Strategic investors want to know how the investment will generate benefit for the company, either in increased revenue or competitive advantage. The payback calculations for the investment has to take into account the profits and revenues generated from the relationship with the startup. For example, if the startup is building a product that complements the investor's product line, and due to this if there will be additional sales due to a "whole product" solution, the profits from the increased sales has to be taken into account in the ROI calculation. In fact, sometimes, it may be the only way they look at the benefit, since they know that most of the startups may never make it.
This means the entrepreneurs who are looking for strategic money should think through the benefit in terms of revenues and profits they will bring to the investing corporate partner before any discussions. Corporate investor will naturally be interested in the startup's longevity, but more importantly they will look at the immediate benefit the investment will bring. If the benefits are large enough, they may invest even though there is a high risk of the startup to become an independent profitable company. Afterall, if they continue getting the benefits, but the company does not do well on its own, they can always acquire the startup. At least, this is how they look at it.
If getting money from VC firms is difficult for the startup due to business model or other issues, but if there is a large corporate investor who would benefit from the investment/acquisition, strategic money is a great alternative for the startup without major dilution. Public companies won't take more than 20% ownership. Startup's value proposition has to be strong however, so that there is no need for a VC to lead the deal. If they don't understand the company and technology well, or don't want to spend effort on the company, they will most likely demand that the startup finds a VC to lead the deal. Sometimes they may help find the VC.
In addition to all of the topics that need to be covered, the pitch presented to the strategic investor has to place some emphasis on some key points:
- How will the corporate investor benefit from the relationship
- How much of the time and effort will be spent on business that relates to them
- What help the startup needs from them in order to meet plan milestones
- The exit strategy - is the startup willing to be acquired at some point
- How much additional funding will be required to be profitable, where will it come from
It is very important to look at the fundraising effort as a company wide sales effort. Often there will be a champion (or sponsor) in the corporate partner who will go to bat for the startup, because he/she believes in the strategic fit (often the effort to find that sponsor takes the longest time). Startup has to work closely with that person and provide all the tools and information to move the process along. One area I often see causing problem is the Non-Disclosure Agreement. The entrepreneur should ask for one, but if they refuse to sign one, than it is better not to disclose key trade secrets and proprietary information instead of insisting on one.
