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Venture Capitals Next Gen: Celebrities

Celebrities are often revered for their good looks, athletic prowess or wit. But they aren’t always regarded as thought leaders when it comes to the world of investing. Perhaps that stereotype is changing.

Appearing on the latest cover of Forbes magazine is former ‘That 70’s Show’ star Ashton Kutcher. This special issue is devoted to the Midas List of Silicon Valley’s top venture capital investors. Venture capital refers to investments in private, unproven startup companies with very high risk-reward profiles. Naturally, it’s easy to disregard Kutcher as a token addition to the list to try and generate magazine sales. That is, until you read the article.

Kutcher has astutely invested in technology startups for about seven years and has been racking up successes at a rate better than many actual venture capitalists (not just the celebrity kind). Kutcher’s track record includes a one million dollar personal investment in Skype back in 2009, after he was invited to participate in the deal by famed angel investor Marc Andreesen of Andreesen Horowitz.1 Kutcher quadrupled his money after Microsoft acquired Skype.2 Kutcher has invested in other home runs including unicorns Spotify, Uber, Pinterest, Zenefits and Airbnb.3

Kutcher soon partnered with another investor, Madonna’s tour manager, Guy Oseary. Oseary’s successes include a $1.2 million personal investment in coconut water sensation Vita Coco (whose stake has gone up as much as 23 times in value) and a $500,000 investment in Uber (that has increased one hundred fold). Together, the duo has made over 70 private tech investments, investing $30 million into start-ups which are now worth $250 million. This is a return of almost 8.5 times their original investment. According to Andreesen, if you can return just 3x, you’re one of the best VC’s and 5x is considered a home run.4

Celebrity Money Managers

The duo founded A-Grade Investments in 2010, along with industry veteran Ron Burkle. Today, the fund takes a giant step-accepting outside capital. Liberty Media invested $100 million in the new A-Grade and this is saying something as Liberty is a publicly traded company. We will see if the duo can handle running outside money as well as they ran their own. And the two are on their own, as Ron Burkle is an investor in A-Grade Investments, no longer a partner.

This type of success isn’t unprecedented-another famous fund with a long and envious track record is Elevation Partners, founded by U2 front man Bono way back in 2004. Bono has also had successful investments but his grand slam was Facebook which he bought a 2.3% stake in 2009. He has made more money from that investment than all the music he ever sold.5

If you are looking for a slightly edgier investment, another aspiring celebrity money manager is none other than Snoop Dogg, who is raising a fund to invest in marijuana startups (he is reportedly going to be focusing on the ‘tech’ side of the business).6 As more institutional money finds its way into marijuana startups, Snoop may be on the ground floor of the green rush opportunity.

Equity for Endorsements

Other celebrities want to get into the venture capital game but don’t have the connections or acumen to be VC investors. There is another way many of them get a taste of the action-through equity endorsements. The concept of exchanging being paid in equity rather than cash was prevalent during the first dot com boom with many young programmers were offered stock from boot-strapping founders. The idea has caught on again by startups using equity as currency. Celebrity examples include golfer Tiger Woods with Fuse Science, rapper 50-cent with Vitamin Water and reality star Kim Kardashian with ShoeDazzle.

Justin Bieber typically receives compensation in traditional payment, but made an exception from ‘Shots’ a selfie- sharing app. After he started using the app for his own pictures, Shot’s popularity increased and the startup just raised a $8.5 million seed round of financing.7 But Bieber has had some success, when a startup he invested in, Stamped, was purchased by Marissa Meyers and Yahoo in 2012 for $10 million.8

Maybe the biggest of all was William Shatner who was paid for his role as the ‘Priceline Negotiator’ in Priceline Group (symbol: PCLN) stock options.9 Some have claimed that his stake in Priceline was worth over half a billion dollars but Shatner himself has denied that amount. And rapper 50 Cent made somewhere between $60 million and $100 million on his equity stake after The Coca-Cola Company purchased Vitamin Water.10 It was after news of Coke’s buyout that Kutcher recalls saying “I’ve got to figure out how to get into the equity game…”.11  

The Pros of Equity Endorsements

The major appeal for a startup issuing equity as currency is often they don’t have, or can’t afford to spend, millions of dollars in cash on a top level celebrity endorser. It also may foster a closer, more engaged relationship between the company and endorser by better aligning longer-term goals. An endorser with ‘skin in the game’ may really go out of his or her way to promote the company and products throughout their career.

