With the flurry of venture money pouring into India, the other class of investors that are equally upbeat is strategic investors and corporates. I have met a few entrepreneurs who have received “investment offers” from these investors, and especially in absence of any pure financial offers, the option seems compelling — “they will put in the money, and then also help me build a business!”. Few things to consider before you take that offer:
– If the corporate investors are going to add significant value to the company, its good to quantify that value and test waters before you jump. Work on a few customers jointly and see if this partnership is working, and intended benefits are being achieved. If it is, the partnership can translate into a strategic investment.
– Objectives of strategic investors vary. Some like to invest in businesses that improve overall demand of their products and services – and they are ok taking minority stakes. Having a minority strategic investor with an operational partnership is also a good potential exit route. Others look at immediate consolidation, i.e. majority stake. While there might be promise of buying rest of the shares at a later point at a higher valuation, remember that you will never get the best value through this route.
– Sometimes, strategic investors will impose conditions on future rounds of financings, or have a first right of refusal on exit, and such other terms. While some of these sound benign because they are apparantly on the same valuation that anyone else is paying, remember that if an investor knows that their offer can be taken to another party which has right of first refusal, this investor is probably not too keen to make an offer anyway. So be careful of such terms, and how the exact process will work so as to not deter other potential investors.
In summary, if you are landing up selling the company today (for whatever value), you should know that is the case!
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sorry, I also wanted to add that strategic investment should only be considered if the investor’s assets can add value in human capital, technology, distribution network, etc. Otherwise go to a pure financier like a VC, Bank…
hahaha, good ol’ strategic investments 🙂
Alok’s suggestion is sound: 1st go in for a strategic tie up, this will allow you to leverage each other’s synergies and also understand each other better. This also saves time haggling over valuations. Its also easier to untangle if things go sour.
My experience, though limited, is that you should take a strategic investment if you eventually plan to sell your company to the investor. And even here, do it in one clean shot, otherwise valuations will become subject to milestones and other complications.
Vamsi, though off topic, short response — anyone can become a contributor here (i.e. so far i have not had to refuse anyone 🙂 ) — so newbies are welcome; all of us are learning… Separate forum not required imho,
Hi Alok, Thanks for the article. A few of us are planning to start a venture soon and this info is very handy.
Alok, I have found venturewoods to be extremely useful in clarifying many startup issues. However I felt that since only the contributors (most of whom have already started companies) can start a conversation, it kind of limits on what newbies would like to discuss – costs of starting a company, how to split ownership, what happens to the stake when someone leaves, getting into incubators etc. Some of these have been covered in some of the earlier posts, but what would be great is a dedicated forum for newbies – where they can start threads on the nittty gritties.
Vamsi.
PS: btw, am also from IITD (Jwala).
The pilot project route is a good suggestion I think, but with large corporations am not sure if too many Indian firms ( most are SMEs by global standards) will have too much of a say. Also my suggestion would be clearly articulate the value that you would bring to the table – quantify/ qualify it as customer relationships, distribution might in india, market topography knowledge, infrastructure already available etc.. and what is strategic investor bringing in – I have been working with some mid size auto component companies and although they have as high as 49% stake, the companies do not consider them a part of the network and share technology fully or integrate the indian firm into the network, which actually stunts the growth in terms of systems and the benefits on the back end in terms of supply chain consolidation etc. And since the investor has had a high stake other investors were not interested and the company was forced to take the stake upto 49% over time. Watch out for this, find out to what things do u have access and to what level.
Another thing which might be relevant when choosing the partner is whether the partner is looking at you for a single product line or for all product lines that he has.. else you will end up being his tutor for a small product line. Look at these kind of factors with strategic investors before you look at valuations…
Alok – as an aside, can you pl register me as a contributor to this site. Let me know where I can send in a request with my profile for you to consider.