How to Pick the Next Uber or Airbnb (a la Ashton Kutcher)
Leonardo DiCaprio, Jared Leto and Bono are in the venture capital game, but you don’t have to be a celebrity to jump in.
In the middle of a meeting on whether to sink money into a concierge service app, the team at the Sound Ventures investment fund got a little silly and tried the service out by ordering a cactus to be delivered to co-founder Ashton Kutcher. "We actually did invest in that company, and we continue to use it," says Abe Burns, a partner in the fund. "And the cactus is now in our office, sitting there."
Hands-on engagement with the ventures it backs is one of the hallmarks of investing for the team behind Sound Ventures, which first made its name with A-Grade Investments, a fund founded in 2010 by Kutcher, music executive Guy Oseary and billionaire Ron Burkle that become a quick legend in startup investing. Early bets on Uber, Airbnb and Spotify have helped its portfolio grow eightfold to $250 million and landed Kutcher on the cover of Forbes' "Midas List" edition in March featuring the world's savviest tech investors.
That growth wasn't just luck. Much like selecting an Oscar-winning script from a pile in an agent's office, picking winners from the mind-boggling number of startups seeking support means performing extraordinary due diligence, establishing a connection with the founders of the company and settling in for a few years. "I think of it like a five- to seven-year — or longer — relationship," says Burns, who's a partner in the $100 million Sound Ventures fund created with Kutcher and Oseary last year. "You're going to spend a long time with them; you have to have that spark."
Kutcher and company are among a number of celebrity investors getting buzz for their startup savvy. Leonardo DiCaprio, Jared Leto, Bono and Nas also have earned attention for their venture funding. Music manager Troy Carter (Spotify's new global head of creator services) has his own VC fund. Big-time DJs Tiesto, John Acquaviva and David Guetta are among a group of EDM artists called Plus Eight Equity Partners, which backs digital music startups. And even such agencies as CAA and UTA are in on the act.
But would-be investors don't need an Oscar or a Grammy to get access to the same sort of deals. They just require the resources and the willingness to do the footwork and take the risk. And yes, risk is rife in the startup world, whether you're offering seed money to a company taking its first steps, acting as an "angel investor" helping a fledging firm take flight or providing venture funding for companies seeking to ramp up to the next level.
"There are some good investments out there, but what people often hear about are the 'unicorns,' " says Daniel Gottfried, a partner at the law firm Hinckley Allen who frequently advises early stage investors. Unicorns, or private companies that rack up valuations of $1 billion or more (think Dropbox and Blue Apron), are the types of investments Gottfried believes should be considered "once in a lifetime" hits "that even the best professional investors will often miss."
The first step for wealthy investors (those with at least $1 million in investable assets, not including their primary home) is consulting with their accredited financial adviser on which venture funds are looking for money. Deals can be as small as a few thousand dollars, but most investors start off with somewhere in the range of $200,000 to $500,000.
Experts advise to buckle up. The smartest way to invest is to spread cash across a number of startups so that a winning bet offsets the losers. "It's inevitable," says Burns. "Not every company can be Uber or Airbnb, and that's fine."
Hinckley Allen saw a rush into angel investing about five years ago, but the fervor tapered off as many people found the risk to be unappetizing. Still, venture investing remains at a 20-year high, according to a recent report from PricewaterhouseCoopers. Some $60 billion was deployed in the U.S. last year and about $100 billion globally.
Experts say novice investors should start by observing. That includes attending an incubator event for startups, where company founders go to meet investors. One that has lured Hollywood players is Y Combinator, the quintessential seed accelerator, where twice a year tech startups present their products and make connections. The San Francisco fund has even teamed with CAA to host an educational conference for clients and friends of the agency who are interested in learning more about angel investing.
Invites to Y Combinator's Demo Days almost are as hard to score as Hamilton tickets, but smaller investor showcases and angel conferences are held throughout the country by hundreds of organizations. One popular place to start is by joining AngelList.co, an online platform that brings investors and entrepreneurs together.
Seasoned investors and advisers contend it's a good idea to start out with an angel group or a pool of investors with varied expertise. The members can then tap into their collective wisdom when making decisions and advising the companies in which they invest.
Experts also stress that these investments are usually not liquid — once the money is sunk in, it can be five or more years before investors see a return. So those hoping to turn the money from a spec script sale into a never-work-again fortune might be waiting a long time.
And then there are cases in which investors are wiped out.
"These investments can be awesome if you have the right ingredients," says Gottfried. "But they can be a nightmare if they don't or if you don't know what to expect."
This story first appeared in the July 15 issue of The Hollywood Reporter magazine. To receive the magazine, click here to subscribe.