline of your deal. It should cover all the key terms, elements, triggers and mechanism between you and your investors, including how and when money is collected, when and how cash is distributed, what constitutes distributable cash, and how to handle anticipated or unanticipated events. The more that you can negotiate and agree on terms with your investor before you bring in the lawyers, the less expensive it’s going to be to get that agreement turned into a contract.

There are two main categories of legal structure. The first is corporation. This is an equity investment: I’m buying stock in the company, and my return comes when the stock is bought or the company is sold. These deals work better if you’re building a brand that might have intrinsic value down the road beyond a set of cash flows. If it’s a longer or bigger play, you need to raise more money.

The other category of legal structure is limited liability companies (LLCs) and special purpose vehicles (SPVs). LLCs offer flexible operating agreements, liability protection, and have substantial tax advantages. A typical LLC can undertake a broad range of business activities. You have members rather than stockholders, and profits are allocated according to an operating agreement and a waterfall.

SPVs are like LLCs in that they are very flexible, but they are typically used to hold a specific asset or investment with very limited operating parameters. These kinds of entities work best when your anticipated payoff is cash flow or anticipated cash flow. You don’t necessarily own anything of underlying value like the IP. 

The “waterfall”, or cash on cash investment, is the return you expect to get. How do you get paid and when? It’s a cascade of cash flow. As people hit certain thresholds their return ratchets down, and your insider return ratchets up. 

The WXO Take-Out

At the WXO we fiercely believe that the meeting of creative and commercial is where the magic happens. A brilliant idea only truly comes to life when it’s brought into the world, and understanding how to make the money work means that more extraordinary experiences can become a reality. Money is the fuel that enables experiences to have an impact in the lives of our audiences.

As Shulman says:

“You’ve got your big idea. You’ve got a team that can execute on it. You’ve got a budget or rough order of magnitude of how much you need in order to bring it to market. You’ve got a financial model that illustrates this, and you’ve got at least the beginning of your thinking on all the other things you need to have in order to open doors. You need all of these things in order to have a viable business.

You need to understand how your project works, how it drives results, how it delivers returns for an investor. You need a customer acquisition strategy. You need to understand the key risk factors and how to manage or mitigate them. And you’ve got to find the right investors, get them into the right business structure.

And you’ve got to do it all while having fun – because at the end of the day, if it’s not fun then it’s not worth doing.” David Shulman

So next time you’re designing an experience, ask yourself:

1. What do I know – or not know – about my project?
2. Is my project a show, a touring experience, or a brand? 
3. What are the risks associated with my project?

Want to come to live Campfires and join fellow expert experience creators from 45+ different countries as we lead the Experience Revolution forward? Find out how to join us here.