Last week, CB Insights published a piece by Micah Rosenbloom of Founder Collective on corporate investors. Micah’s article was thoughtful and useful, but it came with the mismatched headline, “Strategic investors — You’ll Have Sold Your Company. You Just Won’t Know It.” I thought it represented a good metaphor for how strategic investors are regarded — sometimes unfair headlines get in the way of reality. As someone who has invested on behalf of corporates for many years now, I thought I would provide an additional perspective.
Venture capital firms are distinguished by sectors of expertise, quality of people, stage, and funds under management among many other things. However, in one important way they are all alike; they all want to make money. This makes them easy for an entrepreneur to engage with as he/she can anticipate their motivations.
Strategic investors’ goals, however, can be far more diverse; exposure to new ideas, cultural osmosis, partner on new products, etc. This can make strategic investors potentially more complicated to work with. In addition, some strategic investors may make bad choices and try to impose constraining terms such as rights of first refusal or the dreaded “path to control”. In practice, I rarely see these kinds of terms nowadays — they are so clearly unproductive that they don’t survive long when exposed to the real world.
Faced with this context, the entrepreneur who is moving at speed might be tempted not to engage with strategics. In my view this would be a mistake. I believe the best strategic investors can offer as much (and often times, more) value as the best VC firms; and, with a little guidance, entrepreneurs can easily identify who the good strategic investors are.
Senior investors at corporate investment groups typically have better domain expertise and stronger networks within their particular industry than VCs. Strategic investors can also offer specific, tangible value that VCs cannot. They can improve the prospect of winning business from the parent corporation, smooth hiccups in the working relationship, provide early insight into valuable new business opportunities, and so on. Taken together, these benefits can utterly transform the prospects of an early-stage company. Sometimes the value is more prosaic but still useful to cash-strapped start-ups through perks like free use of office space, phone and wifi service or access to corporate buying rates. All this is in addition to the usual benefits brought by VC investors (strategic insight, scaling guidance, recruiting support, business development and customer introductions, etc.).
So, the benefits of a strategic investor are worthwhile. But, it does require that the entrepreneur takes the time and effort to identify experienced and well-structured strategic investing groups. I suggest entrepreneurs ask any potential strategic investor the following couple of questions:
- How are you compensated for making investments?
- How does your group decide whether to fund a deal?
If the corporate investor is compensated on the basis of the carried interest of their portfolio then they have exactly the same motivations as a VC and their incentives are similarly understandable. This question is a shortcut that takes a raft of second-order questions off the table — if your investor personally does well when the entrepreneur does then you can have a high degree of comfort that they’re going to do everything in their power to help you succeed. There are plenty of great strategic investors that are structured differently, but the entrepreneur then needs to figure out what those corporations want out of the relationship and how they might trade off financial return.
The answer to the second question will indicate how quickly the strategic investor can get a deal done and will provide some interesting perspective on how the corporation actually thinks about its investing capability. For example, requiring an operating “champion” to bless the investment can imply months of commercial negotiations before funding is agreed upon. That might be worth it, but the entrepreneur needs to understand the trade-off. The quickest, cleanest structure is for the partners in the strategic investing group to vote on any investment, just as VCs do. This is how we do it at Comcast Ventures and how well-regarded groups such as Google Ventures and Rogers Venture Partners make their investment decisions.
So, strategic investors may be a more diverse and less easily understood class of investors for entrepreneurs than traditional venture capital firms. But, by asking the right questions entrepreneurs can easily navigate among strategic investors and increase their chances of finding a great set of investors to work with.
Andrew Cleland is a Managing Director of Comcast Ventures, based in New York. He has led investments in FanDuel, SundaySky, Iddiction, Enigma.io, Windsor Circle, Simulmedia, PlaySpan (Visa), and Visible World among others. Before joining Comcast Ventures, Andrew was a Managing Director at Time Warner Investments. Previously, Andrew was the Chief Operating Officer of TrustTheDJ.com, a UK-based music start-up. He started his career with Booz Allen’s Media and Entertainment Group in London. Andrew has an MA in Economics from Edinburgh University, and an MBA from INSEAD in France.