While venture capital (VC) firms get all the fame and glory, more and more corporations are creating strategic venture arms to get in on the startup action. The fact is, most 'big' companies struggle to innovate at the pace of the web and mobile web today. By making investments into early stage startups, these incumbents can get early, preferential access to promising companies. Over time, these small investments might turn in to bigger strategic partnerships or outright acquisitions.
While VCs bring money, connections and company building experience, strategic investors theoretically bring something that all startups need: distribution! In the startup World it's not always the best product that wins. The best distribution (or best path to customer acquisition) often carries the day. So, this makes working with a strategic investor worth considering.
As you think about your long-term fundraising strategy, here are some points to keep in mind regarding strategics:
- Have they done this before? Does the company have a separately funded team in place for venture investing? Their should be a committed pool of capital to fund initial and follow on investments. That capital should be run be senior people who have deal experience and have deep reach into the operating side of the company.
- Is your company mature enough? The common thread amongst all strategic investors is that they are BIG. Big companies don't think or act like startups. They won't understand or be able to tolerate your up and downs, burn rate, direction changes, etc, etc. It's best to get through some of those growing pains before hooking up with a strategic.
- Will their sales channel care? Often what makes a big player strategic is their distribution, be it a direct sales force or channel. If you have some bleeding edge complicated product with long sales cycles that customers have not yet budgeted for, you're dead. A sales person won't care how much their company invested in you. They won't touch it.
- Are you better off being 'neutral'? The final point to consider is whether taking money from one strategic investor might make it harder for you to partner with its competitors. If your industry is dominated by one strategic incumbent, then there's less downside. But if there are several players, getting in bed with one may not cut off access to the others.
So when should you raise money from a strategic vs. a VC? When your company has achieved a certain run rate with predictable growth and you have the product stability, maturity, support and other infrastructure needed to play in the big leagues. In the software World that's generally north of $ 5 million in revenue. Till then, I think it's a recipe for mutual disappointment or at best a sound investment minus the strategic bit, which can only come when your company is ready for it.