Strategic investors can hurt you
Often we hear founders get excited about strategic investors – corporations making venture investments – because the founders think the strategic investor will assist with the product roadmap, become a customer, intro the company to new customers, add credibility, and potentially acquire the company at some point. However, strategic investors have not been a benefit to our companies. Below are some of the ways they’ve hurt us:
Trying to control the product roadmap. Strategics do not invest in your company to make a financial return or because they believe in the vision. They invest in you because they think you can fit into their product roadmap. As such, they will try to direct your roadmap to benefit themselves without giving thought to how it could impact you. While suggestions and advice should be welcomed, do not let strategics have any control of the roadmap.
Driving away acquirers. When you go to sell the business, an aggressive strategic in your cap table can actually drive away acquirers. Depending on how your strategic has behaved in the past, some potential acquirers may determine it’s not worth pursuing you. For instance if your strategic has a reputation for outbidding potential acquirers at the last second or voting against deals, many acquirers will determine it isn’t worth the time to pursue you. Who wants to do a lot of work only to have some internal strategic steal your company at the last second? The ultimate impact of this is that no one bids on you and your exciting sale to the market all of a sudden turns into a distressed or uncompetitive sale to your strategic.
Driving hard terms. Do not under any circumstances give your strategic special rights. They should be treated equally to other investors. We have seen situations where strategics have a veto right over any acquisition, can control future rounds, or have right of first Refusal over future offers to fund or buy the company. Hard terms like that are poisonous and should be avoided at all costs.
Strategics don’t do follow-on. Rare is the strategic that does follow-on investments. Why? Because they’re already invested in you and have a seat at the table, so they don’t need to invest more. Remember, strategics are not investing in you for a financial return. They are only investing in you because they think your product can help with their roadmap so once they’re invested, there is no benefit to doubling down. As a result, you end up with an investor that doesn’t invest in future rounds which creates for poor optics and unsupportive capital.
Strategics move on quickly. Because strategics don’t have a financial motivation, as soon as they think your product is not going to provide the benefit they thought or should they decide to move in a different direction with their own roadmap that doesn’t involve you, they lose interest in you immediately, irrespective of how you’re performing or how they can help you.
Does having a strategic even matter? Actually no. Of the 106 publicly traded tech companies we monitor, only 17 of them had a strategic investor. In other words, 84% of the tech companies in our list didn’t need a strategic to get to the promised land. In conclusion, don’t get excited about strategics. They’re not the great investors you think they are.