Aligning your business with a high-profile investor with bags of money and experience is a fantasy for many but choose wisely
Who wouldn’t want a lavish investor with money to burn and fame to boot? High-profile investors (HPIs) can potentially throw millions your way and bring the kind of recognition a new start-up could only dream of. However, some HPIs have more money than sense. While it’s often difficult to say no to an investment, it’s important to know the difference between good and bad investments.
One major benefit of a HPI is that more investors tend to follow their lead. We’ve all seen Dragons’ Den when one Dragon gets behind the product, the others follow because they don’t want to miss out. “They’re like sheep,” says Michael Bruce, CEO of Purple Bricks, the online estate agents. “High-profile investors are more frightened of losing out on a deal than losing money; when they see something that’s good they all pile onto it,” adds Bruce.
Purple Bricks has a wealth of high-profile backers. The company recently received a £7m investment from renowned fund manager Neil Woodford, ex-Capita boss Paul Pindar invested an undisclosed sum in the company and Anthony Gutman, co-head of investment banking at Goldman Sachs, is also a contributor of capital and counsel.
The most obvious benefit to having a HPI on board is wealth but as Bruce explains it’s just as much about the investors’ wealth of experience. “They have the grey hair; their insights into finance, flotation, tech and all that other practical stuff is invaluable to us.”
Having the right HPI on board can send your growth prospects through the roof. Started in 2006, bespoke suit company A Suit That Fits had yearly growth rates of around 20% during its primal years. In 2014 HPI’s Simon Calver, former CEO of Mothercare and LOVEFiLM, and Gi Fernando, an entrepreneurial engineer and recognised expert on social media, big data and education, came on board and now the company is aiming for 50-100% growth year-on-year.
David Hathiramani, the company’s co-founder said the big eye-opener was the level of ambition Calver and Fernando brought with them. “In the day-to-day, our rather ambitious end goal can get forgotten and having people on board with all that knowledge and experience keeps us focused. Collectively they have kept us committed to the bigger picture.”
For a young business, opening doors can be difficult but with a HPI those same doors are much more easily accessible. “When you have someone with you who has been there and done it, the conversation changes. High-profile investors know how to sell your business and people start listening more,” Hathiramani explains.
There is no doubt that good experience is invaluable and the great thing about having multiple HPIs is the different expertise they have. Calver is the hardened businessman and helps in all areas of business; he is currently helping the company upscale at an epic rate. Fernando lives and breathes technology, which is indispensable in today’s fast-paced business world.
Expertise in a certain field doesn’t have to come from entrepreneurs. Sportlobster, the sports social media platform, was launched in April 2013. In just over one year it reached the 1.85 million user mark; this was quicker than Twitter, Pinterest or Tumblr. Now the platform has more than 1.4 million users in over 220 territories globally. Co-founder and CEO Andy Meikle admits that having English footballer Michael Owen and Australian racing driver Mark Webber on board as investors early on has been a real catalyst for success.
While the company has since parted ways with Webber, Owen is still involved and continues to promote the company on social media and attend events as an ambassador. “Having Owen on board was a turning point for our business. It instantly gave us a lot of credibility and some people who would have put the phone down a lot earlier actually listened when they heard that who was involved,” says Meikle.
Sportlobster recently signed deals with the NFL and NBA as it prepares to open its first office in New York. However, while HPIs have been a guiding force, Meikle is confident that the company would have been a success – regardless of who was investing. “We definitely would have achieved success but it would have taken a little longer for us to gain the traction that we did,” he says.
Celebrity investors come in two categories. On the one hand, you have your Michael Owens who are experts in what they do. On the other, you have those celebrities who invest in something they have no previous experience of and this can go one of two ways. Take George Foreman, former world boxing champion who has fought and beaten the best. Never one for being down for the court, after his sporting career he went on to invest in and promote a household grill to great success. Then there’s Ashton Kutcher who doesn’t just play techies on screen; he has made a surprisingly smooth transition into the world of venture capital, investing in successful start-ups like Skype, Uber and Airbnb, mainly through his A-Grade investment fund. For the most part Kutcher’s smart investments in the start-up space has made a lot of other VC’s look like laymen.
These are the exception rather than the rule. Spanish wineries, for example have a tendency to take on celebrity investors. Antonio Banderas, not known for being much of a sommelier, got involved with family-owned wine company Anta Bodegas. Together they launched a campaign to get the wine on the menus of Michelin Star restaurants. Instead Banderas’ bottles of plonk are much more likely to end up in the spag bol according to some experts.
For Bill Morrow, CEO of Angels Den, having the professional investor or anyone with expertise in a certain field can add a lot of value to a start-up. “This is typically someone who has worked in a big company and made himself very rich,” he explains. “However, if the investors have nothing to do with the sector, a very confusing marketing message goes out and it leaves you worse off. Consumers will think ‘that’s a bit weird’.”
Morrow has dealt with a lot of celebrity investors and for the most part it been less than encouraging. “What happens when celebrity X comes on board is: nothing,” says Morrow. “They may have 14 million followers on Twitter but when they tweet about this thing they’ve invested in it cheapens their brand and yours because people can see through this.” The fact is those people aren’t followers of that person for their supposed business prowess.
“There is an assumption that having a celebrity investor will be amazing but we’ve monitored the results and that spike in website visits, for example, just doesn’t happen,” says Morrow.
A dangerous precedent is set in taking on a sugar daddy with no grounding in a sector and has more money than they know what to do with. “Most entrepreneurs are so desperate for funding that they will take money from any source but it’s probably better to not have £100,000 than to have £100,000 from the wrong investor,” says Prof. Pablo Martin de Holan, vice-president of international executive education at EMLYON business school.
De Holan’s major concern is the amount of power HPIs can have. “The investment can buy more than it should given the amount invested. If they buy 20% of the firm then the they should not be dictating,” he says. “However, because the HPI has more perceived power than the entrepreneur they can end up calling the shots.”
Entrepreneurs should be wary that they have much more to lose than those guys with the big bucks. “HPIs invest because they want to have fun with a firm, unlike the entrepreneur for whom this is their life,” says de Holan.
It is key for businesses to keep close relationships with the investors, just as is the case with A Suit That Fits, Purple Bricks and Sportlobster. If you have that support you can grow and develop your business a lot quicker than you could with less long-in-the-tooth investors. But this isn’t always the case; sometimes the more high profile your investor, the less time they will have to actually sit down and talk business.
The overriding lesson in all of this is if you align yourself with a professional who knows about your industry and isn’t in it as a marketing ploy or for the hell of it, the support they bring can help you on the way to rapid success. Negate the warnings however and you’re more likely to receive nothing more than an egotist and their entourage.