FFF – Family, Friends, Fools

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Love Money vs. Smart Money

Small start-ups are always in search for promising financial support. Usually there are two favored options, either to turn to family members and friends or to hire a Business Angel in order to get the business started. In other words we are speaking of love money adverse to smart money. However, what exactly does this mean? Love money is received primarily from the people in the environment of founders like friends and family, whereas smart money takes a step forward and provides money, besides knowledge and important know-how. Smart-money investors are generally sophisticated business people, who bring an understanding of the financial markets, strong networks and an intuition for spotting trends before others with them.

The advantages of love money are obvious: good rates, lenient credit standards and the chance for FF-investors to take part in the start-up entrepreneur’s success. However, there are some notable disadvantages to love money that should be considered too. First of all, relations can suffer. The personal connection might lead love money-investors to ignore the uncertainty of such a high-risk business venture. Expectations regarding repayment, for instance, can be too high which leads to disappointment, if the friend or family member had not been clear about the possible risks. Another problem could be a lack of documentation. If an agreement is too unclear and not properly documented, it could lead to troubles later on. Furthermore, if the terms and conditions are documented, another potential obstacle could be failing to follow them. The best paperwork is useless, if you do not care about supervision.

 

 

Conflicting interests

One special case concerning troubles in this area of investments is now a Business Angel who takes on the role of an FF-investor. This of course could happen, if a family member or friend needs financial help to build up an enterprise. A Business Angel – usually investing in third-party companies – finds himself in the situation of providing both, love money as well as smart money. Obviously this is a very attractive combination for any aspiring entrepreneur, but it brings definitely some difficulties for the investor with it. The most important difference for a Business Angel who invests in some friends or family member’s start-up, is the way of communication which will not be the same as with any stranger. Everything will be discussed in a rather cautious manner, since you are dealing with very familiar people. They may very well address the “private” person in you, however the issues are predominantly relating to business. This leads to a discrepancy that is not so easy to handle.

Warning and advice

To manage the delicate tightrope walk between being the generous friend or a family member on the one hand and a cautious as well as a reliable investor on the other hand, it is extremely important for the Business Angel to be aware of the risks behind such an FF-investment. It could easily happen that you don’t judge things the same way you would do with a normal business client. Regular updates from the start-up entrepreneur, for instance, take a crucial part in the mentoring process. If they are missing, appear in irregular intervals, or do not address critical business issues in-debt, a Business Angel would normally disapprove. On the contrary, the same Angel is in danger to overlook this behavior, if he knows the person very well in private. But then look out: a nice friend might not necessarily be a good businessman! As for any other investment as well you should always keep in mind that the friend or family member could also fail. Some Angels do not invest, if there was no FFF-seed investment placed, as they will figure: “Not even the family of a founder trust him, why should I?” All in all handling the circumstances and paying attention to separate emotional and business issues as clearly as possible should be of first priority.

 

 

Caroline Ramberger, Bakk. phil.:

Miss Ramberger finished her studies of Journalism and Communication Science at the University of Vienna and is currently studying International Business Administration at the Vienna University of Economics and Business.

 

 

Sources:

Debaise, Colleen: The family plan: https://online.wsj.com/article/SB119562618703400389.html# (2013-07-25)

Ennico, Cliff: Accepting money from friends & family: https://www.entrepreneur.com/article/51542 (2013-07-09)

Robbins, Stever: Asking friends and family for financing: https://www.entrepreneur.com/article/44612 (2013-07-09)

Zwilling, Martin: How to get funding from friends and family: https://www.entrepreneur.com/article/217651 (2013-07-09)

Zwilling, Martin: Don’t hurt friends and family investors who love you: https://www.forbes.com/sites/martinzwilling/2013/04/16/dont-hurt-friends-and-family-investors-who-love-you/ (2013-07-09)

The Deals of VIPs – Celebrity 4 Equity

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Celebrity 4 Equity is a big trend in the venture industry but why? Being famous opens doors to events, people, media and wealth. The combination of access to a great amount of capital, a worldwide network and experience of dealing with the public view through media is very attractive for fortunate entrepreneurs. Big businesses have been using this for years, investing a lot of money in testimonials to align their brand with some star appeal – think of George Clooney and Nespresso. Celebrities and their public impact have proven to be one of the best marketing strategies, but it need not be remunerated in cash. Start-ups are usually in a constant shortage of cash, which makes them very creative when it comes to media impact, like guerrilla marketing for instance. Celebrity for equity is a concept where celebrities offer their media effectiveness as a testimonial, receiving equity (company shares) or participation in sales in return. Convincing the right star, with significant impact in target groups and markets can lead to phenomenal results.

A recent example for this type of investment is given with the famous Rap-Super-Star “50 Cent”, who supported the Vitamin Water Glaceau as a testimonial. Glaceau was sold in 2007 for 4.1 Billion Dollar in cash. In exchange for his marketing and brand-building activities “50 Cent” received 10% in shares of Glaceau which resulted in a profit of almost 400 million dollars. Celebrities investing in startups may be seen as classical Business Angels, like Ashton Kutscher. Ashton has been investing in quite a few US and Berlin-based startups yet.

Entrepreneurial Investments

In contrast to business angel investments, some celebrities place conventional venture capital or private equity investments via associate companies. One of these famous companies is Elevation Partners founded by Bono (U2) in 2004. Apart from investments in media, entertainment and technology businesses Elevation Partners bought 2,3% of Facebook in 2009 for 90 million dollars. After the initial public offering IPO of Facebook, the stake was worth about 1,5 billion dollars.

Another celebrity who turned into an entrepreneur is the television personality Kim Kardashian who founded a clothing brand D-A-S-H [Update: Dash closed in 2018] together with her sisters Kourtney and Khloe which leads to the so-called classical celebrity investments like restaurants, fashion-labels, nightclubs, record labels or fragrances. Probably these businesses are easier to understand and therefore celebrities feel more comfortable with them.

However, there are very few celebrities with such a strong commitment to the startup scene like Ashton Kutcher but the demand for start-up-multipliers in Europe is rising. Nevertheless not every celebrity is capable of offering expertise to support a project with the so-called traditional way with funding, deep business know-how, the knowledge of classical management competences and network.

What about social entrepreneurship and celebrities?

Some celebrities are serial entrepreneurs like Victoria Beckham or P-Diddy. Both of them have built quite a decent amount of businesses, like Bad-Boy Entertainment, a holding for various companies or DVB Style, a fashion label by Victoria Beckham. Even so, both use their fame to improve awareness for some social issues like funding a business school in Harlem or supporting a fashion campaign against skin cancer together with Marc Jacobs. Another example of social and clean-tech investment is Kevin Costner’s oil-water separator, which was used in the BP-Deepwater Horizon oil rig disaster in the Gulf of Mexico in 2010. Kevin Costner invested about 20 million dollars over more than a decade into the business.

How about failing?

Of course, there are some celebrities who failed in business-like “The Hills” star Heidi Montag who founded a clothing line called “Heidiwood” which failed poorly after one year. Another example is “The Fashion Café”, which was established by the four mega supermodels Claudia Schiffer, Naomi Campbell, Elle McPherson and Christy Turlington, which had do be closed after three years of struggling.

The idea of uniting synergy effects between celebrities and startups is a very well-known and proved concept of investment even though these projects can fail. Generally spoken celebrity for equity can be a serious benefit for both sides.