Nearly every financing we execute involves a discussion on the benefits of including strategic investors.  Taking strategic capital is increasingly a financing alternative. Large tech companies are becoming more active and hiring staff to manage minority investments. We find entrepreneurs often misunderstand the perspective of the corporate investor. We also see early stage VCs who are overly wary of engaging corporate investors.  We believe in including strategic investors in a financing process. A thoughtful approach can produce a good outcome. We have also learned that poorly conceived partnerships will become frustrating relationships that create a future distraction.

Follow the suggestions below to increase the odds of success.

Decide if you are really ready – Before engaging with potential strategic investors have an honest look at your organization. Young companies run the risk of being stunted by the effort required to support a big partner. Consider the diversity of your customer base and your sources of lead generation. Becoming overly dependent on one strategic partner creates risk that you unintentionally, and without a takeover premium, become a subsidiary. Before involving strategic investors, have confidence your company can stand on its own legs.

Know what you want – Strategic investors are not needed for supply of capital.  Growth equity investors have ample supply of capital and they make decisions more quickly. Pursuit of a strategic investor should be included because of a mutual business benefit.  For small companies the expected benefit is often increased distribution via a better-known brand or larger sales force. If you are looking for sales leverage, date before you get married.  You will get better attention and more resources from a partner once customers have demonstrated they want to buy your solutions together.

Don’t think selfishly – It is natural to focus on what a large partner could do to grow your business.  However, attracting capital and continued support from a partner will only happen if you reverse the calculation to focus on what you bring to the partner.  Small innovative companies can be very valuable to larger partners. A common circumstance we see is the best of breed vendor that enables a large, integrated provider to win key accounts. If you are not ready to discuss how you will help your prospective corporate investor, don’t engage.

Avoid the myth of “Dumb Money” – We meet Boards that suggest a strategic investor on the theory that this investor will price the round more aggressively.  If the strategic fit is really right, a corporate investor may price the round on metrics beyond IRR.  However, targeting corporate investors solely for this reason usually results in failure.  Even when financings do close solely under this premise, it often leads to future strife.  An investor who overpaid materially is usually not a great long-term partner and derailing the career of your corporate sponsor is usually not a path to partnership success.

Prepare to be a good partner – A company partnership that can function beyond the investment press release requires care and feeding.  To get what you want from a partner, you should prepare to invest in the partnership.  Consider using a small portion of the capital the partner provides to hire dedicated staff to manage the agreed upon co-selling or co-development effort.

Qualify your partners – Large companies have highly varied experience in minority investing.  Some, like Intel or Google, have dedicated teams that execute more investments than most venture firms.  However, some corporations will never have the DNA required to do anything other than buy 100% of a business.  One quick tip: if your potential investor mentions they expect a right of first refusal to buy your company, walk out of the meeting and move on.

Be patient – Those of us used to the pace of dealing with decision makers at venture firms find the corporate commitment process slow. Plan for that as the right timeline for this type of financing often is slow. Getting in place the parameters of working together may take time.  We sometimes hold a second closing of the round to avoid rushing to a hasty partnership. One of the best strategic investments I executed required negotiation of a global country-by-country market entry plan prior to closing. It was a lot of work and time, but it formed the basis of a successful partnership and a very attractive round of financing.