Day 93 - Invested in Rakugo

For the past two years I have been raising investment for our Rakugo projects in London and New York.

People both in Japan and elsewhere are often surprised when I say the word “investment”.

What? Not a donation?

Investment?

You mean I get my money back?

This conversation comes up so often I think it is worth a blog post.

The system of investing in Broadway or West End shows is something quite unique to New York, London and a handful of other cities which have long-running shows.

For most theatre in the world, the not-for-profit system is in place. The theatre company registers as a not-for-profit entity, receives grants from the government and arts organizations, and donations from private individuals. This funding coupled with corporate sponsorship and ticket sales hopefully allows them to break even. If they make a profit they save it and use it for future productions, meaning no individual makes more money if the shows to very well.

For donors, they receive recognition, certain perks like opening night invitations, and a charitable tax receipt - but donors are probably most motivated by the feeling that they are part of a special and worthwhile artistic endeavour.

Commercial theatre works a bit differently. The producer or producers solicit investment. In my case for Rakugo it’s $350,000. This is broken down into units - 35 units of $10,000 each. The unit amount is arbitrary - the producers can decide - it is just a way to make things easy and comprehensible, a way to break it down. Investors may choose to invest part of a unit too, like a quarter of a unit or $2,500, as long as the producers agree.

Some investors take several units. There are certain benefits to investing or bringing in investment in larger amounts (bringing in means it may not be the one individual investor’s money, but that this individual investor has brought in the investment from among his or her contacts.

The three main benefits to being a larger investor... Having one’s name above the title of the show as a producer, which on and off-Broadway is not only prestigious and for aspiring producers gives one a producer credit, but makes one eligible for awards - like the Tony Award on Broadway.Such a contribution will often allow the investor/producer on the inside of the process - invitation to some rehearsals and consultation on points of the production.Large investments may also allow participation in the producers’ side of the profits, increasing the potential financial gain to the investor

So how does all this work once the money is collected?

The pre-production budget represents more or less the amount of investment sought - this is called the Capitalization. For Rakugo roughly $150,000 will be spent on sets, lights, sound, design, legal and accounting etc., everything needed to get the show up.

Another $100,000 will be spent on PR, publicity, marketing in the run-up to the show and in the first few weeks of the run.

The final $100,000 is contingency against running costs. This is a very important item. A common mistake for smaller off-Broadway shows is to set aside too little money for this contingency, hoping that good reviews and word of mouth will lead to ticket sales right away. This is a big mistake. Running the show can be expensive and if there are no contingency funds the show may have to close in a few weeks.

So that is how it all works up to opening night.

Then we open.

A second budget comes into play here - the weekly running budget. This includes paying the performer, theatre rent, publicity and administration etc. In the case of Rakugo it will be around $15,000.

Several things can happen from this point.

The show might sell very few tickets, and the show will have to close once the contingency runs out unless more funds are injected. At zero ticket sales Rakugo could run for a little more than six weeks.

On the other hand, the show might make a profit. In this case, the money is returned 100% to the investors until the investors have made their money back. This is called recoupment. If Rakugo made $25,000, and cost $15,000 a week, the show would profit $10,000 a week, and therefore recoup its $350,000 investment in 35 weeks. (Actually, if it never dipped into the $100,000 contingency, this would only take 25 weeks, but you don’t want to disburse this until the end of the run, as it defeats the purpose of having a contingency.) If Rakugo was sold out or in other words running at 100% capacity, it would make roughly $40,000 and profit $25,000. In this case it would recoup in 14 weeks.

Now, the likelihood of operating at 100% capacity from day 1 is slim, but this is an important number.

Another is the percentage of the house needed to break even. Rakugo costs $15,000 a week and tickets are $50. We have 8 shows a week in a 100-seat theatre. So, we need to sell 300 tickets a week. 300 divided by 8 is 38. Since our house is an even 100 seats, that means we need to be at 38% to break even.

This is also an important number.

Experienced theatre people can make a quick judgement on the viability and reasonableness of the show with these two numbers. Rakugo need 38% to break even every week and will recoup in 14 weeks at 100% capacity. The other permutations fall somewhere in between these numbers.

So, we have a hit! What happens?

First of all, if you are making money you can keep running. The contract for the theatre in a commercial long run situation is called “open ended”. You rent the theatre for two or three months, but with a number of weeks notice you can continue to extend the rental period. This is how some Broadway and off-Broadway shows continue to run for years.

Once there is enough money in the bank to repay 100% of the investment, the profits are split 50% to the investors and 50% to the producers. Now, you might think that 50% is a lot for the producers, but it never actually ends up being that much. You saw above that large investors make some of the producers’ share. The producer may also share some profits with a star actor or a director, engage in co-production agreements to share work, resources, and money-raising, etc. The producer is free to negotiate away parts of his or her portion, and often these agreements are crucial to the show getting mounted.

So one can make a lot of money investing in a Broadway show. Why doesn’t everyone do it? Well, many shows don’t make money. I have seen estimates that only one out of five Broadway shows recoup their investments, and the percentage is less off-Broadway.

So why do people do it then?

Again, for investors, they receive recognition, participation perhaps as producers, certain perks like opening night invitations, - but investors are probably most motivated by the feeling that they are part of a special and worthwhile artistic endeavour. Not much different than not-for-profit…

In other words, you have to love it! And many people do! And sometimes, you make money!!

However, all is not completely a gamble on the financial side either. Investors in a Broadway or off-Broadway production are usually offered some sort of “Subsidiary Rights”. This is a percentage of the money the show makes on subsequent tours, or if it is made into a movie, sales of cast albums, etc.

The thinking behind subsidiary rights is that the investors have taken a big gamble by investing in the original New York production, but a long run in New York, regardless of profit or loss, will necessarily add value to the show. It is the Broadway show and credentials as a Broadway long running hit that puts the show in demand as a touring property. So the investors are rewarded for having believed in the show in its inception. There are many cases in which a Broadway show did not recoup its investment but the investors profited later due to just these subsidiary rights.

So that is a short summary of how commercial theatre works in New York.

Have I whet your appetite for investing in a show? Rakugo off-Broadway perhaps…