Lessons Learned from Working with Strategic Investors

Written by  Elyse Ball

Many companies – particularly those that are developing physical products based on deep laboratory research – may not be a good fit for traditional angel and venture capital funds. For these companies, large corporations that have a strategic interest in the technology (also called strategic investors) provide an alternative source of both capital and technical support. 
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In 2021, UARF interviewed Akron Ascent Innovations co-founder and CEO Barry Rosenbaum to learn more about how he built a high tech physical product startup, based on university research, into a successful exit. Akron Ascent had recently announced that it entered into an asset purchase agreement with a large, multinational technology company. This occurred after the startup had secured two strategic investments from large corporations.  
 
The interview provided great insights to answer three key questions:

1. Why should startups want to seek strategic investment, as opposed to other sources of capital? 
2. What are some challenges of working with strategic investors? 
3. How can a company go about identifying and approaching strategic investors?

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1. Why should startups want to seek strategic investment, as opposed to other sources of capital? 
 
Unlike venture capitalists who are generally focused on product sales, strategic investors can often see the potential of new technologies based on their industry knowledge and experience. Rosenbaum noted that working with companies who see the longer-term potential of an early-stage technology can yield benefits for both the startup and the strategic investor. “The acquirer was not interested in our sales, they invested in the potential of the technology,” he said.
 
Strategic investors can also provide broader support than traditional venture capitalists. AAI’s strategic investors provided expertise in product development and access to test markets. In one cases, an investor even embedded an employee in AAI’s lab to lead a design of experiments. This kind of expertise and support can be hard for startups to find, but can often be found in a much larger strategic investor that has hundreds or thousands of employees. ​

Finally, strategic investors can provide direct pathways to market, using their massive sales and distribution channels to get a startups product in front of customers far faster than a startup could achieve on its own. 


2. What are some challenges of working with strategic investors? 

Turnover at leadership levels is more frequent in large corporations. Prior to Akron Ascent Innovations securing its first strategic investment, they had worked with another large company. The relationship stalled when the large company merged with another company, leading to layoffs and uncertainty. Even Akron Ascent’s first strategic investor, Velcro Companies, ultimately walked away. “After working with Velcro for a couple of years, the Velcro board of directors decided to pursue a different strategy and decided that they weren’t interested in pursuing their relationship with AAI,” Rosenbaum said. “They gave back their shares. It was disappointing, but it didn’t hurt us financially.” 
 
Power imbalances can also present a challenge anytime a small startup is forced to negotiate with a much larger company. Often, startups that receive strategic investments may not be permitted to work with competitors of their strategic investor, which can limit some avenues to market. Startups we know have had to wait months or even years to close investments that seemed inches from the finish line, because the larger strategic investor knows it has the power to make the startup hurry up and wait. However, power imbalances may also exist in relationships between venture capitalists and startups, particularly where the venture capitalist knows the startup is running out of money. 

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3. How can a company go about identifying and approaching strategic investors?  
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By understanding your customers and value proposition, you can identify which entities serve similar customers and have gaps in their portfolio for a product like yours. “I-Corps is the guiding light,” Rosenbaum said. “Understand customer needs, market opportunities and the fit. If you can check those three boxes for a couple of years, it’s a tremendous thing.” 
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In many ways, strategic partners are simply another kind of customer. You can use your customer discovery wiles to understand companies that you think might be strategic investors and identify those with the greatest need. Strategic investors aren’t charities looking to give away money to poor startups, but rather for-profit entities looking for ways to grow. It’s critical to understand how your business creates value for any potential strategic partner. Do you directly solve a problem for them, or do you fill a hole in their current product offerings? Do you help them battle their competitors, or do you open up a brand new product line that no one else has yet?  
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Potential competitors can make great strategic investors. Often, they are playing directly in your space and know first-hand how your product or service can help them better serve market needs. While you should approach these companies with caution, one of the biggest mistakes we’ve seen is companies being too quick to “compete” with companies they would do better to collaborate with.  

Find your product champions. Companies are made up of people. For a strategic investment to happen, some of those people have to take a risk by endorsing your largely unknown startup company to those who would approve the investment, which may be an investment committee or even the corporation’s board. Successful strategic investments we’ve seen are typically brought forward by a combination of a well-respected technical leader and a business leader who has been incentivized to make these kinds of deals, like strategic vice president or the leader of a relevant company division. Make sure you develop a close relationship to key people in both of these roles. ​

Rosenbaum said he hopes more startups begin viewing strategic investors as a complement or alternative to other forms of capital: “The fact that we were a hard tech startup from a university and got acquired by a strategic innovative company demonstrated a pathway to work with strategic innovators and not venture capitalists who won’t invest until you have sales.” 

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