Film Company Blowtorch Burned By Hedge Fund Flame-Out

Date: Friday, July 31, 2009
Author: Wall Street Journal

Blowtorch Entertainment Corp., the start-up that gathered $50 million to produce a slate of feature films and short-film content for young adults, is nearly extinguished after several of its hedge fund investors went out of business, VentureWire has learned.

The San Francisco-based company, backed in part by venture capital firm Ignition Partners, owns the rights to the film “Spin,” (originally titled “You Are Here”) staring Bijou Phillips, and is in post-production on the feature film “Tenure,” starring Luke Wilson, Gretchen Mol and David Koechner. The company intended to distribute content across the Web, as well as traditional outlets like television and theaters.

But Blowtorch’s future is in doubt after the company’s undisclosed hedge fund backers, which provided the majority of capital in the form of debt, pulled out as the financial crisis took its toll.

“Our business plan was predicated on equity and debt,” Blowtorch Chief Executive Kelly Rodriques said. “Our debt effectively went away while we were working on our first couple projects and we just slowed everything down. We’ve kept it alive, but haven’t been doing any investing.”

Blowtorch’s story is an unfortunate case in which the company’s fate belonged to financiers instead of the leadership charged with executing the vision.

Rodriques sensed trouble from his hedge fund backers in January 2008, just months after the mega-deal was announced. By April 2008, he knew the deal was dead. “I couldn’t give you any insight on what happened to those guys,” Rodriques said. “They just told us people are pulling out of hedge funds. I don’t think the guys we were dealing with were any worse or better than anyone else.”

Rodriques has tirelessly searched for alternative streams of financing, but found that most of those traditional providers of leverage were not deploying cash, and those that were required terms the company couldn’t afford. He gave up when the economy crashed late last year.

Now, Blowtorch is simply smoldering until new investors are willing to fuel the venture. Its once flashy Web site has disappeared. Its team has dwindled to “a small group.” Its board of directors has mostly disbanded. And its search for movie deals has ceased.

Rodriques has kept the specific structure of Blowtorch’s financing close to the vest. He said the lead firm was a diversified lender that specialized in consumer debt-based lending, such as institutions that provide credit cards or auto loans.

Ignition Partners provided the equity portion of the financing, however the amount was never revealed. At the time of the investment Ignition Partner Robert Headley said it was “not an atypical investment.” Ignition traditionally invests less than $10 million.

Ignition partners and Blowtorch board members Jon Anderson and Rich Tong declined to comment. They remain investors and board members.

Rodriques declined to say how much of Ignition’s investment remains. He said hedge funds provided “significantly greater than half” of the $50 million announced in November 2007. He declined to say how much of that actually ended up in Blowtorch’s bank account and how much was actually deployed.

“It was one of these deals where you use a considerable amount of leverage and when that broke down it made the velocity of what we were doing slow down,” Rodriques said.

Rodriques said 90% of the debt portion of the funding has been returned to the defunct hedge funds. The remainder will be paid back by monetizing the few projects the company has completed.

Blowtorch still expects to see its two current projects through. “Tenure” is currently set to be released in theatres in September. “Spin” will be released shortly after; however it’s unclear now if it will debut in theatres, on DVD or digital.

Blowtorch’s original idea was a blend of old school and new school, with a focus on serving content for the young-adult audience based on the belief that their media consumption behaviors required new rules for media creation, distribution and audience engagement.

Blowtorch planned to develop feature-length films, professional-grade shorts, mobile offerings, an online social community and live events. Its members would help to create and influence content. The plan was to have Blowtorch films on hundreds of screens in major cities and large college markets. In addition, Blowtorch partnered with Vivendi Visual Entertainment to distribute Blowtorch films on DVD.

The founding board and executive team of San Francisco-based Blowtorch consisted of individuals with a history of success in entertainment, technology and marketing for a young-adult audience. They included senior executives from firms such as Leo Burnett, MTV, Ogilvy & Mather, Starcom MediaVest Group, Verizon and major Hollywood studios.

Now, Rodrigues is left to stir the embers of Blowtorch’s remaining assets until new backers come along.

“For me, on a personal level, it felt like we had a combination of a smart plan, great people and timing,” Rodriques said. “The guys at Ignition know this. The plan was very well regarded, but if the financing pulls out you have to hunker down and hope you can pull it out. I’m still hopeful, but I’d be wrong if I told you I wasn’t disappointed.”

So, that’s the plan for Blowtorch Entertainment – “hunker down” and see if movies released this fall and improving market conditions can attract new investors. Meanwhile, Rodriques is serving as an operating partner at Ignition and looking at deals for the firm. He said he’s still particularly interested in media deals geared towards the youth market.

“There’s nothing tawdry here,” Rodriques said. “If this story was coming out at the same time as the movies it would be different. People are going to see that this is a pretty innovative idea. It’s in line with what a lot of people are saying should be the new model.”