Prolific celebrity investors such as Ellen DeGeneres and Ashton Kutcher are part of a new trend that has taken over Silicon Valley. Hollywood starlets have started to invest heavily in tech startups, and it could have a deep impact on the industry. Let’s look at why celebrities are investing in tech, particularly in apps, and how they are affecting the tech world.
How Celebrity Investment Works
A relatively new type of business is connecting Hollywood to Silicon Valley. These networks are designed to be the middleman between celebrities and startups. They help celebrities find and invest in tech start-ups and apps related to their personal brand.
The celebs get a percentage of the company while offering branding and financial resources in return. Instead of being paid for an endorsement and benefitting financially for a limited time frame, they become investors and reap the rewards long-term should the investment turn out to be profitable.
It Opens up New Career Paths for Venture Capitalists
Venture capitalists are considered professional investors. Their job typically consists of evaluating whether a startup is worth investing in and if so, how much funding they will get. Many VCs in Silicon Valley invest on behalf of the company they work for. This means the return on investment affects their career. Bad decisions spread fast and have immediate financial consequences, which makes venture capitalism one of the most difficult industries to be in. Of course, there are also VCs that invest privately, usually in addition to running their own businesses.
Celebrity investment in apps as tech startups are different from VCs in three ways:
- Their career doesn’t depend on the success of the startup
- They are connected to the investment seekers by a third party
- They bring a strong personal brand as part of the deal
There are certainly exceptions, but exceptions don’t change the investment industry. Celebrity investment in tech, and more recently apps, is growing fast and changing the way startups are funded.
A big advantage of making money in entertainment and investing some of it in apps or other tech companies is the primary income stream is not affected by whether the startup fails or not. Unlike the mainstream VC whose career suffers when a startup goes wrong, celebrities gain respect by investing and take much less of a hit if the startup ends up failing or not turning out to be the next Facebook. This means they can take more of a risk and still stay equally successful in their main career in entertainment.
The increase of celebrity investment in apps and other tech startups means that VCs and other investment savvy professions can now become exclusive celebrity financial advisors and investment consultants or simply connect celebrities to their network of startuppers and advisors.
Celebrities are a Shortcut From Series A to Series B Funding
Celebrities frequently invest as Series A or Series B investors and skip Seed Funding entirely. Seed Funding is primarily meant to financially support the initial stages of developing a product or service, such as outlining design elements, determining what the final product or service will look like when it is launched, and defining the demographic targeting.
Celebrities get the most out of their investment when the targeted demographic matches their own followers and fans. This is the reason Series A is the most popular point for celebrities to invest. The audience has been established, and their personal brand will help bring the startup to the next level.
VCs also prefer Series A funding over Seed Investments, but celebrities have something the vast majority of venture capitalists don’t have — a strong global personal brand.
The benefit of the personal brand often combines some the goals of Series A and B funding. Series A funding is usually targeted at reaching new sales targets, introducing new products, or significantly growing existing results. Series B usually focuses on taking things global or acquiring other business.
For startups, celebrity investments have multiple benefits — they gain funding, global exposure through the celebrity’s personal brand, and indirect VC advice.
High Expectations and The Tech Bubble
According to the New York Times, celebrities are very much looking for a Hollywood outcome of high initial public offering and large payouts. This not only increases the pressure on startups to deliver incredible results quickly but it feeds the tech bubble.
Many investors would rather invest 150k in a business with two dedicated and experienced founders than provide millions in seed funding for an idea that has yet to be developed. This is compensated by some celebrities who would rather go big or go home, and, therefore, invest large sums which keeps the tech bubble growing.
How Celebrity Investment Impacts Apps in Particular
While most celebrities may rely on venture capitalists and networking agencies to help grow companies they are invested in, apps are a different ballgame. The stars of the entertainment industries have started to develop apps about them or as an extension of their brand. Ellen DeGeneres has Ellen’s App, Ellentube App, and Psych! just to name a few.
Then there is the Kardashian-Jenner clan who just launched a series of lifestyle and fashion apps about – you guessed it – themselves. The king of Hip Hop, Jay-Z, is an investor in video sharing app Viddy, and Lady Gaga has her own social network, Little Monsters.
Two main changes came with Hollywood investing in apps. First, celebrities are becoming more and more tech-savvy, which means they know exactly what they are doing. Other investors are more likely to jump on board in, which means investing in apps is becoming more popular overall. Secondly, celebs are starting to look at apps to boost their brands with vertical integration. It decreases their dependency on other companies for production and distribution.
Hollywood and Silicon Valley are more connected than ever before. Celebrities are not only increasingly investing in tech startups, but in apps in particular. It will be interesting to watch the relationship as it unfolds — celebrities could have an enormous impact on the tech industry.
Featured Image: Image by Christina Baldassarre
In-post Photo: Image by Christina Baldassarre