How investments by celebrities power up start-up brands

The booming investor ecosystem and innovations from startups, have drawn attention of celebrities, who are also financial powerhouses. The last few months have seen an increasing interest from celebs to tap into the growth in this segment, by turning investors for these new age brands.

It is not just Bollywood celebs who are investing in startups, but also sports stars, content creators and social media influencers. Recent examples of celebs who have turned investors-cum-endorsers for various startups include Anushka Sharma for Slurrp Farm, a direct-to-consumer (D2C) kids’ snack brand, and Rakul Preet Singh for Wellbeing Nutrition.

These celebs don’t just invest in D2C startups. In December 2021, siblings Zoya and Farhan Akhtar infused Rs 21 crore and Rs 10 crore respectively in Bhavish Aggarwal-owned Ola Electric. Gujarat-based innerwear brand XYXX recently made headlines, as cricketer KL Rahul onboarded it as an investor and endorser.

Marketing expert Jessie Paul, CEO of B2B consulting firm Paul Writer, says, “The two primary expectations from celeb endorsers are reach and credibility. If the celeb can change behaviours or get users to adopt the brand, it’s even better. For consumers, a brand that can afford a celeb, appears to be financially sound. The celeb has clearly done due diligence before recommending it to his followers.”

Aviral Jain, managing director, Duff and Phelps (a financial consultancy firm), says that association with a celebrity ensures instant visibility, higher customer engagement rate and a better brand recall.

“These key ingredients help attract funds and command a higher valuation multiple. However, a celebrity can only be a catalyst and not the sole way to increase sales. If a brand is unable to establish a relevant market fit, roping in a celebrity brand ambassador may not contribute much. Thus, a celebrity association should be viewed more as a way to build top of funnel recall and boosts sales,” adds Jain.

It must be mentioned that this trend has been witnessed over the last few years where celebrities do not just confine their association with brands by way of endorsements, but have also turned into investors and strategic partners.

Flavoured yogurt brand Epigamia was launched in 2015. In 2021, Deepika Padukone launched a new range of healthy chocolate spreads in collaboration with the brand (investment). Padukone’s investment in the brand did not just help it garner media attention and popularity among the masses, but also expanded its distribution to a dense network of mom-and-pop stores.

Most celeb investors also endorse these brands. There might also be exceptions to this. Sony’s business reality show Shark Tank India has taught its audience that investing in a startup for a premium equity, leads to the investor having more skin in the game. Hence, more can be expected out of the celeb, than just promoting the product.

Saurabh Uboweja, managing partner, BOD Consulting, points out that a celeb investing in a startup is mostly in the lieu of the money that the brand is expected to pay as an endorsement fee.

“If a legacy brand has to get a big endorser, they might ask for about Rs 5 crore per annum. While big brands might be able to afford such a deal, the same celeb will not give a discount to another brand just because it is a smaller company or startup,” adds Uboweja.

Hence, a deal is worked out, where the celeb is paid in cash plus equity by the brand. However, this does not necessarily imply that all endorsers are directly investing in these brands all the time.

Multiple models at play

Many types of deals can happen between celeb endorsers and brands. Uboweja mentions that one of them is where equity is given by the brand against endorsement. The other is when a celeb becomes an angel investor for the brand.

If a celeb has surplus funds, than investing in a brand is an option that he can explore (in real estate, for instance). However, in this case, the celeb may or may not become a brand ambassador, or it can be a blend of both.

Why do startups offer equity to their ambassadors? Paul reasons, “Only brands that can’t afford cash, will part with equity. Generally, it is a startup that is willing to part with its precious equity, at a discount, hoping the celeb will drive future growth. Celebs would not want equity in the other kind of company, especially one without cash.”

A win-win for both

For the brand, the celebrity’s popularity, outreach and resonance with the target audience offers an advantage of driving consumer trust. Ashwani Arora, executive director, Marketxcel (a market research firm) mentions that often it depends on the stature of the brand and celeb that determines the advantage that each other bring on the table.

“Celebs gain from becoming investors, as they are exposed to the growth that the brand may foresee. The startups that are on the lookout for funding, have found an option to raise capital via celeb endorsements. The collective synergies between the celeb and the brand, contribute to the success of the latter. It is a calculated risk for both entities,” Arora signs off.