A version of this article previously appeared in The Wall Street Journal.
Entrepreneurs typically embrace celebrity investments, while most sophisticated investors prefer to avoid famous entertainment or sports personalities on the cap table. What’s the cause of this incongruence?
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Entrepreneurs are often drawn to celebrities, as they believe their startup will benefit from the celeb’s ability to garner media attention, which they hope will result in incremental revenue. In instances when the celebrity’s brand is aligned with the target market, such as Kim Kardashian’s promotion of ShoeDazzle, this approach works.
However, such alignment is missing at most tech startups, and thus there is little causality between a celeb’s investment and their ability to drive meaningful product adoption. For instance, from the outside looking in, it is unclear how much value Leonardo DiCaprio, an investor in photo sharing app Mobli, have added to the venture, beyond a few “celeb invests in cool startup” articles.
In addition to the lack of go-to-market assistance provided by celebrity investors, VCs discourage the involvement of celebrities because such investments often come with egregious demands for Hollywood-style “sweeteners,” such as “advisor options,” which reduce the cost of the celebrity’s investment while diluting the other investors.
The Elusive High-Profile, Fully-Engaged Investor
Because Rincon Venture Partners’ primary geographic focus is Southern California, we periodically encounter investment opportunities in which one or more celebrities have participated as Angel investors.
Celebrity investors aside, I am a fan of high net worth individuals who are willing to allocate some of their risk capital to foster a startup’s success. However, not all investor dollars carry the same relative value.
A well known (non-celebrity) tech investor who judiciously adds value, provides reputational validation and is relatively effortless to interact with is ideal. These investors’ strong brand will provide your startup with credibility and validation. Their reputations will also positively influence other constituents of the startup ecosystem because of the outsized social proof their investment dollars carry.
Even if a highly-visibility investor with a well-respected brand never lifts a finger on your behalf after their cash hits your balance sheet, their association with your venture will continue to generate value through (and potentially beyond) your first institutional funding round. The same cannot be said regarding the involvement of an entertainment or sports star.
However, the more high profile and prolific the investor, the greater the demands on her time and thus the lower likelihood she will consistently be available to add value when you call upon her. Thus, even well-intentioned high-profile investors can inadvertently become disengaged over time.
Beyond social proof, value-added manifests itself in the form of worthwhile actions performed by an investor on behalf of your venture, such as: introductions, executive recruiting, product feedback and strategic advice. Due to their disconnection with your company, disengaged investors are challenged to help in these areas, even when you are able to get their attention and solicit their support.
Another important measure of an investor’s relative worth is the amount of energy they extract from your venture. Energy can be drained by gratuitous updates, lengthy and unhelpful “strategy” conversations as well as time spent tracking down the investor for routine tasks, such as coordinating schedules or obtaining signatures.
Startup Founders always have more things to do than time to do them, so the last thing they need is an investor who draws upon their time and energy and offers little in return beyond cash. Steer clear of high-overhead investors, whether they be Hollywood celebrities, high-profile tech investors or total nobodies.
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