The Power of Celebrity Brands – Part I
We at JOBI strongly believe in celebrity-backed DTC brands that are well planned and executed. This is the first of a two-part piece in which we summarize the rationale behind our thesis. We will explore some of the key success factors for bringing these brands to fruition in the second part to follow.
Our thesis revolves around advantages conveyed to key areas of the investment opportunity:
Cost of customer acquisition
The biggest advantage we see is on the marketing side. Many of the early DTC brands were based on the idea that they could acquire customers cheaply and effectively online with no cap. With larger reach at lower marketing cost structures than their traditional counter parties, a few unicorns emerged and disrupted their respective markets. That playbook has become increasingly more expensive over the years as brands fought for the same clicks and impressions while social media platforms pumped up their prices. Moreover,the tidal wave of brands that hit the market over the past decade also made it harder to differentiate and gain relevance, which was further complicated by the fact that Millennials and Gen-Z’s evolved into highly selective and savvy consumers.
We see celebrity backing as an important hack in today’s DTC market to gain traction, allowing a new wave of brands to take off without having to incur as large of customer acquisition costs in their early days. With star power and wide follower reach, organically pushing a product through a celebrity’s social media channels (and their celeb friends’) becomes a potent way to gain the awareness and trust of consumers more quickly – ideally leading to conversion into customers.
To illustrate in a simplified manner, assume a celebrity has an average follower base of 15 million and one product at a $50 price point– the brand would only have to convert 0.4% of that base to generate $3m in new customer revenues! A similar brand without celebrity backing could have to spend nearly $3m to generate $3m in new customer sales as acquisition costs (CACs)in the early days can end up being on the level of the average order value(AOV) of newly acquired customers. While the exact numbers may vary in actuality, this situation is one many DTC brands have sadly experienced. The celebrity angle can help lower the overall blended CAC if done well, making it easier to achieve desired LTV (long term value) / CAC ratios.
Having a celebrity onboard can also bring perks to the operations side of the business. The celeb factor adds a certain appeal and credibility that can make it easier to attract best-in-class talent, which helps the company operate at a higher caliber. Manufacturers and logistics firms may also be more open to and flexible in working with the brand vs. other new startup brands.
Further, the same credibility and appeal factor can make it easier to strike wholesale distribution deals, where new startups might have to wait years to establish market credibility to get a foot in the door and / or may have to agree to less favorable terms. In the same vein on the business development side, brand-building partnership agreements may be easier to achieve, e.g. with boutique hotels or other complimentary brands. While having a celebrity involved is no magic bullet, it can help smooth over some of the operational issues that are regularly faced by new startups.
Ultimately, when analyzing an investment, it all comes down to potential financial returns. With the above-mentioned advantages in mind, we believe celebrity backing can de-risk a big part of the investment for potential backers and enhance the return profile, even after taking into account celebrity compensation (especially if celebrities are equity holders vs. receive cash compensation). From an investor perspective, your returns will be dependent upon a few considerations:
· Valuation at which you enter
· Ownership dilution you experience
· Time to exit
· Size of exit / exit valuation
For emerging consumer brands, trouble typically arises when investors enter at high valuations and then significant amounts of capital are raised and deployed (often into marketing), diluting existing investors while often not yielding large enough valuation increases to offset. The celebrity model can be used to help avoid some of these potential pitfalls. While having a celebrity involved could lead to higher valuations simply from the star power effect, this can be partially mitigated by getting involved at a very early stage, e.g. seed. Valuations here will be significantly lower vs.later stages.
The amount required to be raised upfront may be less than other startups due to the mentioned potential savings on marketing costs, which could mean less capital injected upfront by investors (this can help with valuations as oftentimes in early stages valuations are back-solved from amounts required vs. target equity giveaway). Similarly, on an ongoing basis, fewer and smaller capital raises should be required, helping to reduce ownership dilution for investors. On the other hand, ideally the brand will grow faster and larger (and be more desirable by potential acquirers), speeding up the time to exit and size of exit. These factors could combine to produce very attractive investor returns. Moreover, even if the exit is only medium sized, there is still potential for very strong returns if the investors experience only limited dilution.
Overall, there have been significant exits that seem to prove the possibility offered by the celebrity-backed model. For example, Kylie sold 51% of Kylie Cosmetics to Coty for $600m in 2019. Ryan Reynolds recently sold his gin line Aviation American Gin in a deal valued up to $610m. Even smaller influencers have had success, e.g. celebrity-hairstylist Oribe’s eponymous brand was sold to Kao for ~$400m in 2017 (wwd.com).
Despite the promise offered by the model, we think not all celebrity brands will succeed. There are several key factors that should be considered to maximize chances of success – we plan to explore this topic further in our next piece.
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