Is portfolio investment theory friend or foe to entrepreneurs?

Atlassian co-founder Mike Cannon-Brookes and Artesian Ventures managing partner Stuart Fox debated the impact of portfolio investments approaches, where an investor backs many start-ups with smaller amounts in the hope one or two works, at an event in Sydney last week.

 

Cannon-Brookes, who also called for Australian start-ups to stop selling their companies so early, described portfolio theory as problematic for start-ups.

 

“I want portfolio theory to be on my side, not on his side. Even at Blackbird (a start-up investment fund), the problem with a lot of investors is they want the portfolio theory on their side and I don’t think they should. Stay away from big corporates, they can get you into all sorts of trouble,” Cannon-Brookes said.

 

Fox shared Artesian’s plans to invest in between 500 to 1000 start-ups in the next five years and how portfolio theory was key part of their approach.

 

“If we’re going to invest in 1000 start-ups and they’re all billion dollar exits, we’re going to double the market cap of the ASX so that’s not probably going to work,” Fox says, adding the approach was likely to increase in popularity as new investors join the angel community.

 

‘If we want external investors, we need to make this look attractive to investors who, no offence, are going to have a portfolio approach. They’re going to price it against not just the people in the room, but also against other asset classes.”

 

Cannon-Brookes added technology investors make most of their money on the one-in-a-hundred companies.

 

“You need to believe you’re the one in a hundred or you’re starting a different kind of business,” Cannon-Brookes says. “The greater proportion of the returns flow to the winner and that’s it. In almost any kind of technology, the winner takes it all and everyone else is well who cares.”

 

With this in mind, portfolio theory leaves underperforming start-ups more vulnerable. Fox explained they were quick to get rid of start-ups that have started to fail.

 

“Our sh-tty ones we turn the oxygen off. I don’t want to be harsh, but we turn the oxygen off. We’ll hit an idiot bid first but that’s the same,” Fox says.

 

“If anything comes out of my view, it’s that we’re not prescriptive. We want to get in really early on a lot of things,” Fox says, adding Artesian is backing got a couple of great companies who aren’t looking at maximum value of $20 million.

 

Artesian Ventures has also recently launched VentureCrowd, a crowdsourced equity platform that will open in February. Fox said it should open up further funding opportunities as it will have a lower cost (minimum $1000) to access than an angel investment ($10,000 and up).

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