To start taking majority stakes in startups, have bigger say
How often should startups update their investors?
UNDER what circumstances would startup founders accept funding if the condition was that they would lose majority control?
I posed this question to Catcha Group chairman and group chief executive officer Patrick Grove. His short response: “When they have no other choice.”
My question was triggered by the article my colleague Goh Thean Eu wrote on why MyEG Services Bhd has decided not to partner with Cradle Fund Sdn Bhd in launching the Cradle Seed Ventures fund.
MyEG has had a change in strategy. Instead of taking a hands-off approach and minority stake, it now wants to be more hands-on in any venture it bets on, and has decided the best way to be more hands-on is to also ensure it has majority control.
While I have not spoken to MyEG managing director and cofounder Wong Thean Soon (better known as TS Wong), I suspect that this has a lot to do with his frustration over MyEG’s advice not being taken by the startups it has invested in.
One other startup investor shared similar frustrations with me recently. His companies were either not taking his advice, not even consulting him on major strategy decisions, or worse, were not doing what they said they planned to when courting his money.
The last gets explained away with “we had to pivot because ….”
And this reminds me of the time when I first met Khailee Ng. This was within a year of Groupon buying out his fledgling clone of its own site. His first investor, Chok Kwee Bee of Teak Capital Ventures, introduced us and was there for the casual meet as well.
The point that I remember most from the discussion was about what she liked most about Ng. “He does what he says and he keeps me updated weekly. As an investor, that is very important to me,” Chok explained. This was in 2011.
Strangely enough, I have no visibility of how often startups update their investors as this tends not to be part of our conversation. But I do know that when I tell some people I update our investor, IdeaRiverRun (IRR), weekly on what is going on with DNA, they are very surprised.
Their surprise, surprises me! I don’t give a written report or the like. It is just a short conversation about how things are going, and with IRR chairman Vincent Lee sharing his thoughts or giving ideas. I would think that is what all investors in early stage companies would do.
But of course, the equation changes if an investor takes a majority stake. Grove tells me this is not unusual with corporate investors as they prefer to have more control. Even Catcha does this. It took majority stakes in both iProperty and Carlist when it first invested in them.
What’s interesting about MyEG is that as a corporate investor it has previously behaved like a VC (venture capitalist) in taking minority stakes. Now that it will revert to traditional corporate investor mode, it will be interesting to talk to MyEG’s Wong one year down the road to find out if this approach has worked better for him.
According to Malaysian Venture Capital Management (Mavcap) chief executive officer Jamaludin Bujang, the results of this majority control approach have been mixed.
“A lot of the success factors are dependent on how the majority shareholder can work hand-in-hand with the entrepreneurs. I would prefer the typical VC strategy, however,” he says.
“VCs are typically driven not for control, but to help the company in building value to have a better chance to exit with a profit later.”
That is an interesting comment because I can almost hear Wong use just about the same reason. Just replace VCs with “corporate investors,” drop “not” and “but.”
Have a good restful weekend and productive week ahead.
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