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Are celebrities better venture investors than the professionals?

We Americans are obsessed by celebrities. Many of them have lots of moolah. So I’m sure you took notice of the recent announcements that Leonardo DiCaprio has joined a Boston VC firm. Maybe you also happened to notice another recent announcement that Kobe Bryant had launched a $100 MM VC fund, with one Jeff Stibel.

This is just the tip of the iceberg though. Every celebrity worth their salt is now a venture/startup investor. Kobe Bryant says he’d rather be known for venture investing than basketball. Bono, Ellen de Generes have their own VC funds. It’s now de rigeur amongst many of the glitterati to be known for investing in startups.

Of course, many if not most people would see celebrities as being poor or even terrible investors. The common wisdom would be that they are good at one thing – the thing they happen to be a celebrity at, and so of course they can’t do anything else as well or even well at all.

In the US there are three main types of celebrities that are getting into venture capital and investments. These are athletes, musicians and actors.

Athletes

There don’t seem to be so many athletes who are also tech investors. Maybe that’s because the majority of athletes aren’t in sports that pay a lot, like Olympian sports. So they can be famous but poor. But of course in the US you still get the NFL and the NBA. Athletes in these areas earn huge sums of money and are famous. So they potentially have a lot of money for investing.

 

The successful athletes from the NBA include Michael Jordan and Magic Johnson although of course there are many others. But it’s hard to find successful investors in the NFL. Tom Brady may be the best-known NFL athlete with the highest net worth, but that comes from his huge salary not from his investments. Famous football players have lots of money and they do make tech investments, but apparently not usually successfully. In fact most articles about NFL players in the US seem to be about their failures. I have a theory about that, read on below.

Musicians

There seem to be a lot of rappers who are tech investors such as Luke Lupe Fiasco, Snoop Dogg (started as a rapper then evolved to actor), Jay Z. Will I Am is a famous rapper.

But there’s hip hop too represented by Nasir "Nas" Jones, now a partner at QueensBridge Venture Partners and MC Hammer who is an active investor in DC Tech. But that is still part of the modern, disruptive music scene that is led mainly by black musicians, just like rap.

But it’s not just hip hop and rap musicians, or even individuals. There’s Lady Gaga, whose Backplane company recently failed. Many others too of course all with tech investments, successful or otherwise including Bono, who is an advisor at Elevation Partners. Justin Timberlake, also an actor is there and Madonna, whose entrepreneurial investments have been very successful, even though they are not mainly in the tech area.

Actors

Probably actors are the largest potential source of startup investments. There’s thousands of them all making tons of money. But in comparison to that number, the number who seems to be making investments in venture capital investments seems to be a lot smaller.

But it seems to me that actors as a whole do not embrace a lot of risk, unlike musicians. Maybe it’s because most actors who make money are in an older profession which is populated by money managers who advise actors to eschew risk; these are traditional wealth managers whose goal is capital preservation rather than capital augmentation.

In contrast many musicians are much more risk tolerant, do not have money managers and maybe fall prey to promoters who are selling high risk investments. In addition the musicians often have never had anything to do with money and are easily sold on high-risk investments.

You would notice that there’s a strong racial element in these groups. Most actors are white. Most musicians and athletes are black. Does this make a difference? We’re going to talk more about that below.

Is it Possible for Celebrities to Understand Tech Investing?

We’ve got to remember that of the three celebrity groups we mentioned, there are big differences in education. Musicians and athletes mostly have relatively low levels of education and educational achievement. Actors, being mostly white, have relatively high levels of education. Shouldn’t that make a difference to their potential success in making tech investments?

So here’s what occupies my mind. Are celebrities better than the professionals at venture investing? Wouldn’t that be nice to know?

Unfortunately there’s no data anywhere that I can find, which is not surprising. These are private funds invested in small, new, private companies which don’t publish any financials, not that they would have any financials to publish. So in in trying to figure this out I have had to rely on my febrile imagination coupled with infinitesimally-informed guesswork. If anyone can do better, please drop me a line.

For starters let’s recap how well the professionals do. It’s not a pretty picture actually. It’s well-known that the vast majority of VC firms lose money. Check out this article from Harvard Business Review to see the ugly numbers in which (in 2013 for example) VC firms badly underperformed the S&P 500, the NASDAQ and the Russell 2000. So the good news is that the celebrities don’t have a high hurdle to vault at all. Rather they have to crawl low enough to slither under it.

But the VC industry, just like much of our economy, is actually a tight oligopoly. There’s only a few that consistently do well. These are the top 3 VC firms, Sequoia, NEA, and Accel and another 8 including Kleiner Perkins, Redpoint Ventures, Norwest Venture Partners, and Battery Ventures.

So of the thousands of VC firms out there, just a tiny proportion actually perform well. These are the guys that backed all the famous firms such as Apple, Uber and Airbnb. It would be pretty hard to come remotely near their performance for anyone, no matter how celebrity-prone they are.

So when a celebrity gets into the venture game, it’s probably not so hard to beat the vast majority of VC firms but almost impossible to beat the big guys. So you shouldn’t expect them to get too many unicorns, if any. But that’s hardly news. We’ve got to use our noggins if we want to figure out something more useful than that.

It’s pretty obvious that a celebrity can do a lot for a fund or a startup, courtesy of the halo effect and the obsequiousness of many of our good citizens who will do anything to hobnob with one, even to the point of investing in things that are probably rubbish, just so they can get a selfie with a star.

