Strategic Investor Definition
Investing firms or individuals who invest with the goal of acquiring strategic advantages rather than financial returns are called ‘Strategic Investors’. For e.g., investing in a new product or idea to have more of a say in its later development and direction, rather than to make bank from its sales, is a Strategic Investment.
In the real world scenario, this is akin to a traditional media conglomerate like Disney, investing in an online marketing firm, not to gain profits from it but to learn and adapt to online marketing media for strategic marketing advantages. This would make Disney, in this particular example, a Strategic Investor.
A Little More on What is Strategic Investor and Venture Capitalist
While Venture Capitalists and Angel Investors are also known to invest in new products, ideas, and drive innovation with their investments, Strategic Investors differ in their approach and interest in regards to the business they are investing in. Venture Capitalists and Angel Investors bring money, experience, and domain expertise to the table while taking away a chunk of profits.
Strategic Investors on the other hand are investing with a different intent. The idea is to leverage the business they are investing in, to boost their own market standing. More than the profits, a Strategic Investor wants access to the invested business’ technology, ideas, services, or products, to enhance its own business model.
When Google acquired Motorola Mobility, it wasn’t looking to make any profits from the business since Android already had a far bigger market share. Google wanted to have access to all the patents in Motorola’s kitty to bolster its own cell phone manufacturing business. This was a Strategic Investment that allowed Google unprecedented access to mobile phone manufacturing technologies that it could build upon, license out, or stop its competitors from using.
It is the intent of investment that sets Strategic Investors apart from regular investors.
Factors to Consider Before Seeking a Strategic Investment
Seeking a strategic partnership with an investor who seeks to use your products or services for its own ends could be profitable for both parties. However, partnering with large firms is tricky business and attention must be paid to the following aspects before seeking strategic investments:
- Identifying the right strategic partners: Would this partnership reap benefits for your business even as it improves the standing of your investors? Will your firm be receiving the short end of the stick due to this investment? Ask as many of these hard hitting questions to identify the right business partnerships for your firm.
- Planning and Processing: Go through the proper legal channels, have your documents up to date, include all possible clauses to safeguard your interests and clarify your objectives regarding the investments you seek.
- Analysing the strategic advantages of your investors: Try to gain a 360 degree view of the scenario. If you were the investing firm, why would you invest in your firm? What advantages does this investment confer on the investor’s firm? Are these advantages in any way detrimental to your own business? Think of the long term impact of knowledge sharing, granting licenses, and exchanging technical know-how, and decide whether the investment is beneficial to your firm in the long term.
- Timelines: Avoid hurried decisions, take your time to assess the situation from all angles, allocate time for protracted negotiations and legal paperwork to come through on all fronts.
- Work with your Investor: See if you and your investor make for good partners. Working style, vision and mission alignment, similar work values, and other social cues are important for smooth cooperation and beneficial partnerships.
- Negotiations: Be flexible in your approach to negotiations even as you are careful to stick to your goals. Keep your options open to alternative sources of raising capital in case the deal fails to materialise.
- Implementation: Work out the details of how the Strategic Investment Plans would be implemented.
References for Strategic Investors
Academic Research on Strategic Investors
Financial contracting with strategic investors: Evidence from corporate venture capital backed IPOs, Masulis, R. W., & Nahata, R. (2009). Journal of Financial Intermediation, 18(4), 599-631. This paper sheds light on the practice of financial contracting in strategic investments.
Regional economic development, strategic investors, and efficiency of Chinese city commercial banks, Sun, J., Harimaya, K., & Yamori, N. (2013). Journal of Banking & Finance, 37(5), 1602-1611. This paper looks at Strategic Investors in the Chinese banking systems and their impact on regional economic development.
A Risk Analysis of Chinese Banking Industry Introducing Strategic Investors [J], Shuo, Z. H. A. N. (2005). The Study of Finance and Economics, 1, 010. This paper does a risk analysis study of Strategic Investments in the Chinese Banking industry.
Foreign strategic investors in the Chinese banking market: Cultural shift or business as usual?, Hawes, C., & Chiu, T. (2007). Banking & Finance Law Review, 22(2), 203. This paper sheds light on the presence of foreign Strategic Investors in the Chinese banking market and attempts to decipher the unusualness of this phenomenon.
Impact of foreign strategic investors on earnings management in Chinese banks, Wu, M. W., Shen, C. H., Lu, C. H., & Chan, C. C. (2012).Emerging Markets Finance and Trade, 48(5), 115-133. This paper studies the impact of foreign Strategic Investors on the Chinese banking sector’s earnings and management.
Do more foreign strategic investors and more directors improve the earnings smoothing? The case of China, Wu, M. W., Shen, C. H., & Lu, C. H. (2015). International Review of Economics & Finance, 36, 3-16. This paper studies the Chinese banking industry’s earnings to gauge the impact of increase in Strategic Investors in the market.
Privatization governance and strategic investors: evidence from the telecommunications industry, Welch, T. (1999). Management International, 4(1), 31. This paper sheds light on the Strategic Investors in the telecommunications industry and their impact on privatization governance.
Performance, Controlling Stake and Strategic Investors: Experience from Banking Reform in Transitional Economy, Zhi-feng, W. U. (2006). In Finance Forum (Vol. 5, p. 001). This paper studies the transitional Eastern European and Chinese markets with banking reforms to understand the role of Strategic Investors, controlling stakes and market performance.
The Impact of Foreign Strategic Investors on Transition and Development of Banking Industry in 8 Central and East Europe [J], Shikai, L. (2006). Studies of International Finance, 9, 005. This paper analyses the impact of Strategic Investors on banking reforms in eight Central and Eastern European markets.
Committed anchor investment and IPO survival–The roles of cornerstone and strategic investors, Espenlaub, S., Khurshed, A., Mohamed, A., & Saadouni, B. (2016). Journal of Corporate Finance, 41, 139-155. This paper studies the role of Strategic Investors in the survival of IPOs.
Research on share control right of state-owned banks following strategic investors import, Shuo, Z. (2006). Modern Economic Science, 5, 38-44. This paper presents a research study that examines the state of share control rights in state owned banks post Strategic Investments.