Strategic investors are generally corporations that invest in early stage companies in order to 1) earn financial returns and 2) partially control ventures that could affect or “disrupt” their market(s) in the future.
Unlike venture capitalist or angel investor, whose only interest is a cash-on-cash return on their investment, strategic investor is also will make an investment in your company because of a strategic interest in your business. For example, if you have developed a novel product or some interesting, new technology, the strategic investor may wish to complement its own growth by strategically integrating your company’s novel product or new technology into its business.
A strategic investor is usually a larger company, often in the same industry as your company. Compared to a venture capitalist, a strategic investor is usually less aggressive on valuation, i.e., is willing to take a smaller equity position in your company for the same amount of money. The strategic investor will also generally be less aggressive on controls on decision making.
Strategic investors can offer capital in amounts ranging from a few hundred thousand dollars or less to several million dollars.
Some corporations, like PETRONAS Ventures and Grab Ventures, have formal venture capital arms that actively seek and invest in emerging companies.
These corporations are ideal to contact should you have a venture in their market space(s), since if they like your concept they could provide value well beyond their capital contributions such as strategic advice, industry connections, and distribution assistance.
Note that most corporations, even if they don’t have formal venture capital arms, do fund emerging ventures if they are properly presented to them, specifically if the venture’s management team clearly shows how their venture could impact the industry and/or help the corporation further its mission.
For example, if you have a product or technology that enables a corporation to gain competitive advantage and thus increase profits, they might be extremely receptive to providing funding.
Industry expertise. The most important benefit your venture gets from a strategic investor is both an unparalleled domain knowledge with a long history and broad industry contacts suddenly available to you. They can be better positioned to help grow your business compared to other type of investors.
Potential acquirer down the road: as strategic investors are investing in your venture for strategic and financial gains, you will be dealing with a potential acquirer early on. Both parties will get to know each other over a longer period of time to make an acquisition easier for both parties. Building a pipeline to M&A may also be part of the strategic investors’ strategy.
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 you to be more versatile.
It can be difficult to figure out what is motivating a strategic investor to fund your venture. Oftentimes, strategic investors aren’t enticed by financial returns. Instead, they care more about your venture growing into something that could benefit their own operations in the future. This can create serious conflicts between founders and other investors.
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.
Additionally, when it comes time to exit, strategic investors may cause some 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 money, be ready to sign over some rights to your IP, give out the right of first refusal/offer, or allow custom development.