"Having a strategic investor on board may look great at first, but it can lock you out of many important options in the future!"
Background
There are many different options for funding digital and technology-based startups and companies, each with their own pros and cons: e.g., bootstrapping, business angels, venture capital firms, grants and subsidies, and - as presented in the last Digital Business Nugget #7 - X for Equity. In addition, there are many other options, such as the entry of a strategic investor, which can be a bit of a double-edged sword. Let's break it down why.
Meet the Strategic Investor
Unlike regular investors who just give money, strategic investors are often bigger companies that want to team up with startups. They do this to get access to new technology, ideas and/or talent that can help them to improve their products and/or services to beat their competitors. For example, a car company might invest in a startup working on AI for self-driving cars to stay ahead in the game.
The Good Stuff
Here's why some startups love working with strategic investors:
They're More Than Just Money: Strategic investors bring more than just cash. They can open doors with their industry contacts, help with marketing and sales, may have the right resources and experts, and can even provide their infrastructure, technology, and/or customer base.
Deep Pockets: They often have lots of money to invest, which is great if your startup needs a big boost.
Easier Valuation Talks: They may not haggle too much over the value of your business because they are more interested in the strategic value it has for them.
Big Name: If the strategic investor is a big brand, it is a great reference for the startup to have that brand working with them.
The Not-So-Good Side
But as good as all this sounds, unfortunately, there are often the following disadvantages that you need to consider:
Their Plans Aren't Always Clear: Sometimes they hide their real strategy, or they change their mind so that their strategy no longer matches yours, which could mess up your plans.
They May Not Want to Sell: Strategic investors often want to keep their stake in your company to maintain the strategic advantage that could make it difficult for you to sell your company one day. So they may have a monopoly on your exit.
It Might Become Tricky to Bring Other Investors on Board: It might get difficult to bring together strategic investors and venture capital investors, for example, as the two parties usually have different objectives.
They Could Control Everything: They might want the majority of the shares and / or important veto rights. So, they might get so much control that it feels like they're running the show, not you.
Market Restrictions: Working with them could stop you from working with e.g. their competitors, limiting your options.
Eliminating Competition: In some rare cases, a strategic investor can simply drive you out of the market by investing in your company, gaining all the insights, and preventing you from getting their competition.
Slowing You Down: Their involvement may slow you down due to complex corporate processes, regulatory compliance and legal issues.
What you can do
In some instances, strategic investors can pave the way for success, while in others, they mark the beginning of the end for startups. The outcome largely hinges on various factors, including the specific circumstances, the founders' objectives, and the terms of the deal. However, it's wise to consider the following alternatives as well:
Consider a partnership or a collaboration instead of an investment from a potential strategic investor, and keep your shares and freedom.
Examine contracts to understand veto rights and any other restrictions (e.g., blocking minority, limitation of the market etc.).
Investigate whether other companies in the strategic investor's portfolio maintain their autonomy by speaking with their founders or managers.
Sometimes it may be advisable to stay away from strategic investors in the early and mid-stage of your venture.
In a nutshell: Remember, working with a strategic investor can be a great move, but it's not for everyone. Make sure it fits your plan and goals before taking the leap.
Learn more
Join my webinars, video masterclasses, workshops, and coaching sessions to learn more about successful data-driven business models and scaling, metrics-based financial planning, investor readiness, and how to leverage technology and AI to move your business forward.
I speak tech, product and business!
Let's scale digital and tech-based businesses together! 🚀
Visit my website (English / German): www.arndtschwaiger.com
Join me on: LinkedIn, Instagram, Facebook and X
I am looking forward to your feedback and comments!
Thank you for reading and sharing!
Best regards,
Arndt
