Corporates looking to put venture capital into startups should take a long term approach to funding so the entrepreneur isn’t left high and dry according to Reinventure Group co-founder Simon Cant.
Speaking at Disruptocon in Sydney, he said that one of the dysfunctions with corporate venture capital is that corporations are investing off balance sheets.
“One year their investment may be in but the next year it may be financially challenged and no-one wants to invest again,” he said.
He said that a committed fund is critical to support the startup over time.
Venture capitalists also needed to appoint independent management, rather than executives.
“The experience of a lot of entrepreneurs when they have a corporate investor is that it is led by executives. These executives tend to get rotated somewhere else after a few years and the new executive comes on to the board and wants to change everything,” said Cant.
This can be disruptive for the entrepreneur and should be avoided.
Lastly, venture capitalists should make minority investments, rather than 100 per cent acquisitions.
“The biggest example of that [100 per cent acquisition] was MySpace where News Limited spent $400 million. Within a few years they sold it for $32 million.”
“The strategy should be minority investments so we can continue to support an entrepreneur to grow value into the business,” he said.
Cant, who advised Fairfax Australia on moving into the digital age, said that startups are often in a better position to innovate than corporates.
“We had these internal business units at Fairfax whereas at Seek, they were set up as independent ventures which got backed by other media companies.”
“With the internal business units at Fairfax, there tended to be over investment in startups. For example, real estate site Citysearch had $100 million invested in it.”
Fairfax ended up having to sell Citysearch before launching Domain, he said.
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