The Impracticality of Investing in Individuals
Some Initial Thoughts about an Old-New Idea that Is as Obvious as It Is Insane
Sam Lessin recently published an analytical piece about how, soon, individuals are going to surpass companies as the most valuable brands and attract the smart, forward-thinking equity financing. That’s right: instead of investing in companies composed of teams, products, and business models, VC is going to start investing in individuals.
Given recent events and trends, this thesis is appealing and makes a lot of sense at first glance. So let me first expand on Lessin’s argument and explain a few reasons to back up his point that even he seems not to have thought of.
Then I’ll explain why investing in individuals is impractical, not to mention insane.
Why Investing in Individuals Makes Perfect Sense
Lessin starts by pointing out the obvious: the market doesn’t treat people equally. Elon Musk, for example, can move billions with a single tweet, and he’s done it again, and again, and again. Even if the product is lacking, the right individual’s endorsement can enchant the market anyway. Increasing value in return for some of the profits is the name of the game, so if individuals are the ones creating value with their aura, then they should get the money.
Helpfully, Lessin provides five reasons for the increasing influence of individuals:
- Individuals are coming to be seen as more trustworthy than institutions.
- Followings have become far more portable thanks to the internet.
- Connections with followers are gaining immediacy and intimacy thanks to new platforms and AI.
- Tech wizardy lets influencers remain relevant for longer (i.e. thanks filters!).
- Business models are becoming increasingly commodified while trust and brand loyalty — influencers’ products — are becoming scarce.
Perhaps best of all, individuals are cheap and flexible. They entail negligible fixed costs, their functions and messages can be adapted by the second, and the supply of eager candidates seems inexhaustible.
What Lessin proposes is for influencers, who tend to lack growth capital, business expertise, and ways to monetize their potential, to sell equity in their brands. Investors hungry for returns are likely to jump at the prospect. It’s a win-win.
The case for investing in individuals is, however, deeper and older than Lessin suspects. Everyone has always invested in individuals. Trivially speaking, this is why bonuses and commission-based compensation schemes exist. It’s why boards select CEOs so carefully and compete for the best candidates. It’s why startups don’t pick a preferred university class and just take any graduate at random. It’s why the truism that VCs bet foremost on good teams is so undeniable and yet so banal.
Less trivially, it’s an old trick to turn a bunch of people into a quasi-individual to make investing in them easier. Corporation comes from the Latin corporatus: “to make or fashion into a body.” In order to enable a group of individuals to do things like sign contracts jointly, their several bodies and personalities had to be subsumed under a single legal person. It’s no coincidence that the modern state was emerging in the late 17th century — at the same time as joint-stock corporations were becoming a big thing. Aggregating people into permanent, abstract, corporate institutions was in the air.
From a certain perspective, every investment is an investment in individuals.
Why Influencer Equity Is Still Insane
Like a stoner thought, the idea of buying equity in an individual sounds really intriguing until you think it through.
Equity is a claim on value; it’s (partial) ownership. Let’s charitably assume that nobody is talking about slavery. That would be patently illegal and unconscionable. Instead, it seems we’re talking about “a situation in which an ambitious person surrenders moral integrity in order to achieve power and success for a limited term.” That’s right. It’s straight up Faust.
But then what would the term sheet look like? While the right to enter into contracts is constitutionally protected, not much remains from a standard term sheet’s provisions. Ownership is out, and so are board seats, which big investors cherish for good reason. What would an individual’s board of directors even look like? Something like the Headquarters in Inside Out?
But influencer equity can’t be the same as an employment contract either. Shareholders’ ownership doesn’t get suspended when all their company’s staff turn out the lights and go to sleep at night. That’s another benefit of legal personality as an abstraction — it floats above reality’s constraints. Employment, however, is only a claim on some of a person’s time and effort for certain purposes at certain times. When an employee is home asleep or off duty and pseudonymously writing Law and Order fanfiction, it’s none of their employer’s concern, and most employers don’t even want to know. An investment-influencer, however, is never off. The idea that “everything is securities fraud” is a joke, but in this case it might really apply. Could an investment individual do anything that was irrelevant to their value as an investment?
Perhaps that focuses too much on the downside risks. The upside is no less fraught. Imagine that, say … uh … XÆA-XII Jones has, through incomparable charisma and dynamism, acquired great influence over stock prices. All XÆA-XII has to do is tweet a ticker symbol followed by “to the moon(s) … of Jupiter!”, and the price doubles. An IG post with XÆA-XII using a startup’s product can turn any growth-stage business into a paper unicorn. Now here’s the serious question: if XÆA-XII or their investors own any stock, and XÆA-XII plans on tweeting about it someday, is that thought, that intention, not already “confidential, undisclosed information that is material to the value of securities”?
So here’s the upside paradox: an influencer’s equity has value because they can reliably influence the value of other equities, so either their own thoughts and plans regarding other equities constitute insider information, implying that they cannot legally perform the service that made their own equity valuable in the first place OR their thoughts and plans regarding other equities are irrelevant to those equities’ value, meaning the influencer’s own equity is worthless in the first place.
And let’s not forget the VC’s perspective in all this. VCs want to invest in great people with great ideas and the determination to realize them. In the Faustian scenario we’re talking about, VCs play the role of Mephisto, giving the influencer what they want in return for their soul. But in the story, all souls are valuable. There is no distinction between blue-chip and junk souls. If, however, what VCs are looking for is bright, driven people, do we really want to invest in anyone willing to make the Faustian bargain? Isn’t the fact that an influencer would be willing to make this kind of deal proof of their shortsightedness and corruption?