Entrepreneurship for Athletes: The Magic Johnson Formula

For many reasons, a vast majority of professional athletes struggle to manage the lucrative financial rewards of their playing careers. One major well-documented cause is what is called the ‘lure of tangible investment’[1], essentially an athlete’s desire to pursue entrepreneurship. It is a sexy, seemingly financially attractive means to invest one’s time and money. The appeal of entrepreneurship to athletes is powerfully apparent, particularly post career when the bright lights have turned elsewhere. There is a competitive aspect that syncs with an athlete’s psyche. There is the potential for big payouts and the fulfillment of a desire for attention that players often miss once they retire. You will never hear about a former player’s stock and bond portfolio; you will read about their promotional companies, their restaurants, their real estate or their car washes. There is even an MBA course offered at George Washington University specifically focused on entrepreneurship for professional athletes. “Called STAR, an acronym for Special Talent, Access, and Responsibility, the program treats entrepreneurial inclinations…as a weapon to be honed and deployed.”[2]

To certify the appeal of entrepreneurship, there is the business resume of Magic Johnson – an eye opening, former athlete’s entrepreneurial success story. Today, the former orchestrator of the Showtime Lakers is known more for his business accomplishments than his basketball prowess, a lofty feat considering his Hall of Fame playing career. The umbrella conglomerate of Magic Johnson Enterprises is reportedly worth near $1 billion[3]. He has stakes in movie theaters, sports franchises, a promotional company, a movie studio, food service operations, among other ventures. And, considering his major playing contract was the infamous 25 year $25 million deal brokered by the late Jerry Buss in 1981[4], a billion dollar figure is a staggering number.

Magic’s early business highlight reel runs something like this. In 1994, Johnson brokered a deal to create a chain of movie theaters in minority neighborhoods in the Los Angeles area. He recognized a lucrative business opportunity: the inelasticity of the African American community’s demand for movies coupled with the discounted cost per square foot to operate theaters in these neighborhoods[5]. Magic then parlayed this success into a rare partnership with Howard Schultz at Starbucks to bring the infamous coffee shops into the very same neighborhoods as his movie theaters. Magic pitched to Schultz his knowledge of the customer, that he had studied the numbers, and that he would connect Howard’s product with a market in demand. “It became clear that no one knows more about African-American spending power than Earvin. I was expecting a basketball player, but here was this businessman telling me there are 40 million African-Americans who spent over $500 billion last year.”[6]

Magic was not just some athlete selling his name and likeness. As he told Success Magazine, “A lot of athletes go out and want to start sports bars or restaurants, and they do it without a vision of what they’re going to add to their customers.”[7] Magic showed an early passion for the business process. During his playing days, when the Lakers were in Atlanta to play the Hawks, Magic would set up meetings with executives from Coke. He had a unique enthusiasm for business, recognizing early that the dedication and diligence of watching game film to study opponents was akin to what was required to study potential customers. He is a self-described control freak, awake every weekday morning at 6:30, reading the business section of the newspaper. Johnson was unafraid to leverage any opportunity or connection and relied on expert mentors with proven track records to guide him. During a regular season game in LA, he famously asked two courtside season ticket holders ‘How do I get into business?’ The two men, Peter Guber and Joe Smith, subsequently introduced Magic to CAA co-founder Michael Ovitz, who would become a pillar of Magic’s success.

Early on in his business career, Johnson had an ironically unlucky experience that put in perspective just how easily an entrepreneurial career can fail regardless of someone’s name or likeness. In one of his first business endeavors, Magic opened Magic 32, a chain of retail sporting goods stores. It made perfect sense to him on the surface; the face of the most beloved sports franchise in a city selling sporting goods to the people of that very same city. Yet Magic 32 closed its doors just a year later. When asked about the failure, Magic said, “I didn’t ask a single customer what they’d be interested in.”[8] He had not thought about the consumer’s interests, he had only thought of his own.

