Star Power: How Celebrities Raise Debt To Launch Brands

While celebrity endorsements are nothing new, in the past few years, stars have been able to capitalise on their brands in novel ways. 

On the face of it, launching a celebrity brand seems like a quick and easy way to diversify an income stream, but these ventures don't always work out. Customers are increasingly discerning, and where a quick perfume launch was once an easy way to make money, potential buyers now want exceptional quality: products or services sold under celebrity brands have to be exceptional in their own right, with or without the celebrity's endorsment. 

Seed Funding

One of the challenges for celebrities is that as more and more household names launch products and brands, the celebrity product marketplace becomes increasingly saturated. This can translate to there being more overall risk the venture won’t be a success, and early investors are wary of putting forward capital on the basis that the venture might not be profitable. While it can be easy for celebrities to raise additional capital later (many big-name venture capital firms have invested in celebrity brands like Rihanna’s Fenty, for example), initial investment into a start-up business can be difficult for celebrities to secure. 

As a result, celebrities will often need to put their own capital into launching a business venture, with subsequent funding rounds raising more liquidity based on the initial reception of the product, service or venture and its financial success. However, seed investment is often an option for celebrities, which tends to come most easily from industry acquaintances or friends who are prepared to partially bankroll a start-up and take on the associated risk of a new business venture. (As a byline, celebrity venture capital firms are also increasingly common, with Serena Williams, Jay-Z, and Aston Kutcher all owning venture capital firms, and Kim Kardashian has recently launched a private equity business).

Why Differentiation Is Important When It Comes To Debt

Although not obvious, differentiation is important when it comes to celebrity brands and raising capital. As more celebrities launch products, there is more competition in the marketplace for star brands to compete with. Simultaneously, consumers are also more discerning (especially in the current economic environment with significant inflationary pressures), and potential buyers need a reason to purchase from a brand: and they are looking for that more than a simple celebrity association with a product. 

Differentiation is therefore critical because it gives consumers a reason to buy: Rihanna differentiated Fenty Beauty with inclusive beauty products delivered through an array of make-up that meets the needs of consumers of different cultures, races and skin types, regardless of gender. For her part, Selena Gomez’ Rare Beauty celebrates natural beauty rather than unrealistic beauty standards and encourages discussion around mental well-being. 

Overall, a brand story and, most importantly, a vision that a celebrity founder can commit themselves to and connect with consumers is increasingly a recipe for success. Consumers can buy into the brand’s vision rather than feel they are simply bankrolling another celebrity’s income. 

Needless to say, quality is also critical: a celebrity endorsement alone is no longer enough to satisfy investors of the potential of a brand. Poor products that don’t deliver on quality or match their price point are simply no-goes, and increasingly, investors want to see a product that is good enough to launch by itself rather than the brand being wholly reliant on the celebrity to garner interest and sales – in other words, the celebrity is the cherry on the cake, rather than the element that keeps the whole venture together. When a celebrity brand is launched and is tangibly successful (Rare Beauty made $70 million in blusher sales alone in 2022, for example, and is now an established brand in its own right, with or without Gomez’s branding), raising debt or funding becomes increasingly easy for celebrity founders if they want to explore it: investors – from venture capitalists to private equity houses and corporate investors are all options. 

Debt And Equity

For household names launching businesses, having their own equity in a business (as opposed to being paid to promote a brand) is increasingly a consideration in what is known as equity-for-endorsement deals. In return for what is effectively a long-term partnership and strategic and long-term endorsement of the brand, an already-established company may offer a celebrity equity in the business in a bid to boost its bottom line. The challenge here is to make sure both sides get what they want from the deal: in order to safeguard their personal brand, the celebrity will want to partner with companies they align with, and that will resonate with their fans. On the other hand, what a celebrity will bring to the company that’s offering equity is also essential: no brand wants to give away equity in return for a few social media posts that don’t add to the company’s profitability, support growing market share or help to build awareness in the product. 

As equity deals in established businesses become increasingly challenging (but not impossible) to arrange, stars are increasingly looking to own equity in their own businesses, aligning their vision with their brand and often holding a controlling stake or more significant portion of the business than they would be offered in equity in an existing business.  

Here, debt comes into play. Stars that are relatively sure of their ability to make a venture a success (think mega-stars like Kim Kardashian or Ryan Reynolds) are increasingly cashing in on their own brand to launch successful businesses and are retaining as much ownership as possible. While raising debt to start a business can be difficult – even for celebrities – they typically look for other ways to optimise their cash flow and will often take on other debt that allows them to keep capital available for their own business. This is why celebrity mortgages are so common: even when a star could easily bankroll a property purchase outright. Rather than paying in cash for a house, they will take out a mortgage to maintain cash reserves that they can then invest into their business, that will see them generate the best returns on investment. Using unencumbered properties as collateral for a loan is another way to raise capital for business investments, as is securities-backed lending. 

As more and more celebrities successfully invest in businesses (U2 front man Bono reportedly made around $40 million from an early Facebook investment, and Aston Kutcher has a fondness for Silicone-valley tech stocks and has invested in Uber, Skype and Airbnb through his investment firm, A-Grade investments, turning a start-out fund of $30 million into a $250 million fund). While there’s nothing to say that these stars have accessed securities-backed lending in the past, many will have the option to do so if they have invested millions into securities. Ultimately, they can use these securities as collateral for a loan, giving them liquidity to invest in other ventures. Celebrity investors (both those operating in their own right or via a team of advisers) that consider securities-backed lending are likely to reinvest to diversify a portfolio, seek higher returns, or invest the capital into business ventures.