Written by our Master Duke Urbanik
So you are ready for your investment round. The biggest mistake that a lot of startups but also scaleups make, is that they started too late getting into the “Funding process” and that the end of the runway is in sight. One solution is to grab the opportunity closest at hand: the first willing investor that you talked to and seem to fit the bill.
However, is this investor the one you SHOULD have? Did you research if he/she is in there for financial gain or is their main interest getting you off the market, or support their own business model? Did you go for the highest bidder but now find that the investor wants to stay on board for at least 10 years?
Recently, I have seen companies making this decision quite recklessly, not considering the impact on their growth and business plan in the long run.
Find below the two investor types: Financial Investors and Strategic Investors; a nice definition by JP Martin:
“Financial Investor:
A Financial Investor is always looking for a return on their capital, not just a return of capital. The reason they’re investing in your business is to MAKE MONEY, not run a charity, not anything else – just to maximize their financial returns, over a specified period of time. And money can be a great motivator for great results!
They look at investments in a different way. They could be looking at the market opportunity, product, traction or track record, team and more importantly exit potential. And it’s the last point – exit potential – which makes it important for them to figure out how they’re going to sell, well before they even buy. Which is also why we stress this when crafting your pitch deck.
A Financial Investor wants to make sure their money is being put to use, so they’ll often take board seats and add value by introducing you to a larger network, or help in terms of strategy, hiring, financials and more importantly industry insights as they work across a portfolio of similar companies. They’re like consultants in that they can work with various companies and gain a mosaic of insight, unlike a focused Strategic Investor.
Strategic Investor:
A Strategic Investor is a different beast, they’re not just in it for the money, though that is part of the raison d’etre for being a corporate body. They have a more ‘strategic’ point of view to investing, it could be because your business either complements theirs and add value in some way or even be seen as a competition, they’re just willing to buy out.
It may be that they don’t want to spend time building what you did, instead they’d rather use their capital or money in an efficient way, and just buy yours. This accelerates their revenue, growth, market, insight and development roadmap.
They understand the time value of money. And this where we get the “A” from M&A or Mergers and Acquisitions. In fact, Financial Investors may even sell your company to a Strategic Investors.
Strategic Investors may be a bit more forgiving and patient when it comes to growth. They’re not in rush to maximize a return on their investments like a Financial investor. As a business owner, entrepreneur or founder who is selling… you may be given freedom to continue building your business as you have, without much pressure to deliver on the milestones within a quarterly time frame. Sometimes, their strategy could be to simply create synergy between their other companies, and if your company fits the bill, you’re in luck.”
So, which one do you choose, which one is best for your company?
Do you have a great dependency on a certain market and don’t have full access to it, or need more pushing power to be able to fully explore that market? Than a strategic investor could be your choice. They can open their market for you, you have a great reference from them and they can help you fund the go to market, because it is their own market too.
Do you have a product or service that has a much broader application field, like a software platform, then a financial investor could be best suited. They have a shorter investment horizon and in general support hyperscaling – which is obviously a more risk bearing exercise.
Finally, there is an other dilemma for you to solve: where is this investor located. This greatly influences the amount you can raise, and also the conditions you are raising. I will cover this in a separate article.
At Masters of Scale, we have Masters from both sides of the table, and founders who have mastered this challenge themselves.
Want to know more? Send us an email at hello@mastersofscale.nl.