While Magic was able to stem the financial tide of this business failure and gainfully learn from the mistakes he had made, many athletes are not so lucky. Often times athletes choose to invest too much of their assets in one project (Google: Curt Schilling, 38 Studios) or become repeat offenders, refusing to recognize and learn from what went wrong the first time around (Google: Rocket Ismail). Athlete or not, failure is the nature of the beast in entrepreneurship. Henry Ford failed and went broke five times before founding the Ford Motor Company. Bill Gates started a business called Traf-O-Data before launching Microsoft. The probability/likelihood of failure in entrepreneurship is what ultimately increases the return and the attention when an entrepreneurial venture actually does work. Often times, many athletes (especially when funding investments with private wealth) do not afford themselves the opportunity to stay solvent if and when a venture fails.

For current pro athletes looking at Magic Johnson’s achievements as a model for themselves, these successes must be taken in context. For one, Magic’s business resume is what author Malcolm Gladwell would define as an ‘outlier’, “things or phenomena that lie outside normal experience.”[9] In other words, Magic is the exception, not the rule. Gladwell suggests that individuals with ‘outlier’ success stories are the result of two inputs, the 10,000 hour rule (i.e. a heck of a lot of practice towards achieving greatness) and access (a window to apply that greatness). Referring back to Magic, Johnson has been a diligent student of entrepreneurship since early in his career. While there is no way to verify the total aggregate hours Magic has dedicated to business, we can presume his totals reside near the tipping point required (to keep with the Gladwell theme). As for access and opportunity, Magic happened to be in a community (Los Angeles) at a time (post riots) with a viable business opportunity (movie theaters). Derrick Coleman, in contrast, the 1991 NBA Rookie of the Year, had similar entrepreneurial aspirations as Magic, investing to revitalize his hometown. However, Coleman invested in a city (Detroit) at a time of great financial duress (The Great Recession), especially for a community supported by a cyclical industry (autos). [10] A great entrepreneur and a great business model, without opportunity and access, is just that, a business model.

Magic’s experience with Magic 32 is a key teaching point for athletes clamoring for the bright lights of entrepreneurship. It is not necessarily true that if YOU build it, they will come. In entrepreneurship, your jumpshot doesn’t make you profitable. It might get you the meeting, but it certainly won’t sell your jackets. Magic failed before he succeeded. This is an important point, because the likelihood of failure far outweighs the likelihood of success in entrepreneurship. As an athlete, with the vast majority of your lifetime earnings in your rearview mirror when you retire from your sport, you HAVE to allocate accordingly when investing in a business venture. A 20-something college graduate with a job in financial services investing the bulk of his or her investable assets into a start-up is a lot different than a 33 year old professional athlete investing the bulk of his or her investable assets in a start-up. That 20 something with a finance job has a lot of years of peak earnings salary in front of them.  As an athlete, it’s almost certain that your peak earnings years are behind you. You have to be safer with your capital, and entrepreneurship, while sexy, is not safe. You simply don’t have the ability to make big mistakes.

The entrepreneurial success of Magic Johnson should be taken more for the lessons that it teaches rather than as the key to long run financial health for athletes.  For one, Magic invested more of his business acumen in these ventures than he did his personal capital. This is a fact he sometimes receives flack for, but should rather be rewarded.  He had a passion for business that defined him as an ‘outlier’ not just amongst athlete entrepreneurs, but entrepreneurs in general. This distinction is vital, because in the boardroom, the former pro athlete and the four year corporate veteran are all peers. “I think the problem is that for some athletes, our ego has been fed our whole life and we’re not used to people treating us as peers,” Magic recounted.[11]

Magic had a vision for his movie theaters that offered something to his end customers, not a vision for a business that offered something to himself. The latter leads to failure, which he learned the hard way from Magic 32. Importantly, Johnson was able to stomach the financial loss of his sporting good store, and live to see another day. It is wise to understand entrepreneurial investments in the construct of your broader financial picture. The bulk of lifetime earnings are likely behind you. Can you afford to lose what you’ve invested at this point in your life? Because, no matter how great that pitch sounds, it is more than likely you will fail. It is nothing to be ashamed of, most great entrepreneurs do.