Strategic investment deals: Investing in complementary tech startups

Strategic investment deals are structured as a common or preferred share financing from a company (for example, Cisco, Intel, Google) investing in startup companies developing technologies complementary to their businesses.
Strategic investors often request performance warrants from tech startups as part of a financing transaction. These would typically be earned as the strategic investor assists your business to achieve certain revenue milestones through the investor’s sales and distribution network.
Strategic investments often come with strings attached in the form of conditions of financing. Conditions could include:

• Time-limited exclusivity and/or most favoured pricing for your product
• Significant influence on how your product is developed or taken to market (including not being able to approach certain customers or partners who are direct competitors of the strategic investor)
• First right of refusal to purchase your business

A strategic investment from a big industry player can represent strong validation of your startup business. The strategic venture team can access resources in their operating business units to help you build and scale your business more quickly.
However, due to the strings attached, strategic investments can create a potential conflict of interest among the strategic investor, your business interests and potential financial investors. This could make it difficult for you to attract other investors, commercialize your product or negotiate an acquisition with a third party.
Financial investors tend to prefer co-investing with strategic investors in later rounds of financing when your company is already shipping product (Series B or C rounds) as your business will then have more leverage to negotiate the conditions of financing.

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References

Houston, T., Johnson, A., & Smith, E. (2006, September 15). Technology Startups: A Practical Legal Guide for Founders, Executives and Investors. Retrieved April 9, 2009, from Fraser Milner Casgrain website at http://www.techstartupcenter.com/
VC Experts. Retrieved April 9, 2009, from https://vcexperts.com/.