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Not all investment money is created equal. There are investors—and then there are strategic investors. When you want a strategic investor to help grow your business, you'd best be strategic in your search.
Know how much involvement you want.
Most angel investors are not strategic, says Robb Kunz, an active angel investor, founder/managing partner at Ventureblue Capital and co-founder of BoomStartup, Utah's mentorship-driven investment program.
A few angel investors may act like venture capital firms, in that they want to take an active role in the direction of the company, but most want to be silent partners. Generally, they aren't interested in the day-to-day affairs of their portfolio businesses. Rather, they invest for the short term and hope to get out within nine to 12 months with a tidy profit.
On the other hand, a venture capital (VC) firm will typically employ its equity as a part owner of the company and take on an advisory role. The VC will want to be involved in the decision-making, have a member on the company's board of directors and assist in the growth process and various rounds of funding.
That’s not to say angel investors aren’t important. If your goal is to attract venture capital, you’ll want an angel investor in your corner first. As Kunz notes, it’s tough to attract venture capital without first having obtained angel money.
Do more than just shop for money.
A strategic investor—angel, VC or otherwise—must be interested in the long-term growth of your business and therefore be willing and capable of doing more than just providing an infusion of cash. The investor must have the ability to help scale your business through connections to additional funding sources and sales verticals.
Every potential investor will examine your business closely—and you must be prepared to do the same in searching for an investor. “I try to coach entrepreneurs and founders to research where the investors are, what their backgrounds are and to look at their past investment histories, specifically their investments in other companies in your space,” says Kunz.
Kunz has additional advice for finding the right investor. Look for a strategic investor that has experience in your type of business and product space. For example, if your goal is nationwide franchising, look for an investor that can help you expand across the United States. Ask for references. Talk to other entrepreneurs that took money from that investor. Try to ascertain how supportive the investor will be. Having an investor that is willing to give you counsel and make connections for you will help drive your business forward as much as the cash you receive.
There’s more out there than angel and VC.
It is essential to understand the various types of potential investors and realize that strategic investors can come from many sources, including suppliers, customers, competitors, your attorney or accountant, your landlord—even your city government.
That’s according to Bradley Bertoch, president and CEO of the Wayne Brown Institute, a nonprofit venture accelerator that coaches entrepreneurs in how to pitch their businesses to venture capitalists.
For example, he says, your attorney or accountant may be willing to exchange his or her services for equity in your company. Meanwhile, a supplier might recognize that the more your company grows, the more supplier-provided widgets you will need. Hence, the supplier may invest in your business to establish an exclusive relationship with you.
On the other hand, a customer may realize your product or service could have a big impact on its business, giving them a competitive edge in the marketplace. Therefore, the customer may be willing to invest in your business in order to strengthen its own bottom line. The customer might be willing to provide an infusion of cash or pre-pay for orders to support your cash flow.
Even a competitor can be a good candidate as a strategic investor, according to Bertoch. The competitor may have the sales, marketing, distribution and manufacturing channels, but want to license your product to boost its market share.
“It happens all of the time in the IT, pharmaceuticals and medical device industries,” says Bertoch. “A young startup company should be open minded about who could be potential strategic investors.”
Even the city government can act as a strategic investor by letting you rent property at no cost or a discount, or by providing loans and incentives if your company adds value to the community.
“There are all sorts of way to get strategic investments, some in cash and some in kind,” he says. “But you have to be strategic in what you are asking for.”