The idea of strategic investment sounds good.
A larger company invests in a smaller one for financial gain as well as critical strategic advantages. But what does strategic investment actually look like when it's applied in the business marketplace and how does it impact each company?
An ideal strategic investment relationship both partners benefit. In addition to receiving much-needed capital resources, the smaller business often gains the advantages associated with the larger collaborator. In addition to ROI, the investor receives a licensing agreement, a marketing partnership, a distribution arrangement, or some other collaborative benefit.
The following two strategic investment examples illustrate how each party benefits from the relationship.
Rent.com was the first pay for performance rental real estate listing website. While other rental sites require subscriptions or listing fees, Rent.com only made money when a lease was produced through their website. In 2005, Rent.com was sold to eBay for more than $400 million. But much of their early success was based on $17 million in strategic investment funding. Their strategic partners were REITs (Real Estate Investment Trusts) who controlled as much as 20% of the rental apartments in the U.S. These relationships provided Rent.com with capital, but more importantly they gave them an immediate source of listings when they moved into a new local markets. The REITs, on the other hand, gained strategic partnerships with a company who had demonstrated a knack for moving rental properties in competitive real estate markets.
ClariPhy is a semiconductor company that is focused on digital signal processing and mixed-signal integrated circuits for high-speed next-generation networks. In May 2010, they entered into a $7.5 million strategic investment agreement with Oclaro, a tier-one provider of innovative optical communications and laser solutions. Apart from the financial benefits, this agreement gave each partner access to new technologies. However, the most important technological benefit was for Oclaro – they gained the DSP and mixed signal capacity to transition from 10 Gb/s to 40 Gb/s optical networks. Without this kind of agreement, it would have been prohibitive for Oclaro to move ahead with their advanced optical solutions. But here's the real lesson: This wasn't the first time ClariPhy and Oclaro participated in a strategic investment arrangement. The two companies have a history of collaboration and they are mutually-committed to a long-term industry partnership.