Strategic vs financial investors
Wednesday, June 11, 2008/
Strategic corporate investors can seem so inviting on the surface, but it pays to dig a little below the surface – just in case. DORON BEN-MEIR
By Doron Ben-Meir
So far we’ve discussed various types of financial investors – friends, family and fools (FFF), angels and VCs. Their common motivation is maximising the financial return from their investment.
VCs in particular are completely focused on the financial return as they have a mandate from their investors to deliver as high a return as possible.
A few years ago we looked at a deal in the semi-conductor space that had secured a strategic investment from a “brand name” global technology player. On the surface, the involvement of this company was very positive. Not only would it make an investment in the company, but it would stand as a high credibility first customer.
For a struggling entrepreneur this sort of investor can be very appealing – no more “payroll stress” and a big brother to help navigate the commercial battleground. There’s no doubt about the benefits… but is there a down side?
Unlike a VC, a strategic corporate investor is not solely motivated by financial return. If you were running a multi-billion dollar business do you really think that a 10x return on a $2 million investment is going to push all your buttons?
Strategic investors typically look for technologies and business models that either complement existing business units or might form the kernel of new business units. This means that they may not necessarily be looking to sell them off to the highest bidder but rather take a strategic stake to make downstream outright acquisition easier to control.
While a strategic investor will be interested in your success, there may be commercial opportunities that you cannot pursue by virtue of a conflict of interest.
On the flip side, there may be competitors to your strategic investor who won’t want to deal with you because they fear a dependence upon an entity controlled (or strongly influenced) by their competitor.
At the darkest end of the spectrum (rare but real) is the possibility that the strategic investor is making a pre-emptive strike to withhold your technology from the market to protect their dominant position. Were you to secure purely financial investment, you would become a greater threat and potentially would cost considerably more to take out.
With a strategic investor in place, the business may be less attractive to VCs as they understand the differing motivations and may have difficulty ensuring an alignment of interests.
So did we invest?
Our due diligence uncovered a competitor start-up (well backed by a financial investor) progressing well with major competitors of the strategic investor – all of which were not interested in dealing with the subject company. This limited the addressable customer base and would have restricted potential exit opportunities.
With too many eggs in the one basket (outside of our control) we passed.
Read more about venture capitalists
Doron Ben-Meir has been an active venture capital manager for the last eight years. He founded Prescient Venture Capital and prior to that was a consulting investment director of Momentum Funds Management. He was a serial entrepreneur over a 12 year period, co-founding five new technology based businesses.
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