So other things being equal we might expect a celebrity-backed fund to be able to raise more money and attract more supporters, including smart employees. But that still doesn’t tell us anything about how these funds and startups are likely to perform.

Celebrities aren’t the same

We have been talking about celebrities as if they’re all the same. But they have different areas of expertise and fame; they come from different races, cultures and levels of education. They are going to have different levels of tolerance for risk and reward. Can we say anything useful about that?

I’ve already talked a little about some of the issues with athletes, musicians and actors. There do seem to be some differences. Actors are mostly white, and musicians are often black. Athletes are often black too. Does that make a difference?

After looking at the record of these groups, it seems to me that there are some significant differences. Let’s take actors for a start.

Celebrity actors are mainly white. They have moistly come from middle-class backgrounds. And they typically have a financial adviser or money manager.

It’s my impression that most actors have a conservative investment style since their goal is mostly to preserve capital, based on their middle class background. They’re not coming from poverty and they already have a lot of money.

So in general I think celebrity actors as a group are low-risk low-reward investors. So you wouldn’t expect to see so many of them investing in startups. Most of them will invest in established companies and funds. That does mean they won’t invest in startups but it won’t be their main gig.

Musicians are a completely different story. Many, if not the majority are black. Many have come from poor backgrounds and for them capital augmentation rather than capital preservation is their goal. They are in a hurry to put the past behind them.

Also musicians have never had enough money to recognize many of the pitfalls of investing so are more likely to have a high risk style which favors VC-type investing in startups. You would expect to see a preponderance of musical celebrities doing tech investing and that in fact does seem to be the case.

Lastly you have athletes. As I have pointed out earlier, most of these seem to be from basketball, not football. Why would that be the case? I think it’s because playing football takes a terrible toll on your brain due to high rates of concussion and brain injury which leads to cognitive impairment which prevents these celebrities being able to successfully invest. That’s why there are some many press stories about footballers’ failed investments.

So why do we get so many basketball investors? I think it’s because they are black, with backgrounds of poverty that have the same motivation to go for high-risk investments which promise high returns in the short-term. Often they don’t have the same family background in managing money and are much less sensitive to the risks of tech investment.

So I think basketball celebrities will have a similar profile to celebrity musicians which will be totally different to actors, at least white investors. But on this token we might expect black actors to have a higher risk-reward profile than white actors and to be somewhat more similar to musicians.

So I think you’re going to see the musicians, especially the black musicians (hip hop and rap especially) being the most vigorous tech investors. Of course you will still get them from actors and athletes, just not at the same rates.

Which celebrities will be the most successful tech investors?

Most of the celebrity musicians and athletes, except maybe the actors, have less education, maybe even none to speak of. But clearly they’re smart otherwise they wouldn’t have got to where they are. They are usually cognitively intuitive, not analytical. Your VC professionals are highly educated MBA types, cognitively very analytical.  It’s the hoi polloi versus the bluebloods, a clear class division.

The VC professionals all read the same stuff and there’s a lot of group-think (the TED effect). The celebrities are much more outside the box, kind of like Trump, although all over the map ideologically. If I wanted to find someone who would think outside the box and uncover something that others are unlikely to see, I would put my money on the intuitives, aka the celebrities, especially the black musicians. Seems to me they are more likely not to get stuck in the intellectual ruts. So score one for the celebrities.

Athletes are a mixed bunch. If they have come from the contact sports you’ve got to be worried about concussion and undiagnosed brain problems.  On the other hand, research shows conclusively that vigorous exercise makes you smarter by growing more neurons. So the average celebrity athlete (outside football) might well be cognitively more able than the average VC Joe. So as long as they don’t have CTE they might be way ahead.  Maybe even ahead of the professionals. And they’ve got all those spare neurons hanging around with not much to do. Maybe that’s why they have to invest in something.

Actors often get a bad rap (get it?). That’s why Ronald Reagan was initially dismissed as a loser. But there’s mounting evidence that acting develops mental agility (partly through the phenomenon of embodied cognition) and that, in turn, makes you a better leader.

Celebrity actors are at the top of the profession and so we might assume that they have high levels of mental agility. Maybe even a lot higher than most VCs. So if you get a top actor you’re co-opting some of the most powerful mental agility on the globe. It’s that capacity that would lead you to think that they could make a difference to their fund or VC, just as long as they pay attention and are not so focused on PR and self-love that they totally lose it.

Musicians are another breed. Usually they’re intuitive, not analytical. They have a form of intelligence we still don’t understand. But we know that they can be very successful as we see in the record of Jay Z, Snoop Dogg and Nicki Minaj. If you’re a top rapper you’ve had to make it against many obstacles, some of them totally outside the experience and capabilities of professional, lily-white VCs. That’s worth something and not something you’re going to get from the VC blue-bloods.

So, are celebrities better than professionals?

As I’ve pointed out above, you have to take into account what type of celebrity you’re looking at, including their celebrity field, their race and their level of education, or lack thereof, and their cognitive style.

In general I think that if the celebrity is black and a musician (rapper or hip hop), they’re likely to be more successful. If they are white and well-educated they are likely to be worse.

OK so I’m going to stick my neck out even further. On balance I think actors and white athletes are going to be worse. I think black musicians are going to be better. But only if the celebrity is actively involved in the fund or the investment.

If you’re not with the tiny number at the top of the VC tree, it seems to be that celebrity-backed funds and startups are probably a better bet than the vast majority of small no-name brand VCs.

And you’ll get a selfie too.

 

 

 

 

 

 

 

 

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Thursday, 23 November 2017

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