More Strategic Investors Are Funding Startups, and At an Earlier Stage. Take This Advice Before You Take Their Money
More corporate investors than ever are looking to back startups–but is taking their money the right long-term move for your company?
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Startups have better access to capital now than they've had in the past, as the VC world is awash with corporate money. Last year, more than 180 newly formed corporate venture units made their first bets on privately held companies, which is a new record, and a 66 percent jump from the year before.
But more easily available capital is not always good news for company founders. Strategic capital comes with real and implied strings attached, and this can work to your disadvantage.
Most strategic companies are not, per se, in the investment business. While they may be keen to make a deal with you--a deal that usually benefits both parties--the investment portion of the agreement is much more likely to benefit the corporate than it is the startup.
Many founders believe strategic investment signals their technology's value to the market and expect it will make for a more active partner. But if your technology drives a real business goal for the strategic investor, they will be just as active without investment. The investment is merely there for them to achieve an often unspoken set of advantages that do not always match your interests.
Strategic funding can be complementary and can help your company when it is raised from the right investor, at the right time and for the right reasons. But anything short of that can be a hindrance to your growth, your competitiveness and your eventual exit.
Here are some questions to consider:
1. What will potential customers and other partners think?
A strategic investor is almost always viewed by other potential partners and customers as a competitor, which takes on heightened meaning when that strategic owns part of your company.
Even if the strategic is merely a passive investor, perception always wins out, and you will be perceived as having already chosen a side. It is rarely wise for startups to limit their business potential.
2. What technical expectations does the strategic investor have?
The investor often expects your technology to take a certain direction, and most importantly, to advance their own business interests first and foremost.
Many entrepreneurs build their technology platforms to satisfy strategic partners without thinking about whether those technical specifications will fit a broader customer base.
3. What is your ultimate exit goal?
When investing, corporates are thinking about how the investment will benefit their business, their product development, and their competitiveness in the marketplace. And they want to secure an advantage in all those areas at the cheapest cost possible.
Over the past year, I have seen countless startups taken out of the game earlier than they should have been. The story goes like this:
- A strategic invests in the seed or A round, sees the company succeeding, and recognizes how the technology can give them a competitive edge. The investor knows (by virtue of being on the cap table) that the company is about to raise more money at a certain price.
- The strategic offers to acquire the startup at a value just enough over that price to get the entrepreneur to sell early.
Yes, the money is almost always meaningful for the entrepreneur. And yes, building a company requires lots of stamina and energy. And yes, a bird in the hand ... But it is clear to many investors that a lot of money is being left on the table.
If you want your company to realize its full potential, take the following steps before taking on a strategic investor:
- Make sure you understand the real dynamics behind strategic money, so you can make an informed choice.
- If you're looking for this kind of smaller, early exit, make sure you aren't partnering with investors who have different goals.
- If you believe you have a real shot at building something big, remember that spark that gave you the confidence to start the company in the first place and reignite it.
Not every entrepreneur has the drive and desire to go the distance. Many are happy to sell to a larger player early. But if you're looking to go all the way, don't settle for a bird in the hand. Settle in for the longer road ahead.
It might seem nerve-wracking or risky to turn down financing from a strategic, but they are likely to do business with you in either case. Unless you're certain your strategic investor's goals are perfectly aligned with yours, turning down investment is the much smarter move.