Discover more from The O’Daily by Kathryn O'Day
First Hand Experience: What To Know About Fundraising With Strategic Investors
This was for venture investors (aka “VCs”).
Are you talking to strategic investors?
Take that previous advice and THROW IT AWAY.
I got first-hand, real world tips from a company that recently raised from strategic investors (or “Strategics” as we say in the biz).
What did they learn?
What was different between VC + “Strategics”?
What advice would they give?
Here is everything you wanted to know —and more — about the strategic investment process, directly from founders who successfully raised money.
What is a Strategic Investor?
Here’s a helpful fancy-pants overview.
Usually a large company with a “venture” or “innovation” department
Natural alignment — usually have the same customer or industry
Potential acquirer down the road
They put in investment money but don’t care much about controls or valuation
What’s in it for them?
They keep tabs on new innovation
Cross-sell or integration opportunities
Try before they buy
How is the pitch deck different for Strategic Investors?
(1) Less focus on the overall market size.
TAM/SAM/SOM isn’t addressed (so disregard all this).
The Strategic likely knows more about this than the company pitching them 😉
(2) More technical capabilities discussed.
No basic tech intro.
Expect a deep dive into expertise, operations, technology.
(3) More focus on alignment and strategic advantage.
What our startup can do for you!
Acceleration or expansion of internal projects is important to them.
(4) Customize each slide deck.
Less information on Strategic’s competitors.
Know their current priorities and initiatives.
What do Strategics care about?
(1) Their business.
Large companies will often invest, acquire, or partner to:
Open new markets
Increase speed to market
Fill a strategic need internally they don’t have time or expertise to tackle
(2) Win-win outcomes.
A collaborative relationship that leads to future growth for both partners.
Less focus on monetary returns.
(3) Avoiding acquisition by a competitor.
Even if it created a great financial return on their investment, they probably don’t want their largest competitor to scoop you up.
Companies will invest (or even acquire) to prevent competition down the road.
Some Strategics are very focused on when investment will produce EBITDA.
Not used to a high growth (aka startup/VC) model where profitability is a tradeoff for gaining market share.
Be ready to speak their language.
What is different about the investment process?
(1) Introduction and relationship building process takes longer with Strategics.
Meet Strategics at a trade show, conference, or warm intro.
Do not cold-call or send unrequested one-pager (which is typical and expected with VCs).
(2) More investment in “Proof of Technology.”
Build (v1) technical integrations between startup and Strategic as part of the investment process.
Startup may foot the bill and may not recover the expense.
Worth it to do for Strategics but not VCs.
(3) More technical vetting.
Calls with subject matter experts.
Testing, validating, deep look under the hood.
(4) More in-person meetings.
Strategics visit startup.
Startup visits Strategics.
Other key advice and learnings?
(1) The deal can die at any level.
Strategic Investment team may only be 1-2 people. They are likely super excited to do a deal but investment is not a core business function of the larger organization.
Process goes through many layers of internal approval (and external approval if the board is involved) → it can get vetoed at any level.
It is not the same as a professional investment discussion.
Keep multiple irons in the fire and be prepared to win/sell at every meeting.
(2) General counsel can make investment documentation harder.
Most VC deals use outside counsel.
Speed is the focus and terms are more standard with VCs.
(3) Things take longer than expected.
Welcome to large corporates, folks.
It’s true for investment process and internal adoption post-investment.
Exploring strategic investment?
Strategic investors can be incredible partners.
They have industry expertise, lots of customers, scalable systems and sales channels, and money to invest in new technologies.
They are a great option to consider when you’re fundraising.
Follow these tips to customize your approach and understand what matters most!
Want more? How do you maximize your strategic relationship once you’ve partnered??
We’ll continue to add to this series with additional learnings from the front lines.