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| By Chris Graebe |
You need to stay smart — and not starstruck — when considering an investment in a celebrity-endorsed startup.
Such a connection on its own does not automatically constitute a company worthy of your money. To properly vet any potential investment requires you to play devil’s advocate.
That means questioning the obvious — and not-so-obvious — analyzing all the what-ifs, addressing every current concern and those you have about the future. Just don’t make a move either way until you’re absolutely confident in your decision.
Endorsements by “celebrities” go way back in history, which makes perfect sense. After all, it’s human nature to most trust and believe the people we admire, respect and maybe even have a crush on.
It’s even more convincing when there’s a real-life link between the endorser and products.
For example, Roman gladiators touted brands of olive oil long before Michael Jordan hooked up with Nike … or Tom Brady represented crypto platform FTX in ads aired during the Super Bowl in 2022.
When the 15-year Chicago Bulls’ legend suggested that a specific basketball shoe would turn people into all-stars, make them look cooler and become the envy of their friends, not many fans batted an eye at the $85 price tag for the original “Air Jordans” in 1985.
Jordan’s reputation as an elite athlete, all around great guy and now a savvy businessman drew enormous attention to Nike … and his namesake shoes. He spoke about them passionately and honestly, and fans took the bait … hook, line and sinker.
Nike had high hopes but not high enough. The company looked to make $3 million from the original “Air Jordan” in the initial three years. But Nike underestimated Jordan’s impact on sales to the tune of $126 million in just its first year.
The Jordan-Nike marketing effort will go down in history as one of the most successful celebrity-endorsed campaigns ever. Much of that could be attributed to mass appeal from fans of the NBA, Chicago Bulls and general sports enthusiasts.
George Clooney enjoyed similar success as the face of Nespresso in 2006. The brand's sales increased by 30% in the first year, and its market share grew from 22% to 35% in Europe.
Those examples aren’t anomalies either.
In fact, positive associations between celebrities and brands can increase a company’s sales by an average of 4%, according to a study by Harvard Business School.
Seeing our favorite actor, musician or athlete endorsing a product feels like a trusted recommendation from a friend. It's also a win-win for both parties. Celebrities find new audiences (along with a hefty paycheck or profitable investment), and brands get instant recognition.
Sometimes, endorsements can go bad for the company, celebrity or both when a good reputation turns ugly. Take the star-studded endorsements for FTX I mentioned earlier.
Kevin Hart, Gwyneth Paltrow, Madonna, Tom Brady, Larry David, Justin Bieber, Serena Williams, Jimmy Fallon, Paris Hilton, Snoop Dogg, Seth Curry and others played big roles in the rise of FTX via endorsements and monetary support.
They all contributed between $25,000-$50,000 to FTX thanks to co-founder Sam Bankman-Fried opening up investments to people other than employees.
Unbeknownst to the FTX endorsers, Bankman-Fried had been under investigation for alleged fraud and related crimes. The courts eventually convicted him on seven counts of fraud, conspiracy and money laundering. That included stealing from FTX customers and using the money for political contributions, investments and personal gain.
Bankman-Fried’s reputation went down the tubes, and the endorsers of FTX were deemed “guilty by association” by the victims and others who took their advice.
We’ve seen how celebrities and brands can create magic, and how a change in reputation can create negative repercussions.
But what happens when partnerships aren’t believable or don’t make sense?
Kardashian Hot Sauce
Results can fall short of expectations when the product and endorser just don’t add up.
For example, Justin Bieber promoting a brand of nail polish wasn’t a big hit. Neither was the endorsement of toilet paper by Kim Kardashian.
Which brings me to Kardashian’s most recent foray into private equity — as the owner of a consumer-focused firm, SKKY Partners, and its first investment in a hot sauce company called Truff.
No question that Kardashian is more than capable of successfully building brands, as illustrated by one of her most successful brands — Skims, a “shapewear, swim and loungewear” company with a $4 billion valuation.
The brand fills a niche by providing sizes for all shapes, a practice not often associated with Hollywood.
But I wonder if the market for Truff’s hot sauce is big enough to take the startup to the next level … and if Kardashian is the right or best person to grow the brand.
Time will tell if the $80 million minority stake in Truff by Kardashian’s private equity firm attracts more funding to either company.
I’m not convinced that the size of Truff’s Total Addressable Market (TAM) is big enough to grow the company into the billions, attract a buyer or go public.
Plus, the condiment industry is very competitive so any new product(s) would need to be appealing and unique enough to attract buyers with a price point around $18 per bottle.
Having grown up in the corn fields of Indiana, we used Heinz ketchup, mustard and good, old-fashioned BBQ sauce. And none of them cost more than $2. So, I’m not too fond of the high prices, but I understand the reason behind it.
Thus far, price hasn’t been an impediment to company sales. In fact, Truff gained traction fairly quickly after being founded by Nick Guillen and Nick Ajluni in 2017.
Truff came about after the two started a food-related Instagram page, where they served up great dishes for foodies. The guys took note of what people were excited about and built the brand based on those preferences.
By the pandemic in 2020, their truffle-infused line of luxury hot sauces hit record sales, growing by 400%.
Despite a lack of experience in the condiment space, the two apparently knew enough about producing, branding, marketing and selling hot sauce even before the Kardashian connection began in late 2023.
Today, you’ll find Truff products in 20,000-plus stores, including Whole Foods, Kroger, Publix, Target and many more. Since 2019, and prior to Kardashian’s investment, they raised $25 million.
But this isn’t just another Tabasco taste-alike. All of their flavors contain truffles, which explains the cost and the name.
The truffles — many of which sell for $1,000 per pound — explain why it belongs in this newly founded “luxury” corner of the hot sauce market.
And all kinds of questions are roaming around in my head. I want to know, realistically, how big a luxury condiment brand can grow? Sure, Truff has traction. And I see it is growing, but what is its TAM?
It seems to me that with such a high ticket, sales will reach a mass tipping point. Maybe people who bought Truff hot sauce early on just wanted to experiment. Maybe they liked it but maybe they didn’t. Some likely balked at the high cost but bought a bottle anyway for its novelty — but won’t spend that much again.
I just don't know if there are enough people with the money to burn on $18 bottles of hot sauce.
So, today, Truff is officially backed by Kardashian and SKKY Partners. I consider her as the X factor. She understands branding. She understands social media. She knows how to leverage her audience and make money. The price may be high, but the X Factor may be able to push Truff up several notches.
However, I still ask if Kardashian is really the right person to be investing in food-based products. I know she announced a couple years ago that she would begin investing in consumer products.
Now, it appears she’s confident in her potential to give Truff the firepower needed to move the needle and convince people to buy this high-end luxury product. With her fame and connections, I’m sure she’ll do well in attracting new buyers, and retaining existing customers.
I'm just not sure that she and other SKKY investors bought its minority stake in Truff at the right time … and the right value.
They might never see a penny from their $80 million investment if Truff lacks the potential to scale.
The jury is still out on Truff, the startup. However, I wouldn’t mind finding a coupon or a store that sells its hot sauce at a discount.
You know me. I’m always looking for deals.
Happy hunting,
Chris Graebe
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