Strategic investors can be problematic
Often we hear founders get excited about strategic investors — corporations making venture investments. 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 special terms. Do not give your strategic special rights. They should be treated equally to other investors and should not be on the board. 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. Additionally make sure the strategic does not control the vote of any particular class of stock.
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 for a financial return. They are only investing because they think your product can help with their roadmap so once they’re invested, there is no benefit to doubling down.
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 matter? No. Of the 201 publicly traded tech companies we’ve monitored, only 33 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. Strategics are over-rated in our view.
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