What can we learn from the high-profile investment nightmare that was Fyre Festival
If you get a promising business proposal from a young CEO with the backup of celebrities and endorsed by major social media influencers, would it make you want to invest? A high-profile investment opportunity that is hyped so well, it gets the target market instantly interested. On paper, the return is practically guaranteed.
What could possibly go wrong?
In Fyre Festival's case, everything. From the management skills of founder Billy McFarland to the total inexperience of his the team, the event was doomed to fail. Investors were duped to think that the organizers were using the money to good use but instead used for unnecessary expenses.
After a class action lawsuit was filed against McFarland, he was arrested and charged with one count of wire fraud. Last quarter of 2018, he pleaded guilty to two counts of wire fraud (defrauding investors and a ticket vendor) and he was sentenced to six years in prison and forfeit US $26 million.
‘There's always risk involved in any investment. The best you can do is to do due diligence, and assess if you can afford the risk. Always ask what the worst-case scenario is and see if you're okay if that happens.’
The music festival had a lot of potential and it was even co-founded by American rapper Ja Rule. It was endorsed by models and internet celebrities Kendall Jenner and Bella Hadid, among others. It was supposed to be a music fest set on beautiful Caribbean island, featuring an impressive lineup of artists and luxury accommodations.
What was promised was not delivered and investors and customers ended up as victims of a poorly managed and executed event. And being a big-time event, the issue went viral and was covered by national and international media.
As an investor, how do you protect yourself from this kind of investment? Failed investments are normal but what can we learn from this high-profile nightmare?
According to financial advisor and investment expert Fitz Villafuerte, it's important for investors to do their research. It pays that you know what you’re getting into. You must check the legitimacy of the business, whatever field it may be.
“A business has all required licenses and permits. And they are clear on how they will earn and grow your investment. Due diligence is necessary before investing on anything. Never invest on something that you don't understand,” he explained.
While Fyre Festival may have all the proper documents, McFarland's Fyre Media Inc. did not have the experience to stage such event. For a novice company that promised a one-of-a-kind experience, it seemed too good to be true and it was.
Don't be afraid to question the proposal despite having high profile backups. It's your money, you get to choose where to put it.
If you're passionate about music and entertainment and music festivals are your thing, then invest based on the capability of the organizers and not the artists involved. A good track record is always a good sign.
“Invest on the skills and lents of the people who are in charge of using the money. For example, investing on an Ariana Grande concert may seem like a good opportunity, but if the organizers are greedy or incompetent, the concert will most likely fail, and you'll lose money as an investor,” he said. “The same principle applies to any type of investment opportunity.”
Risks are involved
In every investment, risks are involved and it's all part of the business. Protecting yourself from possible failure and from people like McFarland is almost always impossible. The reality is, investments fail.
“You cannot [protect yourself]. There's always risk involved in any investment. The best you can do is to do due diligence, and assess if you can afford the risk. Always ask what the worst-case scenario is and see if you're okay if that happens,” Villafuerte admitted.
It's hard to ignore businessmen who have promising proposals. Good businessmen and even sales agents have a certain way with words. Persuading investors and customers is part of the way they're built.
Fyre Festival was intended to promote the company's music talent booking app called Fyre. McFarland founded his first startup at age 13 and has been involved in the tech industry ever since. It seemed like he knew what he was doing but in terms of organizing music festivals, he was apparently clueless.
Apps and startups seem to be good investment these days because when it succeeds, it can bring back a lot of money. But like in any type of business, there are also risks involved in the tech industry. Because the industry is so popular, saturation can be a problem and there are more companies that fail than triumph.
Again, research is key here.
“A lot of mobile apps fail, but there are several who made millions. There's always risk involved. The question is, 'Are you willing to take on that risk?'” he said.
But also, according to Villafuerte, it's wrong to categorize investment opportunities as good or bad investments. Success and failures apply to all fields and industry.
“It's not correct to categorize general opportunities as either good or bad investments. There are music festivals that made a lot of money, there are also those that lost money. The difference between the two is the team that organized them,” he shared.
Getting your name involved in a high-profile scandal can cause a setback. It's not easy to bounce back especially if it's covered by the global media. You will always get tagged. This is why most investors prefer to be low-key. But when criminal investigation is involved, names pop up.
For Villafuerte, it's important to rebuild your reputation by admitting and apologizing for your mistakes. Rebuilding also takes time and high-profile issues die down eventually.
“You build your reputation again. Be in charge of your narrative. Apologize for your mistake, share the lessons you've learned and how you plan to avoid the mistake in the future, and start rebuilding. Also, it would help to hire a reputation management consultant, especially if it's a high-profile controversy,” he said.
His advice on choosing where to invest is don't go blind and “hope” is not an investment strategy.
“Never put money on something that you don't understand. It's good that you want to invest, but don't do it blindly—do your due diligence and make sure you can accept the risks involved,” he said.
“'Hope' is not an investment strategy. Investing means knowing all the possible scenarios, the probabilities of them happening, and accepting the risks involved in all the potential outcomes,” he added.