It’s tempting to jump at the chance to invest in an entrepreneurial rockstar – the reasons to do so are there for all to see. But a word of caution: not all opportunities are a sure thing for a big return.
Some entrepreneurs are famous for having the Midas touch. Everything they do seems to work out and some have three, four or more business successes behind them. So if an opportunity arrives at your feet to back a serial superstar, why on earth would you turn down the chance?
They have the experience, the understanding of what drives demand, the contacts, the nous and the balls to make it happen time and again – so what could possibly go wrong this time?
Well, before you go running for your cheque book, take five minutes to consider the downside.
The product or service might be overvalued
Attach a big-name entrepreneur to a growing business and its perceived value skyrockets. It does so for good reason – because this person has a proven track record in business and knows how to win. Fair enough.
But what premium should you put on this experience and does this match up with the valuation of their new business? If it doesn’t, then it’s worth a second look. Make sure the fundamentals are right and consider this: would you plough money into the business if they weren’t associated with it?
Remember also that an investment that relies on a single individual is, by definition, a risk.
They might take their eye off the ball
Serial entrepreneurs are flighty by default. They love the cut and thrust of developing ideas, negotiating with VCs, prying open routes to market and being the face of a sexy new outfit that’s the envy of their competitors.
But that doesn’t guarantee their attention for long. Almost all top businesses have had to fight at one time or another in the face of adversity. Is this person hungry enough to stay the course, like for example, Richard Branson at Virgin Galactic? If not, pass it up.
Are they the real driving force of the business?
When you’re raising money, nothing ramps up the pound signs like having a famous face associated with your business. It’s why celebrity endorsements work – the star quality rubs off. But look closely and you might find that an endorsement is all it is.
Is the entrepreneur pledging to run the business, or back it for the cameras and then walk away? How much time are they planning to devote to it? Are they investing themselves and will they do everything they can to ensure the business is as big a success as their previous ventures? It pays to make sure.
Were they the real driving force behind previous successes?
From time to time you hear stories of people who got lucky in business. They co-founded a venture as part of a team and, by dint of the other founders’ talents and/or hard work, saw enormous success.
How can you be sure you’re backing the right horse? Even business megastars owe some of their glory to the teams of geniuses supporting them, without whose talents the business would not have reached its heady heights – think Steve Jobs and Jonny Ive.
Past results are no guarantee of future performance
This, of course, is point number one in the investor’s handbook. Someone’s past successes do not ensure further glory down the line, and many a great entrepreneur has hit giddy heights only to go and release a dud later on.
Serial entrepreneurs are also serial experimenters, and rarely do you come across one that gets it right every time.
Stelios Haji-Ioannou has piloted two billion-pound businesses: easyJet and the business his father established, Stelmar Shipping. Yet for all his unquestionable qualities, his failures significantly outweigh these two gems.
Easy Group has launched countless other businesses, from easyPizza to easyWatches, with varying degrees of success. From an investment point of view, these would not have provided significant returns.
Back a proven winner by all means, but do so with all the cards on the table. As with every investment, you must do your homework and never assume you’re on to a sure thing just because you recognise the guy or gal at the top.
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