Some credit that this compensation model has allowed Under Armour to substantially close the gap on Nike, a company with much deeper pockets. The poster child for Under Armour’s current equity endorsement push is NBA MVP Stephen Curry, whose ‘Curry-branded’ shoe sales are up an astounding 40% given the magical season Curry and the Golden State Warriors have enjoyed.12 But Curry isn’t the only star on their equity endorsement roster-if you’ve tuned into any major golf tournament you know that Under Armour also endorses Jordan Spieth who almost looks like their walking billboard. New England Patriots quarterback Tom Brady also has gotten into the equity-based game with Under Armour. If you get an equity endorsement deal with the right company you could be compensated much more than you would have with a cash deal.

The Cons of Equity Endorsements

The downside for the company, although a good problem to have, would be that the company becomes wildly successful and the value of the endorser’s stock options would end up being worth substantially more than they would have been paid in cash. This could negatively affect early investors, including founders and is one reason many don’t like to give away equity. Conversely, if you take an equity endorsement deal and the company goes bankrupt, you basically didn’t get paid at all. So, as endorser, you have added responsibility to help the company succeed.

Forbes legal contributor and law professor, Marc Edelman, warns that there could be legal ramifications for both parties if the deal goes bad and one side does something to damage their image.13 It’s difficult to unravel a relationship that has a celebrity endorser as a large individual owner of the company versus just an independent contractor where the split would be quick.

Glittery Warning Signs

But concern arises when too many celebrities get involved in the investing game. There is a long, ill-fated tradition of this from the late 1990s, beginning with self-proclaimed stock gurus like Barbara Streisand and former financial advisor Martha Stewart who became a biotechnology investor, landing her in jail. And let’s not forget former Mets great, Lenny Dykstra whose options strategies were all the rage right before he declared bankruptcy in 2009.

Today, celebrities are now donning the covers of financial publications like Forbes is a sign of famous magazine cover indicator by Paul Montgomery. The indicator basically says that when celebrities don the covers of popular magazines regarding investments, the trend may be about to end. When Time Magazine put Amazon founder Jeff Bezos on the cover in December of 1999 it almost perfectly called the top of the dot-com bubble. Further, the popularity of billionaire studded venture capital investing shows like ‘Shark Tank’, Tilman Fertitta’s ‘Billionaire Buyer’ and Jean Paul’s DeJoria’s ‘Follow the Leader’ might portend trouble.

Turning off the Spigot

Consequently, CB Insights reported that VC money is becoming harder to raise, revealing that the 4th quarter of 2015 sustained a 30% drop in the amount of dollar investments made over just the prior quarter.14 And some venture capital investments are showing signs of deflating. Buy side giant Fidelity Investments earlier this year wrote down the value of some of its venture capital holdings. Fidelity is required to internally value and report its stakes in private companies since some of its mutual funds hold these positions, even as private companies. Mirroring a vicious selloff of their publicly traded counterparts, private software startups such as DropBox, DocuSign and CloudFlare saw their valuations get slashed 10%, 17% and a whopping 31%, respectively (Fidelity hasn’t reduced the value of the more recognizable, ‘blue-chip’ private companies like Uber, SnapChat and Airbnb, yet).15 We’ll also be keeping an eye on some of these unicorn valuations which don’t appear to be soaring any further. For example, Uber rival Lyft who sports a $5.5 billion value, an eye-popping valuation for an unprofitable company with just $47 million in revenues for the first six months of 2015.16 That’s a lofty Price to Sales valuation of roughly 58x (annualized). Critics have been sounding the alarm for a few years now so time will tell if this new generation of venture capitalists has learned the lessons of the prior dotcom bust.

 

1,2,3,4,11http://www.forbes.com/sites/zackomalleygreenburg/2016/03/23/how-ashton-kutcher-and-guy-oseary-built-a-250-million-portfolio-with-startups-like-uber-and-airbnb/#90030ea4ae17
5http://www.independent.co.uk/news/people/bonos-group-has-made-more-money-from-facebook-investment-than-from-all-his-music-10480378.html
6http://techcrunch.com/2015/02/06/of-course-he-does/
7,8http://www.inc.com/laura-montini/the-10-top-celebrity-startup-investors.html
9http://finance.yahoo.com/q?s=PCLN
10http://www.businessinsider.com/50-cent-files-for-bankruptcy-2015-7
12http://www.ibtimes.com/how-under-armour-uses-equity-based-athlete-sponsorship-deals-catch-nike-2102141
13http://www.forbes.com/sites/marcedelman/2013/06/17/start-ups-are-signing-celebrity-endorsers-by-paying-them-equity-but-at-what-legal-risk/#46a7c3df2e3e
14https://www.cbinsights.com/blog/venture-capital-fall/
15http://www.bloomberg.com/news/articles/2016-03-01/fidelity-writes-down-value-of-corporate-software-startups
16http://www.bloomberg.com/gadfly/articles/2016-01-08/silicon-valley-comes-to-its-senses-on-silly-startup-money

2016-10-21T11:03:10+00:00 May 4th, 2016|

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