Equity Financing for Creators
Sam Lessin, published in The Information, Jan 2021
The most valuable brands of the future are going to be people rather than companies. The shift in that direction is starting to happen right under our noses.
Take the case of Elon Musk. You can’t assess Tesla’s $800 billion market capitalization against any sort of realistic view of its financial prospects. The stock isn’t valued as a business but as an Elon Musk trading card. Elon’s $100 billion–plus fortune is largely tied to his influencer status above and beyond anything else.
A generation or two ago, before the internet existed, the most iconic personal brands on the planet were worth at most a few billion dollars. According to Forbes, Michael Jordan’s net worth is around $2 billion and Oprah’s is $2.6 billion. When you go down the pecking order a bit, you find that icons like Tom Cruise are worth “just” a few hundred million dollars. Their equivalents in the internet age and going forward should be worth orders of magnitude more.
However, in order to get to a future where hundreds, if not thousands, of influencers are billionaires, a few key things need to change about how influencer brands are built, financed and valued.
Why Many Influencer Brands Will Be Worth Billions
There are a handful of key reasons why influencer brands have been historically limited in their value but will become more valuable in the future.
The first is the cultural flip to trusting individuals over institutions. The internet has, sadly, shattered our trust in institutions and big brands by exposing all the flaws of large organizations. The reality is that any big business will have a number of bad agents or employees working on its behalf and at some point will make mistakes. Individual influencers have swooped in to pick up the prize, which is trust. In a transparent world, people trust influencers more than they trust institutions.
The second fundamental reason is brand portability. Historically, the most famous people in the world were products that sat on top of a given industry, like the stars of movies, TV, music and sports. The industry machines selected them and churned them out—and they stayed relatively beholden to the owners of distribution and capital in their vertical.
The internet has obviously changed this, allowing the low-friction transfer of celebrity and influence built on one digital platform to another. Influencers today always start with a particular platform but have demonstrated an incredible ability to move from platform to platform, taking their following with them.
The third is the possibility of scalable direct connections to fans. Before the internet, it wasn’t possible for people to interact with influencers beyond sending written fan mail. Today, of course, influencers have a massively enhanced ability to connect with fans directly and at scale. In the coming years, improvements in artificial intelligence will enable influencer brands to maintain ever more personalized, intimate relationships with fans or “superfriends.” This direct connection through and around major platforms will give influencers far more depth and latitude in what they can sell to their constituents.
The fourth is the ability for personal brands to have “terminal value.” Eighteen months ago I wrote a column about how I expected this era to yield dynastic celebrities and influencers in a way that earlier eras did not. The theory is that as new social platforms open up new channels for accumulating huge followings and social capital, clear winners will emerge. And, unlike in earlier eras, where eventually those celebrities would get tired, age and die, advances in AI will allow the personal brands built today to last much, much longer. Celebrities will be able to continuously produce digitally enhanced content in a way that earlier generations couldn’t possibly have. Photoshop has already dramatically increased the professional lifespan of swimsuit model brands. The same will happen for everyone in far deeper ways, which means that influencer brands will have much longer tails of brand value.
The fifth reason is the reality of business-infrastructure commoditization. MrBeast, a YouTube influencer, just launched a 300-location burger franchise built in a matter of months on top of delivery services and phantom kitchens. This is perhaps the best current example of what business-infrastructure commoditization really means.
A few decades ago, if you controlled the business infrastructure, you got to pick the stars and the brands and you could pay rock-bottom prices for them. Those characters couldn’t be successful on their own and you could always go with someone else. Gone are those days. The trust these influencers have built with their audiences is now the scarce resource, and the business infrastructure for delivering services and making money is the commodity.
Finally, and in some ways most importantly, there is the other side of the equation—the high demand for alternative assets with low-cost structures and lots of flexibility in future income models.
Things are ultimately worth what people are willing to pay for them, and we are moving into a major shift where investors are going to richly value alternative assets in general. Influencer brands in particular are well set up for this scenario, for a number of reasons. The biggest comes down to the portability of influencers’ ability to get paid, coupled with their extremely low business costs.
We are in particularly uncertain times, with very low interest rates, little organic growth and a lot of questions about how companies whose value is tied to physical assets will weather technology’s obvious and deep disruption. The beauty of influencer brands is that there is basically no cost to maintain them and their value is highly portable. They are like technology companies but potentially even better in terms of the cost-value ratio. So even if you aren’t exactly sure how an influencer will get paid, you can be fairly certain that a good brand with millions of loyal followers will make money from those followers. In a world where people have a lot of cash to put to work, fear inflation and want to invest in assets that will be resilient into the future, influencers are the perfect answer.
