Ask an Investor: Why am I being asked to find a strategic investor?

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Should we change our approach to contacting investors when we have already identified one investor who is interested — but that one investor would like us to find one to two strategic partnerships as well? – Submitted to Ask an Investor

This is not that unusual of a question, but the nature of the exact request by the investor needs some further clarification in order for us to provide you with the advice you are looking for. Specifically, what your potential investor means by a strategic partnership has a substantial bearing on the answer.

On the one hand, your investor might be telling you that she/he does not want to lead the investment. In other words, she is happy to participate if a strong lead comes in and does all of the legal and business due diligence that is required. In effect, what this investor has given you is an option for her to invest, assuming you present a lead investor that meets her criteria of a lead. While this is a valuable option, it is nowhere near as valuable as a firm financial commitment on her part.

Your interested investor might feel uncomfortable investing at the current risk profile.
 

So should it change how you approach other investors? Not really. You should continue to take meetings with investors that are a good potential fit for your business; specifically, they are comfortable investing at your current stage of development and understand the risk-reward proposition, they have made other investments in your vertical or space, and they have a good reputation of working hard for their portfolio companies.

If and when you find a strong lead, you may decide to take the money from your current interested investor…or not. Given that she has not firmly committed to you, there is no obligation on your part to commit to her.

On the other hand, if what she means by a strategic partnership is an inked deal with a large customer or supplier, then what she is asking you to do is de-risk the investment as a precondition of her investment. Unfortunately, getting to an inked deal with large strategics often takes months, if not years. If you are just getting started down the road of working a big B2B sale, you might want to rethink working with this particular investor and continue your search for a more suitable investor.

Strategic partnerships will substantially de-risk some aspect of your business.

However, if you are close to inking a significant deal, a change in tactic is advised. First off, I would push for a term sheet which includes one of these deals as a precondition to close. This isn’t that crazy an ask, and allows you to negotiate many of the other terms of the deal beyond just investment size and valuation.

Second, it’s worth pointing out that getting to an inked deal with a major customer or supplier is generally considered a valuation changing event. As a result, if you are close to signing a large customer but need the funding immediately, it is important to incorporate this potentially positive valuation event into a higher pre-money valuation. However, if you are going to use this tactic to entice your investors to fund you immediately, it is imperative that you provide investors with complete transparency and explicitly expose the risks associated with the deal not going through. This, in turn, may mean a lower valuation.

In summary, it’s almost always in your best interest to keep meeting with investors until your deal is closed and the funds are in the bank.


Sarah’s take

Sarah Marion

Ideally, before formally kicking off your fundraising process and taking investor meetings, you’ll have given some thought to who you want to raise capital from, what they typically need to see to write a cheque, and how they can add value. Strategic partnerships will substantially de-risk some aspect of your business by increasing the likelihood that you’ll be able to incorporate some key technological element, access a strong distribution channel, benefit from co-marketing, and/or build a relationship with potential sources of capital (and eventual acquirers).

Your interested investor might feel uncomfortable investing at the current risk profile, and this is their way of deferring a decision until you’ve progressed a bit more. Alternately, they might feel that your industry necessitates a partnership, and they want to set you up for success. If this request aligns with your vision for the future, or the investor is a strong industry expert and thus their advice has credibility, seriously exploring that strategic partnership is tenable advice.

If they’re unfamiliar with your industry or you sense that pursuing partnerships don’t yet align with the stage of capital you’re raising, consider focusing on investors who have a deeper understanding of your industry. Ultimately, if you’ve evaluated the investor landscape prior to fundraising and are targeting investors with the right risk profile and industry expertise, their advice shouldn’t catch you off guard.

Got a question for the investors? Email them here.

Christian Lassonde

Christian Lassonde

Christian Lassonde is the founder and managing partner of Impression Ventures, a venture capital firm focused on investing and leading deals in FinTech companies raising late seed to early Series A rounds. Her is a former founder, having built and sold Virtual Greats, a luxury online IP rights broker, and Millions of Us, a digital agency. Christian spent a decade in San Francisco building software for Second Life, LucasArts and Electronic Arts and selling solutions to Sony, Nike, Warner Brothers, General Motors, Coke, Intel and many more Fortune 500 companies. You can follow Christian on Twitter at @classonde