In recent months, we’ve seen a proliferation of elite athletes entering the world of investment in more sophisticated ways, from starting joint ventures with established industry veterans, to launching their own organisations alongside fellow professional athletes.

This is particularly prevalent in the US, where the biggest athletes earn more, and where venture capital is a more mature industry.

But why are these athletes doing this, and what are the pros & cons of going independent?

Building generational wealth
For the first time, the very top level of athletes are making enough money to launch a standalone organisation, with a team that manages their affairs and sources investment opportunities. Athletes have moved from having a handful of advisors, to being able to afford dedicated professional teams responsible for this planning.

Creating opportunities beyond the playing career
Athletes are actively engaging with the business world more, and looking to create new opportunities for when they retire – as investors, ambassadors, and as hands-on owners of businesses.

Replacing institutional advisors
Wealth managers and private banks are not specialised enough to source individual opportunities for athletes. Athletes have had to build their own teams to do this, including seeking out early stage business opportunities.

Adding value
Modern day athletes are influencers in their own right. Their endorsement can improve the chances of a business succeeding – especially in consumer brands – providing their association is relevant and well executed, for example by opening doors with sponsors or other connections.

Winning competitive deals
The best start-ups choose their investors, rather than the other way around. Athletes can often get access to hotly contested deals by leveraging their fame and personal audience.

With this in mind, should all athletes be starting their own investment fund? There are many important considerations for athletes:

We can’t all be LeBron
Professional athletes are well paid, but the vast majority of athletes do not earn ‘superstar’ wages, or have a sufficiently large profile to single-handedly drag an early stage business into the public consciousness.

It’s challenging to build a winning team
It takes time, effort, and money to build a team to deliver this. You also need a network from which you can find your partners, and to make sure you assemble a strong, capable team. Athletes need to believe that the upside to this is greater than they can deliver simply by backing professional managers.

It takes time to generate sufficient deal flow
The best investors can take years, even decades, to build a large enough network that allows them to screen thousands of good opportunities each year. It will be very challenging for a first time fund manager to enter the industry cold and generate volume or quality of deal flow.

You need to be passionate about building businesses
This approach is a significant time commitment, and does not guarantee better financial performance than other forms of investing. It needs to be something that the athlete wants to dedicate substantial time to, and ideally enjoys.

Life is harder for first time funds
The data shows that first time funds experience highly variant performance. Established successful funds are more likely to outperform. Athletes should be aware of the risk involved in each investment, and in starting a fund from scratch.

With the above in mind, it’s understandable why LeBron James, Kevin Durant or Serena Williams might start their own investment firm. But for the majority of professional athletes, the evidence suggests that trusting professional investors is a more sustainable approach to entering the venture capital world.

Start-ups fail, and investors will likely need a large portfolio to spread this risk. First time funds face challenges generating sufficient opportunities. Top-tier VC funds (e.g. the top quartile of performers) overcome these challenges, and have historically generated annualised returns in excess of 35% p.a. for these reasons – something that is seriously challenging for any new investor to come close to.

There’s a reason the most sophisticated investors look to proven VC fund managers rather than going it alone.

To learn more about investing in top-tier venture capital funds, read our other blog articles, or reach out to the Sprout team at info@viasprout.com.