By and large, celebrities are absolutely terrible investors. Sure, it’s easy to point out a few success stories where celebrities invested in a product/company that eventually sold for hundreds of millions of dollars. For example, George Clooney sold a tequila company for $1 billion. Ryan Reynolds sold a gin company for $300 – $600 million (depending on milestones) AND a cell phone company for $1.35 billion. Sammy Hagar sold his tequila empire for $95 million. Conor McGregor sold his whiskey company in a deal that could ultimately be worth $600 million (depending on milestones).
Major celebrity entrepreneur success stories are the exceptions to the rule. You’re aware of the successes because they are successes, and therefore they make for fun-to-read articles on websites like… CelebrityNetWorth.
In reality, you don’t hear about the vast majority of deals where a big-name celebrity took equity in a company that eventually went bust. Celebrities (and their publicists) would really prefer to pretend those busted endeavors never existed.
Frankly, whenever I hear a company has brought on a celebrity as an equity-owning “brand ambassador,” I consider it a MAJOR red flag. The idea that a startup would waste its precious pre-IPO equity on a bunch of celebrities making Intagram and Twitter posts is an almost sure sign that the core product and business model suck. For example, we should have known FTX was going to implode the moment it started raining huge equity grants on countless actors, musicians and models who had no experience with crypto and whose biggest sales pitch was the vague “Are you in?” slogan.
On that note, let’s talk about a fitness company called Tonal.
Tonal was founded by Aly Orady, a former engineer at companies like Samsung, HP and Sun Microsystems. Orady has always been avid about fitness, but his busy work schedule made it so he had to wake up every morning at 6am and drive to his local gym to break a sweat. Wouldn’t it be easier if he could just wake up and work out at home???
After scouring the internet and fitness books for tips on at-home strength training routines, Orady had a light bulb moment: What if created a better work-out-from-home experience?
That idea gave birth to a company he eventually named Tonal and a product that is basically a vertically-hung flat screen TV with some TRX ropes attached. Tonal users take classes powered through this TV so they can work out from the safety of their garages, guest rooms, basements… closets. And best of all, the price for this revolutionary new device? A mere…
$4,000
Perhaps not surprisingly, the concept of spending $4,000 on a TV that tells you to do pushups was probably not well received by consumers at first. But guess what happened a couple years later? COVID.
In March 2021, with the world locked up at home hiding from COVID, Tonal raised $250 million. At this funding round, Tonal was valued at $1.6 billion.
Also by March 2021, Tonal had brought on a slew of athlete endorsers including:
A few months later, in October 2021, Tonal had two major announcements:
#1) It had completed a $100 million funding round that upped the company’s value to…
$1.9 billion
#2) It had signed a new brand ambassador to its roster of over 30 athlete investors. Their newest athlete partner?…
How much equity do you think it took to land LeBron as a brand ambassador? If I were to make a totally wild guesstimate, I would say less than 10% but definitely more than 1-2%. So, again just a total guess, maybe 3-4%? Maaaaybe 5%? After all, he is arguably the most famous athlete on the planet right now. LeBron isn’t getting out of bed for some wimpy payday anymore.
Let’s assume between upfront grants and eventual milestones LeBron ultimately could have owned 5% of Tonal. At the $1.9 billion valuation, that stake was worth around $100 million on paper in October 2021. LeBron definitely gets out of bed and works out in front of a TV for $100 million.
Tonal’s newest investor and brand partner:
LeBron James ?
The on-demand, virtual personal trainer introduces King James to its newest campaign and roster of over 30 athlete investors. pic.twitter.com/xQWawQVLRP
— Front Office Sports (@FOS) October 13, 2021
Boom… and Bust…
Unfortunately, as other pandemic-darling companies like Peloton, Etsy and Robinhood learned, Tonal’s skyrocketing success may have actually been a COVID fluke… A flash in the pan… A very bizarre moment in human history where it seemed smart to spend $4,000 on a TV that told you to do a push up in your garage.
Tonal’s sales cooled and in July 2022 the company was forced to cut 35% of its workforce.
It got worse.
(Ontiveroz/MediaNews Group/The Denver Post via Getty Images)
90% Valuation Drop
After raising $450 million to date, earlier this month it was reported that Tonal was looking to do a “down round” fund raise that would shave the company’s valuation to $500 million. And as it turned out, even $500 million was overly optimistic.
If all goes to plan, Tonal is now trying raise money at a valuation of as low as…
$200 million
It gets worse. Even if Tonal manages to raise money at $200 million, that doesn’t actually mean LeBron (and the other celebrities) would then simply own equity in a less valuable company.
As reported by The Information, Tonal is now considering “raising 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 Information claims the company is “…crunched for cash after failing to find a buyer.”
And that if it goes through with this raise, it would be “one of the harshest down rounds for a once high-flying startup that raised money during the era of low interest rates.“
If all of this happens, can we safely presume that all those genius celebrity investors who presumably took equity in exchange for their endorsement are now sitting on big fat bagels? Presumably LeBron’s former $100 million paper gain is now “effectively” zero.
So what’s the lesson here?
In my humble opinion, celebrities would be better off in the long run forgetting about taking equity from unproven startups. Go back to demanding CASH. If a company wants your endorsement, demand a Brinks truck be driven to your garage and have that Brinks truck dump a mountain cash out right in front of your unused Tonal. You can jump in and out of the cash mountain for exercise.
