The world of capital investment breaks down into three types of investors: traditional venture capitalists, angel investors and strategic investors. Venture capitalists are professional investors who contribute larger sums of money, business experience and advice toward building businesses. Angel investors -- typically high net-worth individuals -- provide smaller investments than venture capitalists early on and may participate on the board of a company.
Unlike venture capitalists and angel investors, strategic investors invest on behalf of a company to gain both an equity position in the business and a strategic advantage in the market. For example, Steamboat Ventures invests on behalf of The Walt Disney Company, whereas Peacock Equity Fund is an affiliate of NBCUniversal. Strategic investors look to invest in smaller businesses that offer an appealing product, technology, marketing channel, distribution arrangement or research-and-development function that can be integrated into its affiliated business.
Advantages of Strategic Investing
If your business only needs cash, then a venture capitalist or angel investor may be more appropriate for funding your company. However, if you’re looking to build a relationship with a well-known or established company in your industry, choose a strategic investor as your funding source.
In addition to providing cash, strategic investors have usually spent years or decades building an extensive distribution network and marketing infrastructure. In addition to benefiting from an affiliation with a well-known and respected brand, you can gain:
- Greater acceptance and an enhanced presence in the marketplace
- Access to key players, such as marketing and sales executives, within the firm
- The ability to build partnerships with the company’s operating businesses (e.g. subsidiaries)
- The ability to leverage the company’s investing experience and influence
- A favorable exit strategy, such as the sale of your company
Before finalizing the financing agreement, meet with your strategic investors to determine how much priority and resources they intend to dedicate to your business.
Disadvantages of Strategic Investing
Generally, one of the main pitfalls associated with accepting funding from strategic investors is that the investing company ultimately expects something in return. Whether this is greater control at the management level or an exclusive licensing agreement for your product or service, always assess the impact their demands will have on your company and its future growth.
The process of obtaining funding from strategic investors can also be arduous and lengthy. This is particularly true for strategic investors affiliated with large venture companies that require management, legal and sometimes board approval. In addition to a prolonged negotiation process, startup businesses may feel compelled to accept less than favorable terms from a strategic investor with greater leverage and financial resources.
It’s important to draft a non-legally binding letter or document that clearly describes the strategic investor’s deal terms and holds the strategic investor to their initial promises. Also, consider what type of agreement will allow your business to reach its goals. If you want your company to work with more than one strategic investor, then signing an exclusive deal could hinder your company’s ability to work with future strategic partners. Additionally, negotiate the terms of financing so that you have the flexibility to break the terms of the agreement in the event of unforeseen circumstances or if it’s in your best interest.
Finding a Strategic Investor for Your Business
Before you head to the negotiation table, identify strategic investors who are likely candidates for your business. Avoid seeking strategic investors for the sole purpose of a better valuation (i.e. the estimate of your company’s worth) than a venture or angel investor can provide. Narrow your candidate pool to include strategic investors who can devote valuable resources in the areas where your company needs support.
Approaching a strategic investor can be a challenge in itself, so enlist the help of your accountant, attorney, client, partner, board member or other professional colleague to facilitate an introduction. Search through your network for individuals who know someone within the strategic investor’s organization and possess enough authority and influence within the affiliated company.