Small businesses take risk with celebrity investment

— -- Perhaps he should have been a silent investor.

New York Yankees slugger Alex Rodriguez ponied up capital for Zico coconut water, yet this summer he publicly praised rival brand Vita Coco.

"My trainer suggested I try Vita Coco because of all the electrolytes and potassium," Rodriguez said in a press release. "Now I drink it every day."

The media immediately picked up on the switch-pitch.

"Alex Rodriguez looked like a nut yesterday after backing two rival coconut water brands," said the New York Post. "Error On The Play: A-Rod Endorses Vita Coco While Investing In Its Biggest Competitor," said Sports Business Daily.

Adding to the intrigue, Zico-investor Rodriguez released a statement that put down that brand. "Since Zico changed their formula to concentrate, I felt that the taste and functionality was compromised," it said in part.

The coconut water craziness shows what can go amiss when a growing business takes money from a "celebrity" investor. The publicity that comes from linking with a well-known backer can be a business boon, but there are big risks as well.

Typically, only company insiders know the details when a problem arises with low-profile investors. But when a famous name is involved, it can quickly become public fodder.

Even with the obvious dangers, a slew of small and growing businesses have tied in with top athletes, as well as Academy and Emmy Award-nominated investors.

Baby-food maker HappyFamily announced this spring that Demi Moore was a new investor. Moore's spouse, actor Ashton Kutcher, backs snack-food company Popchips, as do Sean Combs and Boston Red Sox star David Ortiz. Expanding hairstyling chain Drybar has funding from Conan the Barbarian actress Rose McGowan.

Many of those business owners know the risks but say the rewards outweigh any potential troubles. Zico founder Mark Rampolla says he was taken aback by A-Rod's about-face, but adds that other well-known investors have helped his brand.

For instance, Boston Celtics power forward Kevin Garnett— who became an investor and endorser in March — now stars in an online Zico campaign.

(Model Gisele Bundchen and TV host Kelly Ripa have also put money into Zico. For its part, rival Vita Coco's A-List backers include actress Moore, actor Matthew McConaughey and Madonna.)

Rodriguez is now a Vita Coco investor, as well as an endorser. He "is currently divesting his interest in Zico," says spokesman Richard Rubenstein.

Banking on 'halo effect'

When a company spreads the word about its celebrity backers — as many do in press releases and TV interviews — it could boost sales, says Sam Waltz, founder of strategic consulting and capital services firm Sam Waltz & Associates.

There's a "halo effect" in which fans may be interested in trying a product that a favorite actor or elite athlete supports, he says.

Celebrity backing can also pique the interest of other potential investors.

"When an early-stage company is raising capital, one of the first things people ask is, "Who is in? Who else is coming in?'" Waltz says.

While many sports and entertainment stars aren't known for their investment skills, they can bring an aura of glamour that other investors may want to be associated with, he says.

Big-name backers — many of whom have a wide circle of contacts through co-stars, teammates, managers and agents — can also open the door to new opportunities. HappyFamily investors, which include movie star Moore, as well as Rodriguez's and Madonna's business manager, Guy Oseary, "carry a certain amount of weight and respect, (which brings) additional networking that probably wouldn't be in my sphere," says founder Shazi Visram.

Drybar CEO Michael Landau says that McGowan's "wealth of connections in the fashion and beauty world" offered fresh contacts that he could tap into as the business expanded.

"She is a great connector," he says. "This was someone who would bring value beyond just writing a check."

How celebs get on board

Snaring a celebrity investor is rare, but when it occurs, it often happens through networking.

"We put out the word that we were looking for investors, and all these people came through friends of friends and business associates," says Zico's Rampolla.

Giancarlo Chersich, business partner to TV-star fitness trainer Jillian Michaels, heard of their recent investment opportunity via a friend who was pals with the business' owner. The result: Chersich and Michaels now back indoor cycling studio Flywheel Sports.

