Obtaining Financing from a Strategic Investor
It can be productive to seek financing from strategic investors when traditional venture capital is not available to fund your company's capital needs. Strategic investors are a growing source of capital as many successful large enterprises are establishing equity financing programs to help advance their commercial goals. These strategic investors will make an equity investment in connection with some other commercial transaction such as an alliance agreement, purchase agreement or license agreement. If you decide to pursue this source of equity financing, it is important to understand how the process differs from traditional venture capital financing.
Identifying Strategic Investors. A strategic investor will be interested in your business because it helps the investor accomplish some other commercial objective. Look for established businesses that are already involved with your company's industry. A strategic investor can be a supplier looking for additional customers or a potential customer that wants to have access to your products, services or technology. It can be a competitor that believes that your product or service will increase the demand for its own products or services. In developing a list of candidates, you need to carefully consider the advantages and disadvantages that each prospective investor will provide to your own strategic goals. Would your company benefit from a relationship with a company that has a well developed distribution channel for your product or service? Would your customers be reluctant to deal with you if one of their competitors was an investor in your company?
Contacting Strategic Investors. Plan how your company will approach each strategic investor you have identified. The person you contact at each organization should have sufficient authority and influence to champion your cause within that organization. Prior to providing any confidential or proprietary information to a strategic investor, you should have a well-prepared non-disclosure agreement in place. Even after a non-disclosure agreement has been signed, you should carefully consider the timing and manner in which information is provided in light of the damage the misuse of that information can have on your business.
Negotiating the Deal. Be patient. Since equity investment is not the strategic investor's main business, an investment by a strategic investor will take longer to complete than a venture capital transaction. The transaction will also be complicated by the negotiation of the related commercial transaction. As with most complex transactions, it is helpful to have a non-binding term sheet or letter of intent developed at an early stage of your negotiations. Identifying the principal terms of the transaction at the outset will facilitate the negotiation of remaining terms and will make it more difficult for the strategic investor to renegotiate those principal terms.
It is also important to maintain your pursuit of capital from other sources, if possible, while negotiating the terms of a strategic investment. This will provide you with additional leverage during the negotiations. It will also minimize the time needed to obtain capital from those other sources if your negotiations with the strategic investor are unsuccessful.
During the negotiations you should obtain an understanding of how the strategic investor will manage your relationship after the investment is made. Is it the person you are negotiating with or someone else? It is important for you to develop confidence in the ability of that person to champion your cause within the strategic investor's organization. You also need to become comfortable with the corporate culture and decision-making process of the strategic investor since you will have an ongoing relationship after the investment.
Finally, don't lose sight of your own strategic objectives in pursuing a transaction with a strategic investor. For example, you should resist any request for an "exclusive" arrangement if you want the ability to work with more than one strategic partner. You do not want to enter into an arrangement that hinders your ability to reach your goals.
Identifying Strategic Investors. A strategic investor will be interested in your business because it helps the investor accomplish some other commercial objective. Look for established businesses that are already involved with your company's industry. A strategic investor can be a supplier looking for additional customers or a potential customer that wants to have access to your products, services or technology. It can be a competitor that believes that your product or service will increase the demand for its own products or services. In developing a list of candidates, you need to carefully consider the advantages and disadvantages that each prospective investor will provide to your own strategic goals. Would your company benefit from a relationship with a company that has a well developed distribution channel for your product or service? Would your customers be reluctant to deal with you if one of their competitors was an investor in your company?
Contacting Strategic Investors. Plan how your company will approach each strategic investor you have identified. The person you contact at each organization should have sufficient authority and influence to champion your cause within that organization. Prior to providing any confidential or proprietary information to a strategic investor, you should have a well-prepared non-disclosure agreement in place. Even after a non-disclosure agreement has been signed, you should carefully consider the timing and manner in which information is provided in light of the damage the misuse of that information can have on your business.
Negotiating the Deal. Be patient. Since equity investment is not the strategic investor's main business, an investment by a strategic investor will take longer to complete than a venture capital transaction. The transaction will also be complicated by the negotiation of the related commercial transaction. As with most complex transactions, it is helpful to have a non-binding term sheet or letter of intent developed at an early stage of your negotiations. Identifying the principal terms of the transaction at the outset will facilitate the negotiation of remaining terms and will make it more difficult for the strategic investor to renegotiate those principal terms.
It is also important to maintain your pursuit of capital from other sources, if possible, while negotiating the terms of a strategic investment. This will provide you with additional leverage during the negotiations. It will also minimize the time needed to obtain capital from those other sources if your negotiations with the strategic investor are unsuccessful.
During the negotiations you should obtain an understanding of how the strategic investor will manage your relationship after the investment is made. Is it the person you are negotiating with or someone else? It is important for you to develop confidence in the ability of that person to champion your cause within the strategic investor's organization. You also need to become comfortable with the corporate culture and decision-making process of the strategic investor since you will have an ongoing relationship after the investment.
Finally, don't lose sight of your own strategic objectives in pursuing a transaction with a strategic investor. For example, you should resist any request for an "exclusive" arrangement if you want the ability to work with more than one strategic partner. You do not want to enter into an arrangement that hinders your ability to reach your goals.
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