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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The most important thing is the “level of desperation”…
If the entrepreneur is desperate for funds, well negotiation is not a choice open to him at all….he goes ahead and signs on the dotted line with the first guy that brings in the money, brand – whether strategic or financial hardly matters…( remember Warren Buffet – “Markets (here `Situations’ ) can remain irrational longer than you can remain solvent ” )
If the VC has been hunting around long for an idea, slowly fatigue catches up and he loosens his parameters for screening and selection of investments – ends up making a bad decision and is left to grieve. Here all terms can be negotiated – no liquidity preference, no first right of refusal, no ratchets…just plain vanilla investment and exit like all other investors.
Entry of Reliance Capital, Applied Materials, Intel Capital and a host of others have given rise to these differentiations…may the best investor win !
Imagine whatever is happening to the Cleartrips, Make My Trips, Travelguru, Yatra, Seventymm….sob, sob…!
Neeraj
Readers like me would like to know the comparison as I’m least aware of the way strategic investors work.
Absolutely Neeraj — you guys are making our life tough, man! On a more serious note, I think its hard to do a comparison because while financial investors have a more defined value across companies, the value of a strategic investor varies wildly and, imho, is hard to standardize.
But sure, please go ahead and articulate a comparison. I am sure it will be useful for the community!
Alok, feeling the heat from Strategic investors? In my opinion you should have compared the two types of investors and given pros and cons on a few parameters rather than warning your readers about Strategic investors – let them decide which works the best for them.
(yes, I work for a company which does strategic investments)
Are you suggesting that as a VC you will give better terms than a ‘strategic’ investor?! Caveat Emptor applies and entrepreneurs should assume that they are the ones who are going to make the venture a success or not. Indian VC’s (mostly) are too inexperienced to really help so entrepreneurs are attracted to strategic investors. All VC’s do here is talk about lofty things like market size, pain points and other esoteric issues! They know the concepts but have little clue on how to apply them. Fighting words I realize!