Online tools also open up opportunities to reach celebrities, says Brian Heidelberger, partner and chair of the advertising, marketing and entertainment practice at law firm Winston & Strawn. Sites such as Facebook give entrepreneurs the ability to find potential investors, as well as directly message them.

"Social media has made brands and celebrities much more accessible to each other," he says.

Sometimes it's the celebrity who seeks out the deal because they like a business' product or premise. McGowan read about Drybar in a magazine, and was intrigued by its premise: no haircuts or color, just stylish, low-cost blow-drys.

There to get her hair done, she asked the receptionist for the owners' contact information and soon met with Landau and his sister Alli Webb, who launched the company.

McGowan has a personal interest — "I hate blow-drying my own hair," she says — but also thought the concept was strong.

"She really understood the business," Landau says. "We would have never taken the money from Rose just because she was a celebrity."

McGowan — who once attended beauty school and who has an aunt in the salon business — offers advice on what services Drybar should and shouldn't offer. (Among the services she advised against: manicures and pedicures.) Yet, as is the case with many other celebrity arrangements, Landau and Webb have the ultimate say.

"We still control management," he says. "We get Rose's advice, which she happily and readily gives. But (she and other private investors) believe in us and let us do our thing."

Vetting celebrity investors

While most founders retain control, there is a wide variety of ways that deals can be structured. Some stars quietly back a company, while others are vocal evangelists. Popchips investor Kutcher, for instance, is an outspoken brand advocate, even taking on the title of "president of pop culture."

Other celebrity investors don't want to be known.

Many put in their own money. But some perform work — such as public speaking and modeling in ads — in exchange for the equity.

No matter what the setup, a key to creating a successful deal, says Popchips founder Keith Belling, is to carefully vet all potential investors, and to make sure they have "a genuine passion for the brand and your product."

And then be realistic about what will come from that: "You just hope that they can be great supporters," he says. "But don't expect too much."

Another key is to know when to say "no."

If a business owner gets blindly starstruck by a celebrity or the cash they're offering, that can lead to problems.

Unlike endorsement deals, celebrity investors usually aren't beholden to morals clauses that make it easy to sever a relationship in the event of unexpected bad publicity, Waltz says.

Even with background research on potential partners, problems can still occur.

"When you have a high-profile person as part owner, you have to understand that you're taking on inherent risk," says Winston & Strawn's Heidelberger. "Whatever that person does is going to attach to your brand — good or bad."

What's in it for celebs

A celebrity investor may feel a connection with a brand's founders or an intense passion for the product — but there's another major reason they'd want in: to reap a strong return on investment.

Struggling with stock market and real estate declines, some celebrities are simply looking at other investment options.

"They don't just want to sit on their money in the bank," Heidelberger says.

Like all investors, famous folks should do their homework before writing a check, he says.

"They have a lot of money, they know a lot of people, and they are approached every day with business opportunities," he says. As such, they "need an independent third party, someone who has no stake in the outcome but can say 'This is smart,' or 'This is stupid.'"

Those who opt into an investment should make sure that their personal assets are protected from any potential lawsuits. Those with big riches can become easy targets if something goes wrong with the product or if the business founders make any false claims, Heidelberger says.

The risks are many, but the success stories keep luring famous investors.

One such tale: In 2005, Will Smith, Jada Pinkett Smith and Jay-Z were among the early investors in beauty company Carol's Daughter. At the time, the fledgling brand had about $4 million in revenue.

Thanks in part to that funding, as well as the publicity those backers helped to generate, Carol's Daughter was able to expand. It's now sold in stores such as Macy's and Sephora, and is slated to have sales of about $50 million this year.

An even bigger — and more legendary— windfall was had by rapper Curtis "50 Cent" Jackson.

His small stake in VitaminWater-maker Glaceau brought him huge returns when Coca-Cola bought the company in 2007 for $4.1 billion.

50 Cent's take wasn't disclosed, but reports peg it in the tens of millions.

There's a cachet to having a business bonanza like that, Heidelberger says.

And of course, there's also the cash.

Celebrities say "I want to make 50 Cent money," he says. "They want to find their own VitaminWater."