The Pros and Cons of Strategic Investors
Strategic investors continue to pour more and more capital into the startup world.
In 2015, venture capitalist invested $74.2 billion in North American startups. According to CB Insights, by taking part in 17% of all venture deals, strategic (or corporate) investors were responsible for 24% of all venture dollars deployed ($17.8 billion). For perspective, strategic investors only participated in 12% of all venture deals in 2011 — meaning the market is growing.
If you’re unfamiliar with strategic investors, here’s a quick primer: Companies that have a ton of money to invest often form their own investment arms (think Google Ventures, Pfizer Venture Investments, and Coca Cola’s Venturing & Emerging Brands). For the most part, these investment units look to fund startup organizations that could drive a lot of value for their parent companies sometime down the line.
Startup owners will certainly appreciate the fact that, thanks to corporate investors, the venture capital pie continues to grow bigger — meaning they’re more likely to be able to raise capital. Still, prior to accepting money, it’s critical that founders go in with their eyes open, understanding the goals of the company and how a strategic investor could help — or hurt.
Strategic Advisors: The Pros
Because strategic investors have many assets at their disposal — financial and otherwise — they can be better positioned to help grow your business compared to traditional investors. Strategic investors can help you with product development, sales, joint ventures, and more. This is a strong selling point, this will likely be their pitch.
Due to the fact strategic investors are investing in you for both strategic and financial gains, you will be in bed with a potential acquirer early on. Both parties will get to know each other over a longer period of time hopefully helping to make an acquisition easier for both parties.
Partner with the right strategic investor, and they’ll act like a lab for your product development. They’ll let you test (and screw up) in a safe atmosphere — which allows your startup to be more versatile.
Strategic Advisors: The Cons
But like anything else in life, strategic investors aren’t all roses.
For starters, it can be difficult to figure out what is motivating a strategic investor to fund your startup. Oftentimes, strategic investors aren’t enticed by financial returns. Instead, they care more about your startup growing into something that could benefit their own operations in the future. This can create serious conflicts between founders and other investors who want a payday.
Strategic investors may also limit your abilities to sell your products or services to their competitors. This obviously could have a substantial impact on the success and sustainability of your company.
Strategic investors seem to be less valuation conscious when it comes to the investment given their strategic motivations. While this may seem attractive initially you, over the long term, you want to price your company in a way that’s attractive to all investors.
Additionally, when it comes time to exit, strategic investors can introduce potential issues — like a right of first refusal or creating a messy situation when one of their competitors is interested in bidding on the company.
Finally, strategic investors may ask for certain rights or benefits that a traditional venture capitalist wouldn’t. So, if you decide to take strategic dollars, be ready to sign over some rights to your IP, give out the right of first refusal/offer, or allow custom development.
What You Need to Look For in Strategic Investors
Whether strategic investors will make sense for your startup depends on your specific situation. In the event that it does, try to look for strategic investors that have previously made successful investments proven to grow companies. These deals should include way more value than just capital. Don’t forget that stage matters, too. Look for partners that have helped companies at your stage.
Whenever possible, work with strategic investors that have a dedicated venture team and fund. That way, you can be confident that they have the ability to follow on and support you.
You’ll also want to go into any deals with your eyes wide open. Ask questions so you understand the exact goals of the investor. The last thing you want is a huge surprise. And remember, whatever you do, don’t stake your future on the strategic investor. Their dollars and support are definitely nice. But your primary focus should be on building an independent company.
The more mature your company is, the easier it will be to make a strategic investment work for you. You’ll have more negotiation power and probably won’t be as reliant on them for your success. Do your due diligence and consider all of your options. If the stars align and the partnership makes sense, you’ll see how a strategic investor can help your startup become a household name. Good luck!