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Celebrities rarely make their fortunes from stockpicking ability

01/12/2016

Andrew Williams

Andrew Williams

Investment Specialist, Equity Value

“An investment that helps you sleep at night” is, for a variety of reasons, not a phrase you come across as often as you once did. Even if it were still in vogue, however, here on The Value Perspective, we do not believe it would be appropriate for the array of so-called ‘smart’ mattress companies now advertising their wares in the press, on social media and across billboards. Oh, the irony.

When the Financial Times took a look at what it called the “mattress wars”, it highlighted three players – the UK businesses Eve Sleep, Simba and the New York-based Casper. The article described the last of these as “the oldest and most established of the mattress start-ups” – it was launched way, way back in 2014 – before adding “it is unprofitable and it is not known when it will start to make money for its investors”.

Those investors, incidentally, include celebrities such as Ashton Kutcher and Leonardo DiCaprio, no less, who along with a number of technology funds recently helped Casper to raise $70m (£56.3m). On this side of the Atlantic, in October, Eve Sleep raised almost £14m from investors – including Neil Woodford, whose own celebrity status in the UK perhaps falls somewhere between those two Hollywood stars.

So why are we talking about mattress vendors? Well, to be honest, we could be talking about a number of other kinds of online business because, to quote another headline, this time from The Times: “Razors? Mattresses? Yes, we are all digital revolutionaries now”. Suppressing our urge, here on The Value Perspective, to respond ‘Speak for yourself’, let’s instead take a closer look at what the article had to say.

Among other things, it catalogues a number of perhaps unlikely “darlings of the American tech community”, including razor manufacturer Dollar Shave Club, which Unilever snapped up in the summer for close to £1bn; “gourmet home meal kit creator” Blue Apron, which apparently has investment bankers tripping over themselves to take it public; and, yes, the aforementioned celebrity-backed Casper.

Arguing it has never been easier to scale up a business quickly into a national or global brand, the article quotes one venture capitalist as saying: “With Dollar Shave Club and Casper, you are just selling product but you are leveraging the fact that this new technology allows you to deliver a brand at massive scale and with a lot less capital. That’s the revolution.”

Stirring stuff – but we have come across Casper on The Value Perspective once before. A little over a year ago, in Hit and myth, we raised an eyebrow at its $500-$900 ‘sleep surfaces’ and suggested: “Needing to win market share equivalent to 100% of the entire UK sleep surface market to justify its $550m valuation, we fear returns may prove as substantial as its namesake, the friendly ghost.”

We mentioned the company in the context of ‘unicorns’ – the term now used to refer to unlisted start-up businesses, typically within the technology arena, that have reached the magic paper valuation of at least $1bn – and now you know why we are discussing mattress sellers. Maybe Casper will win out. Maybe Eve Sleep or Simba will or perhaps a company we have yet to hear of – but the point is that most will fail.

Optimistic bunch

Yet it is the nature of investment – and articles written on the subject of investment – that you rarely hear about the losers. You hear lots about the few businesses that have made their backers a fortune in the past and, because investors are a generally optimistic bunch, you hear even more about the businesses that could make their backers a fortune in the future. But those that lose their backers a fortune? Not so much.

The peculiar fascination tech start-ups appear to hold for celebrities (multiplied by the peculiar fascination celebrities appear to hold for mere mortals) only serves to enhance this sort of ‘survivorship bias’ – the impression people gain that, since they tend largely to hear about winning investments, they must stand a better chance of winning as investors themselves.

Thus, according to the CB Insights article “Fame and fortune: The top 22 celebrity start-up investors and their investments in one infographic”, which was published in October, the top 75 celebrity investors by number of deals have since 2007 participated in more than 350 funding rounds, totalling approximately $4.6bn to private companies.

It adds: “The year 2015 was the most active investment year on record for these celebs, when they contributed roughly $2bn invested across 101 deals to private tech companies. So far this year, we have seen celebrity investors – including actors, athletes and musicians – participate in approximately 42 deals totalling nearly $500m.” Can you guess which purveyor of sleep surfaces has attracted the most celebrity co-investment?

If you want to discover the most active celebrity investors, you now have the link but, of course, just because you can speak a line, kick a ball or hold a tune does not mean you can pick a winning start-up. In fact, to ram the point home further, let’s use the example of Sup to show that just because you can found a winning start-up does not mean you can pick another winning start-up.

Sup is – was – an app that alerted friends when they were within five, 15 or 25 minutes’ walk of each other. Endorsed by Virgin boss Richard Branson and Apple co-founder Steve Wozniak, Sup raised £650,000 from investors, including Innocent Smoothies’ Richard Reed – and closed a couple of months back after only 80,000 people downloaded it, making it improbable any two users would be close enough to trigger an alert.

And, yes, of course everybody makes mistakes but that is why venture capital experts invest on a portfolio basis – they are expecting a significant number of these businesses will not succeed. Woodford will know that too, of course, but as for the other celebrities and those fans who might feel emboldened to invest in their footsteps? Well, at least the Oscar-winning DiCaprio is not going to be short of film offers.

Author

Andrew Williams

Andrew Williams

Investment Specialist, Equity Value

I joined Schroders in 2010 as part of the Investment Communications team focusing on UK equities. In 2014 I moved across to the Value Investment team. Prior to joining Schroders I was an analyst at an independent capital markets research firm. 

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