In its simplest form, a strategic investment is a business relationship between two companies.
Instead of seeking funding from angel investors, venture capitalists, or personal acquaintances, small businesses receive an influx of capital from other companies.
Why would another company invest in your business? Lots of reasons. For starters, the other company expects an equity position in return for their investment. But for strategic investors, financial incentives are secondary. The primary reason for investment is a strategic advantage in the form of a licensing agreement, a marketing partnership, a distribution arrangement, or some other collaborative agreement. It's possible that the other company may even be interested in investing in your company to secure an option to buy at a later date.
Ideally a strategic investment situation is a win-win for both parties. When negotiations culminate in a balanced deal, both companies achieve critical advantages. Here are just a few of the benefits your business receives when you're on the receiving end of the strategic investment.
- Better valuation. Strategic investors are usually less interested in beating you up on valuation. In other words, strategic investors are usually willing to take a smaller equity position for the same dollar amount, especially when compared to venture capitalists. That makes sense because strategic investors are also gaining a strategic advantage through the investment.
- Industry credibility. Most of the time, strategic investors are larger companies located in the same industry. By nature, a strategic investment is a partnership, a collaboration that ties your smaller company to larger industry player. You not only receive capital funding, but also the instant credibility of being associated with your investor.
- Technical validation. If a larger company is interested in pursuing a strategic investment to gain access to a new technology or a process you have developed, the investment gives your innovation immediate validation. If an established company is willing to invest big bucks to access your product, it will only be a matter of time before the rest of the market follows their lead.
- Access to infrastructure. As a collaborative partner, it's in the strategic investor's best interest to help your company succeed. Frequently this translates into access to infrastructure, relationships, and resources that would otherwise be unavailable to your business.