A strategic investor can kill a greentech startup. Here is why and how.
We all love big, strategic investors as they can bring not only capital needed to scale. More importantly, they can bring off-takes and market expertise, which will give a solid signal to other investors.
What is less well known, is that a strategic investor can kill your startup faster, than it can scale it. A couple of times I was on a strategic investor’s end of negotiations with startups, and a few of those times I told startups that they could get our support, but they would be better off without it. Why?
Primarily, because when strategic investors invest, they tend to view your startup as their property. So they feel entitled to do whatever they please. In their thinking, they are your chance of a lifetime, so you should be happy as it is. This will be sugar-coated, but bitter.
The first thing they’ll try to do is to slot their director into your board. It doesn’t really matter who that will be, as this unfortunate fellow will have to: a) relay all of his interactions with you to the higher-ups; b) get approval from 5-12 corporate executives for EVERY decision he or she makes as a board member. This will hugely complicate and delay your decision-making.
Second, they’ll try to make sure that competitors cannot get you, your product, or your startup. The avenues of attack will be numerous. A simple proposal to give your strategic partner the right of first refusal in any M&A deal will make your startup less attractive to any other investor.
A more elaborate approach would be to get permission from the strategy investor for any new significant investor. This will block you from getting their competitors as investors. Non-compete clauses in various forms will be pushed upon your startup.
In many cases when I was on the startup side, I had to fight off expanding my supplier’s list to include my strategic investor-related businesses. The strategic corporate’s subsidiaries will be on your phone and in your office in a blink of an eye, making offers “you can’t refuse”. When you actually do - they will make sure that you have a lot to talk about with your corporate representative.
And I am not mentioning the amount of additional reporting you’ll have to do. You’ll quickly understand that you’ll need a separate department to handle of the extra paperwork.
It is possible to protect your startup from most or all of these interferences. I had it done to me when I was on the buy side, and I had it done to my strategic investor when I was on the sell side. If you are planning to take on a strategic investor, or are in negotiations with one, reach out to me and I will help you to prepare your position, lead you through negotiations, and protect your interests.
P.S.
For a deep-dive into whether you should adopt a strategic investor, check out Yair Reem’s article here: https://medium.com/extantia-capital/the-essential-dos-and-don-ts-of-adding-strategic-investors-to-your-cap-table-66f4511b0246
For some practical reflections on working with investors, check my podcast with Duke Oh, CEO and Founder of JR Energy Solutions. Toward the end of our talk, Duke shares his experience of having strategic investors in his startup. https://www.askerov.pro/video#