Celebrities have over the years proven that they are terrible investors. It is quite easy to point out several success stories where celebrities invested in a product/company that in the end sold for hundreds of millions of dollars. For instance, George Clooney sold a tequila firm for $1 billion.
Ryan Reynolds sold a gin firm for $300 to $600 million (subject to milestones) and a cell phone firm for $1.35 billion. Sammy Hagar sold his tequila empire for $95 million. Conor McGregor sold his whiskey firm in a deal that might eventually be worth $600 million subject to milestones.
Major celebrity entrepreneur success stories are the exceptions to this rule. You might be aware of the successes since they are incredible successes, and thus they could make for fun-to-read posts on websites like… Econintersect.
In reality, you do not hear a lot about most of the deals where a big-name celebrity took equity in a firm that eventually collapsed. Celebrities and their assistants like to pretend that such deals never existed.
Some experts consider it a major red flag when they hear that a company has brought in a celebrity as an equity-owning brand ambassador. The idea that a startup would waste its pre-IPO equity on celebrities making Twitter and Instagram posts is nearly a sure sign that the core product and business model are shaky.
For instance, people should have known that FTX was going to implode the moment it began offering massive equity grants to many musicians, actors, and models with no experience with crypto and whose largest sales pitch was the ambiguous “Are you in?” slogan.
In that context, there is a fitness company called Tonal.
Tonal was launched by Aly Orady, a former engineer at firms like HP, Samsung, and Sun Microsystems. Orady has always been passionate about fitness, but his busy work schedule made it so that he needed to wake up every morning at 6 am and drive to his local gym to break a sweat. Wouldn’t it be easier if he could just wake up and then work out at home?
After searching the internet and fitness books for various tips on at-home strength training routines, Orady had a brilliant moment:
“What if I created a better work-out-from-home experience?”
The idea resulted in a firm he eventually named Tonal and a product that is a vertically-hung flat screen TV coupled with some TRX ropes attached. Tonal users take classes that are powered via the TV to enable them to work out from the safety of their guest rooms, garages, closets, and basements. Best of all, the price for this revolutionary new device? Just…
$4000
It is not surprising, the concept of spending $4,000 on a TV that tells you to do pushups was not well received by the users at first. But several years later, COVID came in.
With the world locked up at home hiding from COVID in March 2021, Tonal raised $250 million. At the funding round, Tonal was valued at $1.6 billion. By that time, Tonal had brought in many athlete endorsers including:
- Mike Tyson
- Larry Fitzgerald
- Bobby Wagner
- Serena Williams
- Steph Curry
- Klay Thompson
- Michelle Wie
- Paul George
- Tony Gonzalez
- Drew Brees
- Maria Sharapova
Several months later, in October 2021, Tonal has two major announcements:
- It had completed a $100 million funding round that increased the company’s value to…
$1.9 Billion
- It had signed a new brand ambassador to its roster of more than 30 athlete investors. Their latest athlete partner?…
LeBron James
How much equity did it take LeBron James to become a brand ambassador? It was not revealed but it could even have been 5% since he is currently the most famous athlete in the world.
Let us assume the upfront grants and eventual milestones LeBron could eventually have owned 5% of Tonal. At the $1.9 billion valuation, the stake was worth about $100 million on paper in October 2021. LeBron gets out of bed and works out in front of a TV for $100 million.
https://twitter.com/FOS/status/1448257249902747654
Boom And Then Bust
Sadly, as other pandemic-darling firms like Etsy, Peloton, and Robinhood learned, Tonal’s exploding success may have been a COVID fluke. A flash inside the pan – a majorly strange moment in human history where it appeared smart to spend $4,000 on a TV that told you to do pushups in your garage.
Tonal’s sales cooled and in July 2022 the firm was compelled to cut 35% of its workforce.
Things got worse.
90% Valuation Drop
After raising an impressive $450 million to date, earlier this month it was said that Tonal was seeking a “down round” fundraising that would cut the firm’s valuation to $500 million. As it turned out, even $500 million was highly optimistic.
If everything goes as planned, Tonal is now trying to raise money at a valuation of…
Buy Crypto Now$200 Million
Things get worse. Even if Tonal manages to raise money at $200 million, it does not mean that LeBron James and other celebrities would own equity in a less valuable firm.
As reported by The Information, Tonal now wants to:
“Raise money at a valuation nearly 90% lower than its last one, in a deal that would effectively wipe out the stakes of many existing investors, people familiar with the matter said.”
The company is crunched for cash after failing to find a buyer. If it goes through with this raise, it might be:
“One of the harshest down rounds for a once high-flying startup that raised money during the era of low interest rates.”
If everything happens this way, we can safely presume that all these celebrities who presumably took equity in exchange for their endorsement are now sitting on nothing. The previous paper gains in millions of dollars is now ‘effectively’ zero.
What is the lesson here?
Celebrities can be better off in the long run if they forget about taking equity from unproven startups. The solution is to go back to asking for CASH. In case a company wants an endorsement, always go for cash. Tonal is a lesson for many to think critically when considering endorsement deals.
