Can strategic investors be too good to be true?

Investors from supply-chain partners, future customers and specialised venture capital funds are considered strategic.

The strategic investor is thought to be able to accelerate development, provide a major source of early revenue, act as a channel partner for new customer acquisition, enhance a start-up’s credibility, and perhaps ultimately serve as a potential acquirer.

With these advantages, founders highly regard interest from strategic investors. But, from our experience working with founders, we recommend that businesses proceed cautiously.

The impact of investment controlling the direction of development.

Interest is not always to secure an investment return or to demonstrate a belief in the vision. Funding comes when investors think you fit into their development plans. Recognising feedback can be valuable, but some founders caution against too close involvement in controlling internal development processes.

Avoiding strategic rights or terms.

Investors should be treated equally at an early stage, and complexity is to be avoided. Recently, my team has seen investors looking for a restrictive right of veto over any future acquisition and first refusal over future funding proposals.

Begin with the end in mind.

Strategic investors often won’t participate in follow-on rounds.

Early investment typically means a board seat and visibility, so they don’t need to follow their money. If they’re not investing for a financial return, there may be no motivation to increase future investment.

Strategic investors can change focus.

Without financial motivation, investors can lose interest if development does not deliver the perceived benefits. Founders need to think very carefully when fundraising and faced with the sparkling diamond, who is a strategic investor.