#28 – Strategic investors – a Mistake or real Value-Add?

In this episode, we talk about Strategic Investors, detail what they are, their underlying realities and structures of operation, and present the case For and Against them. We also share Lessons Learnt that can be of value to you, if you are an Entrepreneur, a Financial/Institutional VC or a Strategic Investor.  Navigation: Intro (01:33) Section 1: Context Setting (02:44) Section 2: The Bad Examples (12:01) Seciton 3: The Good Examples (21:39) Section 4: Other Players Join the “Party” (36:30) Section 5: Lessons Learnt for Strategic Investors, Entrepreneurs and VCs (41:25) Conclusion (51:31) Our co-hosts: Bertrand Schmitt, Entrepreneur in Residence at Red River West, co-founder at App Annie, business angel, advisor to startups and VC funds, @bschmitt Nuno Goncalves Pedro, Investor, Managing Partner, Founder at Chamaeleon, @ngpedro Our show:   Tech DECIPHERED brings you the Entrepreneur and Investor views on Big Tech, VC and Start-up news, opinion pieces and research. We decipher their meaning, and add inside knowledge and context. Being nerds, we also discuss the latest gadgets and pop culture news Subscribe To Our Podcast Intro (01:34) Bertrand: Welcome to episode 28 of Tech DECIPHERED. This is a special episode on the topic of strategic investors. What are they, who are they, and are they helpful, how helpful can they be? I think it's one of the typical questions as an entrepreneur you would have to answer when you are considering getting financing. What type of investors, should I bring on board? And typically, early on, you might look at business angels. You might look at seed fund. And at some point, you would consider working with VCs. And you will probably discover that you have different type of VCs.  On one side the sides we typically hear about in the news, in the press we are talking about more financial VCs. And on the other side of the spectrum you have what is called strategic investors, strategic VCs. Strategic sometimes for short. And we are going to talk about them. Who are they, what are they helpful for, how useful they are, how bad could they be for your business, for your startup.  Welcome, Nuno, good to be with you to discuss this topic. How are you today?  Nuno: I am well, in sunny California, so very well.  Section 1 - Context Setting 
(02:44) Nuno: Maybe starting by defining what is strategic investors and where does that come from? The notion of they invest in, but they also contribute something that is more strategic. Maybe in the form of a partnership, or in the form of resources or other types of things that you put at the table. Normally, strategic investors are looked in the light, or as opposed to financial investors. So investors that are solely driven by the financial return and therefore, also solely driven by the capital that they put in. The world has become a little bit muddy over the last decade or so. There's now, investors that are more what I would call operating investor. So operating investors that jump into the company, and spend a significant part of their time in the company, sometimes even taking a significant part of the company, not just the classic minority in the company. But in order to simplify our discussion today, let's stick to the financial investor side, and the strategic investor side. So a financial investor would be someone like Chameleon, Red River West other VC firms that are out there, Sequoia Capital. We are investors that invest in a company, the biggest upside we can get is really financial. And obviously, we will produce value for the company under the form of helping the company scale, helping the company hire, helping the company get access to resources, and a variety of other things. So there is a little bit more operational minus in VC in general today, but the key objective of the whole thing is financial returns. A strategic investor, in many cases, when we talk about it, we use strategic investor as opposed to corporations, but it means the same thing in our minds. Their main value out of investing in the company is not actually just financial. In many cases, it might be more nonfinancial than financial. And that's what it being mean, strategic in that sense. So it's not strategic, necessarily to the company they're investing in, but it's strategic to themselves as investors. They're trying to reap benefits from investing in that company that are not just financial returns. And why would they do that? They would do that because they want to tap into a specific technology that's being developed over time, and that they want to be one of the first users of it. They want to use it, and they want to tie it to other activities that they have within the company. So maybe to really set the stage of how do investments fit into, for example, corporations, let's start with the broader remit of what a corporation does. Corporations grow in two way. They grow organically, and they grow inorganically. Organically is through their own products, their own existing resources, et cetera. Inorganically, normally this fits within what we call development, which includes business development and corporate development. Corporate development, historically, is mergers and acquisitions, investments, we will come back to it in a second. And business development, on the other side, is partnerships, strategic alliances, and other formats of basically working with an industry at a very strategic level without necessarily buying anyone or investing in anyone. In many cases, business development, corporate development are under the same person. The Chief Strategy Development Officer, in some cases, under the CEO directly but it's a pretty vital piece of how big corporations in particular, grow. As part of that, and as they're looking at this right mix between inorganic and organic, basically what corporations do is what assets should I allocate to each of these pools? Should I be active within M&A? Should I be buying companies out? Or merging parts of my area of production and development with other companies out there? Should I be doing joint ventures? Should I be investing in companies tapping into it? So classically, investment fits into corporations that want to tap into earlier stage type of innovations. Not necessarily early, but earlier to where they are. And in many cases, it's linked to R & D. It's a way of externalizing some of their R & D, it's a way for them to really figure out what's out there in terms of technologies. It might be because they want to tap into that market, understand the key trends of what's happening into that market. It might be that, they want to go into a space that might be disruptive to the space that they are in the first place. There are cases where corporations go into spaces that are totally greenfield to them, so that are totally new to them as a way of expanding their horizons and starting to explore new ways of accelerating their growth outside of their core business. So there's obviously a lot of reasons why a corporation would start investing. It fits within the larger realm of inorganic growth, as I mentioned before. It is normally a space where I want to tap into that space earlier in terms of innovation, but also I don't want to necessarily own that space. And why would I want to do that? Why wouldn't I just acquire a company? Because in many cases, if it's very early in the development, if I'm a big corporation acquiring someone, I might just, by the virtue of the scale that I have, killed that company upon acquiring them. I bring them on board, and then what happens to them? They're sort of basically killed by all the processes internally, all the governance. And so I actually don't want to buy into that company. I just want to help them, I want to invest in them, I want to basically shepherd them to a stage where they might bring some value to me. And we'll come back to that notion of value to me, because it's really important this helps us distinguish between good strategic investors and bad strategic investors and how they act as agents in this market. But again, that's in a nutshell, where it fits within the realms of the company. Bertrand: Thank you Nuno, I think that is very helpful to get a good sense, and if we keep going into where do they fit as a company, I would say typically, of course, you will see these teams as part of a bigger corpdev team, itself usually split between M&A, biz dev, alliance, partnership or direct investment. Maybe we can also talk more about how do they invest, typically. And I think there is a big difference with typical financial investors, is that some corporations can invest directly from their balance sheet. Which might mean actually that compared to a more traditional firm, they might not have a limit on their time or horizon, at least not technical limit. Nuno: Yes and we will come back to it, on what are the motivations and incentives part. On one hand to your point if they invest from their balance sheet they are not bound by 10 year funds, and you know the recycling of capital and all of these things, but at the same time corporations have another dynamic to them, you know, CEOs do change. And sometimes more often than funds, some CEOs don't last 10 years or more in a company. So it depends really you know under which part of the organization this seats. Our episode today, as you guys will figure out is going to be very nuanced. There's a lot of nuances to the discussions we're gonna have. There isn't a black and white answer to whether, strategic investors can create value for you or not. Already, that's the punchline of our episode today. But there is definitely a lot of nuances on the organization you're working with, who's actually commanding that investment, where does it fit within the larger corporation. Is this part of the overall strategy of the company? We look at some corporate venture capital arms,...