Short Answer:
A strategic investor invests in companies for strategic benefits rather than just financial returns, aiming to gain advantages like innovation synergy, and industry insights to enhance their own company’s operations and future growth.
Introduction & Background
As John Montague, my extensive experience in the corporate world has uniquely positioned me as an authority on strategic investments. My journey through the spheres of finance and strategic development has given me a firsthand understanding of the pivotal role strategic investors play in shaping the futures of startups and established companies alike. My expertise is grounded in orchestrating partnerships that extend beyond mere financial transactions, aiming for synergies that fuel innovation, operational enhancements, and mutual growth. This approach has not only allowed me to witness but also to facilitate the transformative impact of strategic investments on both the investing entities and their beneficiaries.
My authority on this matter is further solidified by my involvement in numerous strategic investment initiatives. These experiences have equipped me with a nuanced perspective on how strategic investors differ fundamentally from venture capitalists. Unlike the latter, whose primary focus is financial return, my interest has always been in identifying and fostering partnerships that offer long-term strategic value. This includes leveraging technology, expanding market reach, and enhancing business operations. My background in identifying such opportunities and guiding them to fruition has not only benefited my ventures but has also provided startups with the resources and network they need to thrive in competitive industries.
Key Concepts
- Their differences compared to other financial investors
- The pros and cons of accepting financing from a strategic investor
- How to know if strategic investment is right for your company
What Is a Strategic Investor?
A strategic investor is an individual person or firm making investments with the goal of gaining strategic advantages from the partnership. Rather than being concerned with financial returns, a strategic investor is looking for a strategic partner that will enhance their company’s future operations, whether through innovation or synergy.
For example, a strategic investor might choose to fund a specific business because they’re interested in the company’s technology. Instead of spending large amounts of time and money on research and development, a company can choose to strategically fund a startup in exchange for the license to its innovative technology.
Typically, a strategic investor is a large company in the same industry as the startup they’re investing in. As a successful, established corporation, a strategic investor can provide advantages like a wider business network and more development opportunities. They can also provide insight to help small businesses grow in all areas, including sales, marketing, and finance.
Differences Between a Venture Capital Investor and a Strategic Investor
It’s essential to know the differences between a traditional venture capitalist and a strategic investor before you start trying to acquire funding. Depending on your business goals, choosing a strategic investor might not be the right fit for your company and its interests.
Motivation for Investment
A venture capital investor is after a return on their investment, while a strategic investor has an interest in your company for reasons other than money. If the investor is a customer or supplier, they might want to establish a commercial arrangement that benefits them or negotiate other favorable terms for their company in exchange for the investment.
Companies making strategic investments will also look for synergy in finances, culture, and operations. They might look at the employee structure and other specific aspects of your company to determine whether your partnership fits their strategic objectives.
Valuation
A strategic investor is typically more willing than a venture capitalist to invest at a higher valuation. While a traditional investor is more interested in profit and uses funds from external investors, a strategic investor has other interests, such as how the company’s products could add to its business model.
It might be tempting for company owners to take funding from a strategic investor because of the high valuation, but it’s important to consider the motivations of the investor and whether they align with your own objectives.
Involvement in Business
A venture capitalist investor might take an active role in the growth of your company through board involvement, using their expertise to help your company make sound decisions in order to secure their investment.
Depending on their reason for investing, a strategic investor could have little influence on the direction of the company. However, a strategic investor can offer guidance for growth and success, providing industry knowledge and connections that greatly benefit your growing company.
Benefits You Can Get From a Strategic Investor Besides Money
Typically, taking funds from a strategic investor means more than an investment from a venture capitalist or another financial investor. An organization making a strategic investment will want something more out of the relationship, whether your company’s technology or a specific segment of the market you possess.
Your startup can significantly benefit from an established relationship with a successful company that has already gained respect in your industry. The following are a few advantages you can get from a strategic investor besides money:
- Access to the company’s market
- Expansion of your business network
- Access to resources for scaling your company
- Increased credibility by association
- Extensive industry knowledge and experience
A strategic investor can provide strategies for your company to get ahead of a competitor or give the opportunity to develop products or services together. When you make a deal with a strategic investor, you should ensure that you get more out of the investment than money from the outset.
When Should You Accept Strategic Investment?
If your only goal is to receive cash, a deal with a strategic investor might not be in your best interest. However, you might choose to partner with a strategic investor for other reasons, such as gaining access to a much larger audience for your products, tapping into their marketing or distribution channels to expand your startup, and gaining new customers.
With the backing of a huge parent company, you gain the ability to join seasoned professionals in your industry to research and develop new products with greater resources than you had before. You might also make new connections with contacts of the parent company, adding more growth opportunities for the future.
Pitfalls of Accepting Financing From Strategic Investors
When you enter into a strategic relationship with a company, there could be a potential conflict of interest, making it difficult for your organization to take certain steps in the future. By upholding your end of the deal, you could be compromising your ability to negotiate with another company or investor down the line.
A strategic investor might ask for the right of first refusal, which allows the investor to intervene in the acquisition process when someone tries to acquire your company. Instead of allowing the acquisition to go through, they can step in and buy your company first.
A strategic investor might also limit your ability to sell products to their competitors, using your company to hinder the success of others. If an opportunity is great for you but bad for the investor’s company, they might hinder the process for their own benefit.
While your company might be focused on achieving profitability, the investor might only be concerned with how access to your technology, products, etc., benefits their own roadmap. If you commit to an investment from a strategic investor, you could be limiting your ability to gain additional funds from other investors.
In summary, accepting financing from a strategic investor could do the following:
- Negatively impact future business deals
- Hinder a future acquisition process
- Limit the potential for additional investments
- Make it more difficult to reach your goals
Notable Strategic Investors
Some of the most notable strategic investors include:
- Microsoft
- Intel Capital
- Salesforce Ventures
- Google Ventures
While many large corporations have venture capital initiatives, one analysis found that only 18% of nearly 200 of the top tech companies had a strategic investor1. Certain industries, such as SaaS companies, have a stronger prevalence of strategic investors.
In many cases, large companies like Google and Microsoft strategically invest in startups because they’re interested in the technology of the company and want to be in a position to acquire it if they show potential.
Resources:
1 https://www.linkedin.com/pulse/strategic-investors-dont-matter-sammy-abdullah-2c/
