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Why so many celebrities are becoming venture capitalists

When Kobe Bryant was playing basketball, he says his focus was almost always winning. Now, he, like a growing field of celebrities, has found a second career in another industry where the stakes are high and the competition is fierce: Venture investing.

Bryant announced Monday he would launch a $100 million investment fund, alongside former Web.com CEO Jeff Stibel, that focuses on funding technology, media, and data companies. In doing so, he joined ranks with celebrities from Lupe Fiasco to Robert Downey Jr. that have said they would dedicate money to finding the next big win.

Skeptics argue that it can be risky for start-ups to exchange part of their company for a fizzling grasp at fame. But many say that venture capital, like basketball or selling records, is more art than science.

Former NBA star Kobe Bryant, CEO of Kobe Inc,
Lucy Nicholson | Reuters
Former NBA star Kobe Bryant, CEO of Kobe Inc,

As tech touches more lives, it's not all that unusual on so-called "Silicon Beach" to see the Yahoo CEO rub shoulders with celebrities at the Met Gala, or hear that Mark Zuckerberg and Priscilla Chan are the new Brad and Angelina. But less well-known is that off the court, Carmelo Anthony has Melo7 Tech partners, off the runway, Tyra Banks has Fierce Capital, and backstage, Ellen Degeneres has Ellen Digital Ventures.

The high-risk, high-reward world of investing is a big step from simply endorsing a product. But it's one that has obvious appeal, said Jon Vanhala, who, after a career at Universal Music Group and Island Def Jam Music Group, became a start-up investor and advisor at Crossfade Partners.

Becoming a top performer amid the pressures of a record label and the finicky consumer sentiment is known in the music business to require "taste and tenacity," Vanhala said. The challenges of being in a band — the willingness to overcome rejection, the need to learn from mistakes — makes a transition to the start-up world natural, Vanhala said.

"They were unknown at some point and now they are global social super stars," Vanhala said. "They all started out somewhere. Ninety-nine percent had to battle their way up. They have a lot of built in empathy for early stage creators. The know how challenging it is got get someone to pay attention to you."

He points to a band like Linkin Park — whose fund, Machine Shop Ventures, invested in Lyft, Blue Bottle Coffee and Hyperloop One.

"They've been mega super stars, they've played in the same band since high school," Vanhala said. "Some of them are focused on the visual presentation, other might be focused on new technologies, and have come to a comfortable place that they each have the role to play."

Machine Shop Ventures is quick to point out online that Linkin Park is not a "celebrity investor."

"Every celebrity came with insight perspective, credibility, a network." -Pascal Pilon, CEO of start-up Landr

"If we can't add value, we don't invest," their website reads.

That distinction becomes important as the celebrity start-up hype machine has faced criticism. Jay-Z's Tidal, which sports equity shareholders like Nicki Minaj and Kanye West, was slammed when some argued its glittering launch failed to sell the details of the service.

Tidal's launch video relied heavily on the stars' domain expertise, a factor that was also key for Pascal Pilon, CEO of start-up Landr, which uses artificial intelligence and machine learning to master tracks at lower costs for new artists. His investors include Nasir "Nas" Jones, hip hop-legend-turned partner at QueensBridge Venture Partners, as well as several other recording artists.

"If there was one thing that was great was those investments, it wasn't the money," Pilon said. "Every celebrity came with insight perspective, credibility, a network. Super useful to get us into the different scenes around the world where we're widely adopted."

That's not always the case, said Cortney Harding, digital strategy consultant and author of "How We Listen Now: Essays and Conversations About Music and Technology." While a top-tier venture capitalist can provide guidance every step of the way, chasing fame for fame's sake may leave entrepreneurs with little in the long run, she said.

"I think the issues is there are pop stars who are like, 'That seems fun, I'm going to do it,'" Harding said. "It's their money to lose. But as a start-up, it may be worse to take money like that — a year down the line, you're going to get a lot more help from a boring investor rather than someone you put in a press release."

Indeed, the level of involvement in the technology space varies widely among celebrities.

Bono, Ashton Kutcher, and Jared Leto, for instance, are well-known for their long-standing and wide-ranging portfolios. Legendary artist managers Troy Carter and Scooter Braun — who helped launch the careers of Lady Gaga and Justin Bieber — are also known to be deeply tied to their start-up investments.

Having a trusted team to vet investments and do due diligence can make a difference, Harding said.

"Troy Carter or Scooter Braun, they're really smart guys," Harding said. "They know the business. Madonna's manager has been very forward thinking. These are super-savvy business people. If he's getting his clients to put in money, then everyone wins."

Critics often point to the struggles of celebrity-driven ventures like Lady Gaga's Backplane. But big-name brands like Menlo Ventures and Sequoia were on board too, said Charlie O'Donnell, a venture capitalist at Brooklyn Bridge Ventures who has penned tips for celebrity investors on his blog.

The bottom line is most venture-investments fail anyway, and that's not always a reflection on the celebrity, said O'Donnell. After all, there's very little formal training to become a venture capitalist, O'Donnell said.

"Anyone can functionally do it," O'Donnell said. "Whether or not they do it well is another thing. Some people do it and hit success through some amount of luck. Does every single Uber investor have a higher than normal chance of the next big win? I wouldn't say that that it makes you a good investor."

Still, the trend comes at a time where venture investing is arguably getting more challenging. Venture deal count was down 26 percent year-over-year in the second quarter, KPMG and CB Insights found, as investors have become more diligent over the past year.

"Studying up enough on this ecosystem to get outside of your bubble, figure out who to trust — it's probably the biggest challenges," O'Donnell said. "It's a challenge for a lot of family offices, celebrity or otherwise. It's doubtful [Kobe Bryant]'s going to put his email address up the way mine is. But if the only people you talk to are people you already know …. They aren't in the industry. It's not an easy thing to figure out who to open up to."