Back
Amit Ashkenazi is VP Business Strategy at Fiverr, and also formerly a Partner at Viola Growth. This post was written during his tenure at Viola.
Generating strategic interest in your company can be a great thing both for your business development initiatives and investment opportunities. And if you can manage to get it from the leading company in your industry, it’s especially meaningful because it usually reaffirms your company’s contribution to innovation or disruption in the market and your position within it.
In recent years there has been a growing interest from the corporate side to invest in startups. According to CB Insight’s H1 2016 Corporate Venture Capital Report, the number of active global corporate investors more than doubled since Q1 2012:
Source: CB Insight’s H1 2016 Corporate Venture Capital Report
Engaging with investor ‘giants’, however, requires a lot of masterful planning in order to make the most from the relationship. It’s definitely more art than science, so here are a few things you might want to consider:
The Pros:
Taking money from a strategic investor may motivate both parties to engage in a larger commercial relationship, which could be great for your company. Some relationships even include distribution agreements and quota credits to the investor’s sales team, which can boost your go-to-market efforts and significantly accelerate your growth. This is especially important if it’s an early stage company with limited sales and marketing capabilities.
An investment from a strategic investor can help to ‘legitimize’ the company in a way that makes it easier for it to attract additional venture capital investments, because it makes future investors feel more comfortable about the company’s technology and product-market-fit.
Some strategic investors can provide access to accelerators, equipment, IP or know-how that your company doesn’t currently own, which would alleviate your development efforts. This is especially important to companies that are innovating in areas that require significant amount of data, such as FinTech and InsurTech. Startups that operate in those domains with a strategic relationship in place can gain access to real bank and insurance data, and to beta sites that they can leverage to test and optimize their solutions.
A strategic investor may be able to lend domain expertise to your company that it may not otherwise have access to. This would be amplified further if the strategic investor were to appoint a board member or observer to enrich the board discussions.
Strategic investors are, by nature, strategically motivated and are therefore less sensitive about valuations, thus creating less dilution to the founders and other existing investors. The motivation for strategic investors, is to help other players with simpler organizational DNA to provide innovation to their industry while limiting the risk and costs of doing it in-house.
The investment and ongoing relationship with a strategic investor can potentially pave the way for a future acquisition by this investor.
The Cons:
Although a strategic investment may increase the probability of a future acquisition by the investor, it also limits the potential of possible acquirers, as you will be inadvertently associated with this specific company, especially if the investor has first refusal rights.
Your ability to do business with strategic companies in the industry might be negatively impacted by your association with the strategic investor. Some investors might even legally prevent you from dealing with other companies.
If the commercial relationship is incredibly productive, to the extent that a significant portion of your business is enabled by the strategic investor, it could also limit the negotiating power you’ll have with them in any future discussions on acquisition, which could in turn limit the potential for an exit.
Organizational changes on the strategic investor’s end can create difficulties in leading long term initiatives. People in these organizations are always changing roles, so you can easily find yourself with someone who wasn’t part of the original collaboration and who might have a different strategic focus in mind from the people you originally dealt with.
Other Things to Consider:
The size of the investment and the investor’s equity stake in the company: On one hand, you don’t want to surrender your intellectual property for a minimal equity investment and let the investor keep a ‘foot in the door’ without paying for it. On the other hand, you don’t want their presence in your cap table to be ‘too’ meaningful, or for your company’s association with them to imply that they effectively own you and your strategy going forward, including the ability to influence your product’s road map and other development efforts. So you need to make sure that your company’s best interests are always prioritized ahead of those of the strategic investor.
Most strategic investors will not be able to appoint a board member but rather a board observer. This is mainly to avoid future disputes that may result from claims that a strategic investor had access to the company’s proprietary information, and to limit the statutory fiduciary duties of board members.
What part of the strategic investor’s organization will be making the investment and who will lead the post-investment relationship? A lot of the incumbents today have stockpiled significant cash reserves with limited growth engines, so most of them form venture arms (or in other words Corporate Venture Capital, i.e. CVC). Those vehicles are formed to enhance innovation efforts by investing in small startups that will eventually grow and become strategic partners or candidates for a potential acquisition.
It should be noted that some of these CVCs are purely financially motivated and thus are not really different from any other VC so the more the investment arm is strategically oriented, the better. You should always aim for the investment to come from the organization’s business division and to cultivate a relationship with them if you want to nurture business development initiatives.
Source: CB Insight’s H1 2016 Corporate Venture Capital Report
When is the right time to bring a strategic investor on board? In general, it is advisable for this to happen later rather than earlier in a startup’s life, because by then the product is already shaped and the company is more established. In addition, at later stages there are already VCs and other investors that have a complete alignment of interests with the company, so adding the strategic investor at that time would limit its ability to impact the strategic direction of the company.
Always make sure that you retain all rights on IP and remain as independent as possible in your future endeavors.
It is advisable to continuously nurture your collaboration and intimate relationship with the investor, as eventually he’s the number one prospective acquirer for your business and may well end up being your future boss 🙂
Looking for companies you might want to target as potential strategic investors? Here’s a list of the most active ones globally:
Source: CB Insight’s H1 2016 Corporate Venture Capital Report
At Viola, we have a great relationship with all of the above (as well as many others) and we generally encourage our portfolio companies to engage with them.
More posts by Amit Ashkenazi:
From Don Draper to Sheldon Cooper: The Transformation of CMOs
Why spending big to grow a company that’s based on shaky unit economics is a lousy idea
Everything as a Service (EaaS): Why eventually we might not need to “own” anything
Change Agents and how they impact new technologies
Raising money for your startup? Why you need to beware of inflated valuations
Love thy Competitor: Why competition can be a good thing for startups
What your approach to recruiting top talent says about you and your company (and why it really matters)
