When fundraising, a crucial decision is around whom to go to for money. Investors can be categorized into two main groups: strategic and financial. A strategic investor is a company that is active in the same industry as the business looking for money, or a complementary one. A financial investor is one whose business it is to make money from investing money, simply looking for a financial return. Strategic and financial investors don’t necessarily exclude each other; they can co-exist and make investments in the same business.
The three most impactful differentiators, that a business raising money will want to consider, are:
Return Requirements/Perceived Risk: Return requirements go hand in hand with the perceived risk: the higher the perceived risk, the higher the return expectation. Strategic investors may be satisfied with a lower return than financial investors because they are familiar with the business and have the expertise to step in and operate it; they may therefore perceive the risk as being lower than a financial investor would. Strategic investors may also accept lower returns because they believe the business will provide other benefits in form of synergies or future business opportunities.
Exit Strategy: Strategic investors are more likely to take a long-term view, while financial investors often have a specific time frame for a financial return in mind, generally within three to five years. That said, if the investment is in an infrastructure asset with predictable long-term returns, certain financial investors (such as infrastructure funds, pension funds or life insurance companies) may have the mandate to keep the investment for the long haul and enjoy the annuity-like returns.
Value-adds: Added benefits a strategic investor may bring to the table are expertise in development, deployment of technology, and operations and management. Furthermore, a strategic investor may provide a recognized name and a solid reputation, instrumental support in proving a concept, and helpful contacts along the value chain. Financial investors, due to their exposure to various sectors, possibly worldwide, may have very helpful contacts.
For more detailed information on this topic, see the book I wrote: The Decision-Maker’s Guide to Long-Term Financing – available at www.guidetolongtermfinancing.com.