The Value of Strategic Investors
Throughout my career, I have worked extensively with private equity firms, venture capital firms, hedge funds, family investment offices and high net worth individuals (HNWI’s) to raise investment capital for entrepreneurs, start-ups and growing businesses. These financial firms and executives are in the business of making investments in companies and realizing a return on their investments – their goal to identify private companies with attractive future growth opportunities and durable competitive advantages, invest capital, and realize a return on their investment with a sale or an IPO. In all but one instance, my experiences were both professionally and financially rewarding. Some of the most successful companies I’ve built however, were done so using strategic investment capital.
While VC and private equity investors remain an important driver and key component of business growth and financing, across nearly all industries, there is another source of business funding that is frequently overlooked by business leaders in their search for investment capital – the strategic investor.
The traditional strategic investor is most often a corporation or business engaged in a complementary or similar line of business, while financial investors are traditionally private equity groups and /or individuals. Strategic investors may also be unrelated to your company’s industry but looking for opportunities to grow in your market or diversify their revenue sources. Their goal is to identify companies whose products or services can synergistically integrate with their existing P/L to create incremental long-term shareholder value.
Why is this important to your business? In my opinion, there are three key reasons why strategic investors should be seriously considered when looking to finance your company – company valuation, risk/reward profile, and alignment of interests.
For the most part, the strategic investor is a company in a similar line of business, in a different market or in need of new products and services to sell to their existing customers and vice versa. It is most often a much larger company or one which has a large financing capacity. Competitors are not strategic investors. The strategic investor finds value in the combined future of the companies and is therefore willing to consider paying some increased multiple for the future benefits.
In this regard, the differences between strategic and financial investors are numerous, but the clearest differences are found in their overall approach to investments. The strategic investor wants to “Buy and Hold” and the financial investor tends to want to “Buy Low and Exit High”. 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.
There are many criteria that must be met to satisfy an investor, whether financial or strategic, and justify an investment in your company. In the case of the financial investor, their decision will be primarily driven by ROI, a calculation based largely on your financials and by their interpretation of the risk/reward profile of your business.
With strategic investors, your investment proposal has to meet two criteria – financial and strategic. The manner by which each is weighted, however, provides you considerable opportunity to be more creative in justifying your opportunity. Whether investing to fill in gaps (i.e., the investor sees an opportunity to strengthen itself) or in complementary companies, these are factors that can reduce the risk of the transaction and / or increase the reward to a strategic investor. Keep in mind also that this can positively affect your valuation.
Having an investor that understands and supports your company’s goals is important. By their very nature, investment firms must eventually sell their investment to return capital and profit to their investors. Therefore, they may be in a hurry to grow their investment to several times its original purchase price, by any means.
The strategic investor often has a slower growth model because their investment horizon is usually many years longer. These investors typically look for technologies and business models that either complement existing business units or have the potential of forming the kernel of new business units. In many cases, not only will they make an investment in your company, but serve as a high credibility first customer.
Interested in talking more about this? Feel free to reach out and contact me.