The Risks of Seeking Strategic Investors Too Soon: A Founder’s Perspective
Picking strategic investors too early can doom your startup.
A few years ago, we urgently sought an investor for an interim round. The options were limited, and the runway was about three months. One of them was a strategic investor, an international company interested in the B2B space we were building at the time. We felt comfortable with this option:
- The team was great.
- The collaboration brought us a significant customer in addition to the investment.
- The strategy at the time was entirely in this direction.
It was the time of a pivot towards more B2B business, and we felt the sky was the limit. But things turned out differently than planned ...
The Dangers of Strategic Investors
Entrepreneurs are often looking for ways to increase their chances of success, and many believe that having a strategic investor on board is the key to making their startup a success. But there are severe downs sides to picking strategic investors in the early phase of a startup or during a pivot, and it can even lead to the downfall of a startup.
One of the biggest dangers is that it can limit your options for the future. Strategic investors often look for specific outcomes, such as market opportunities, which can restrict the startup’s freedom, making it difficult to pivot or change direction if circumstances change.
“Strategic investors can be like a ball and chain around your ankle. They can limit your flexibility and freedom.” — Tim Ferriss
Another issue with strategic investors is that they often can dictate the exit strategy for the startup, which can be a problem if the investor’s vision for the company’s future is not aligned with the founder’s. For example, if a strategic investor wants to sell the company, but the founder is committed to growing it, this could lead to a problematic and potentially damaging situation.
Finally, strategic investors can hurt the culture of the startup. Suppose an investor is focused on a specific outcome. In that case, they may be less interested in the team’s well-being and more focused on achieving their own goals or pushing too hard in a specific direction, which can be demotivated. This can create a toxic work environment and ultimately lead to the startup’s failure.
When to Seek a Strategic Investor
When is the right time to seek a strategic investor? It’s essential to wait until your strategy is crystal clear and you have a clear exit plan. This will ensure that you’re on the same page with your investor and that you’re both working towards a common goal.
Additionally, building a strategic partnership or structuring the shareholder agreement wisely is essential. It will help protect the startup’s autonomy while allowing the strategic investor to provide valuable support and resources. For example, a shareholder agreement could include clauses limiting the investor’s control over the company or specify a timeline for the exit strategy.
Another critical factor to consider is the stage of your startup. If you’re in the early stages of development, focus on building the product and establishing a customer base before seeking a strategic investor. Once you have a solid foundation, you’ll be in a much stronger position to negotiate with investors and secure the terms you want.
The Benefits of Strategic Investors
Despite the potential drawbacks, there are many benefits to having a strategic investor on board. They can provide valuable resources, such as capital, expertise, and connections, that can help accelerate the startup’s growth. They can also bring a wealth of experience and knowledge to the table, which can help to guide the company through the various challenges of startup life.
“Investors who are thinking about long-term value tend to be a better partner in the long run.” — Mark Zuckerberg
Strategic investors who are in it for the long haul can provide stability and consistency, which is invaluable for startups.
In our case, our B2B business never took off as planned, and it almost led to a total failure since the strategic investor blocked another round with new investors, ultimately leading to a stronger focus on another business model that was not in this company’s interest. And here comes the point: the strategic investor has his interests, which is his right. But a startup in this phase needs the freedom to try out new business models or to pivot.
In conclusion, it’s essential to approach strategic investors with caution and to carefully consider the potential benefits and drawbacks of having them on board. Never pick strategic investors in the early startup phase, when you’re still figuring out your business model, or during a pivot.