The Problem to Solve
With so many tailwinds on influencer value, the question is what is preventing most from being far wealthier and more powerful today—and what needs to change to unlock their value and power. All the things that have to happen relate to one specific big issue: You can’t actually invest in influencer equity today the way you can invest in the stock of a company.
The following three factors constrain influencers today:
First, they have very limited access to capital. Money is generally a critical ingredient to growth, but influencers, unlike businesses, have very few options to get access to real capital. Realistically they are stuck growing off their cash flows or starting more-traditional businesses that can raise capital from mainstream financial institutions.
That approach is economically inefficient because it makes the capital more expensive than it might otherwise be and limits the ways in which the capital can be applied. So much of the value of influencers is tied up in their ability to nimbly reinvent their businesses and how they are compensated as the world rapidly changes. Yet that property is precisely why it makes it hard to finance their activities with debt or by collateralizing just one of the many things they do.
Second, influencers have very limited access to talented people who can help them grow. There are of course managers, agents and other aides who work to help influencers. But in the universe of talent, these tend to be the B players compared to the superstars you might find at companies, and they don’t have a high incentive to maximize influencer value. They get compensated by receiving a percentage of revenue. This massively undercounts the value being generated and incentivizes managers and agents to juice revenue at the expense of long-term value. Just imagine the crazy deals that would be done if all traditional companies compensated employees based only on immediate revenue goals!
Finally, aligning incentives around growth presents a major challenge. One of the primary ways that influencers grow is by cross-promoting each other to their fan bases. This is clearly the future, but the problem is how to fairly exchange value, especially in the scenario where one creator is interested in lifting up another more junior one and getting a stake in their success. If influencers had a clean model where they could negotiate and efficiently invest in each other, they could build stronger, more durable networks. Again, think of the corporate analogy here. Imagine doing business development deals without the benefits that arise from companies investing in each other. This is the state of the influencer world today.
The Solution: Issuing Real Equity in Their Brands
There is one simple solution to all of this. Influencers need to start treating themselves like real businesses and selling equity that represents a share of their complete, worldwide, perpetual earnings. Think of this as a kind of income sharing agreement. The ISA model has been popular for things like coding schools, where graduates share their income on a fixed-term basis after completing a program. But the very important distinction here is that the income share for influencers lasts forever and covers all earnings (not just the income generated by a tech job over a short time period).
With this structure, a few amazing things can happen.
First, influencers can unlock real access to capital from primary investors and then, over time, from the public markets. Investors might be rightfully skittish about financing a single product from an influencer, especially in our uncertain times. Will the influencer’s shoe line or restaurant take off? Will advertising on their social media channels be their primary income, or will it help drive growth while the real monetization comes elsewhere? With a share in all their revenue over time, far more people would be willing to take a stake in influencers, believing that they will find ways to monetize their brand as the world evolves. So, by selling real equity in themselves, influencers will have access to far more capital at much lower prices from investors.
The really big upside for influencers of course lies in investment from their fans and the broader public, which could drive alignment with those fans. And against the backdrop of the rational race for alternative assets we see today, I have no doubt that these types of offerings would draw real attention and serious valuations.
Second, influencers can attract real talent to work with them. With the currency of a stock to offer, influencers will be able to compete equally for talent with the biggest and best tech companies and startups. And just as importantly, influencers will be able to incentivize those people around creating brand equity rather than simply doing whatever they can to create short-term cash flows at any long-term cost.
Finally, influencers can make real business deals with other influencers to secure growth. Having a real stock is a powerful tool for creating true alignment between influencers. When I was a kid in the 1990s, I used to joke that I would happily give Bill Gates 1% of all my future earnings for nearly free, on the theory that his alignment would be more than worth 1% over my lifetime. Taken in a real and far more practical direction, this idea could connect the biggest and most powerful influencers in the world and the up-and-comers.
Allowing individuals to finance their personal growth and investment through real equity rather than debt was the first business idea I ever worked on, starting in the late 1990s in high school. I strongly believe that a world in which people have access to equity financing and can cross-invest in each other would create all sorts of new positive opportunities and outcomes.
Since those days I have watched many attempts touching on that theme, most recently as a way to finance education in the ISA world and as cross-collateralized insurance products for people in high-risk, high-return businesses.
The influencer world, however, might be the most obvious place for this trend to really take hold. It requires a mentality shift on the part of creators to recognize that they are building seriously valuable assets rather than trying to quickly monetize their “15 minutes of fame.” It also requires challenging the existing world of people and services that support influencers, since it goes against their established business practices.
But when influencers wake up to the reality that they are serious businesses and as such should have access to capital and talent, the world is going to change very fast.