Celebrities Don't Always Make the Best Start-up Investors

NEW YORK (TheStreet) -- Entrepreneurs sometimes think that the key to success is having celebrity investors that will help promote awareness through networking or a couple strategically placed tweets. While having an A-lister can provide some benefit, involving them in your start-up during the early days doesn't necessarily guarantee success and can even present some risk.

A single celebrity investment can bring in a wealth of attention for a company solely from that influencer's association. In addition to the free publicity, this process acts as a sort of endorsement for the company, giving it a level of credibility in both the eyes of consumers and other investors. The heightened visibility also naturally causes a boost in the startup's followers on social channels.

Yet, that visibility can be the worst thing for a start-up that isn't ready. The problem that often arises is that with a great deal of pubic attention comes interested consumers who expect to find products and services that work flawlessly and are ready to wow. Entrepreneurs need to remember that good public relations makes a bad product fail fast.

At FlashFunders, we see a lot of celebrities, athletes, and entrepreneurs that overvalue their publicity impact, tending to think that they're more effective than they really are. Granted, they can help to raise awareness quickly, but that doesn't matter if the product is no good. Just look at how Jay Z, arguably one of the most powerful influencers in the world, couldn't compensate for the disappointing Tidal, a premium music streaming service, even with a stage full of music celebs backing him up.

Additionally, while the notoriety that the influencers bring to an early stage brand can be highly beneficial, the brand also becomes susceptible to that celeb's potential high profile media nightmares. Association with a celebrity's bad behavior can be extremely harmful to a brand. We have seen it many times, from Tiger Woods to Lance Armstrong, brands will not hesitate to drop celebrity endorsements that could affect brand image. Donald Trump is the latest celebrity to see his brand turn toxic, with Univision, NBC and, now, perhaps Macy's piling on. 

Another disadvantage that comes with celebrity investments is the demand for perks such as "advisor options," which reduce the cost of the celebrity's investment while diluting that of other investors involved. 

To be sure, some celebrity investors have been very successful and helpful to the start-ups they have worked with. A key example of celebrity cache influencing start-up growth is Ashton Kutcher. With investments such as Uber, Skype, and Airbnb under his belt, it seems that everything he touches turns to gold. 

But when it comes to these very public partnerships, entrepreneurs must be careful in their considerations, making sure that the celebrity's image and personal brand will fit in with that of the start-up. It needs to be an authentic collaboration for the company, the celebrity, and most importantly, the consumers. While Justin Bieber may be the perfect investor for the selfie app Shots, finding this alignment would be a bit more difficult if he decided to invest in mobile analytics start-up Mixpanel.

Having celebrities on your team who can help raise awareness is incredibly valuable, but only if it's the right one, and they join at a price you and the other investors can afford, and only once you have a product that is ready for the big leagues -- before then it's just a distraction.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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