Corporate strategic investors are an excellent source of capital for your company.
In addition to the money that corporate strategic investors can bring to the table, they can be invaluable source for product insight and feedback. Having the right corporate strategic investors can also be an expansion opportunity for your professional network. Having the right corporate strategic investors can be an important way to validate your opportunity, and provide a proof point to other potential investors like Angle investors and venture capitalists.
Large corporations are looking for ways to support innovation in their companies without the impact on earnings of massive R&D budgets to drive innovation inside their own company. This is especially important for public companies that are under pressure to deliver on quarterly earnings and expand EPS.
If these investors are potential competitors or acquirers of your company, or both, you will need to take the necessary precautions of what information you share with them and how you do it. But don’t let this be a deterrent for bringing these ‘smart money’ investors into your company.
Patrick Henry: These (corporate strategic investors) are typically larger corporations that are ecosystem partners, suppliers or customers. They somehow touch your business.
Larry Kesslin: They have an interest in your success.
Larry: It will help the company that’s investing the money or the person. I’ll give you an example of a company. They’re building clean rooms to do bio packaging. Their major investor has 10 different companies that need the packaging done. That’s a strategic investor who will use the company that he’s investing in to service 10 of his existing investments.
Patrick: Exactly. There is an alignment between the strategic investor that can potentially make an investment. Sometimes the strategic partner has a venture group within their company. Intel was an early company that had Intel capital. Sysco has a venture arm. Verizon has a venture arm.
At Entropic, we raised a lot of strategic money in addition to money from venture capitalists. It’s always better, from my perspective, if you can do non-recurring engineering or pre-sales. It’s something where you don’t sell stock. You can get those companies to put money into your company without giving them stock. If you do need to give them stock, the strategic investors typically won’t lead a financing round.
They want someone who is a purely financial investor to price the round and set the deal terms. You want to have those people you can drag along into a Series A or Series B. A lot of them don’t want to get involved at an early stage. Series A companies are more mature now than they used to be. In that Series A and Series B stage, talk to your biggest strategic partners to see if they’re potentially interested in making an investment. They can be a source of capital.
This is Patrick Henry, CEO of QuestFusion, with The Real Deal…What Matters.