Tag Archives: Exit

When to raise money from a strategic investor

As a startup, there are two benefits of raising money from a strategic investor.

First, the strategic support provided by the investor can provide value beyond what a financial investor can provide. For example, this may come in the form of new customers, new suppliers, a distribution channel, technology, or a reduced cost base.

Second, a strategic investor can turn into a strategic buyer at the time of exit.

There are also two downsides to raising money from a strategic investor.

The first is that the strategic investor can, either through their investment rights or through persuasion, pull your startup in a direction that makes sense for the interests of the strategic but not necessarily for your startup. This goes beyond the different perspectives that founders and all investors, including financial investors, can have about the best direction for the company to achieve its goal of maximizing long-term shareholder value.

The second is that the presence of the strategic investor and the fact that it is often a likely buyer of the company has the potential to limit other exit options for the company. As a result of the restricted exit options, financial investors are often less willing to invest in the company.

When you’re an early stage company, you have yet to exhaust the many ways in which you can create value. You’re also far removed from an exit. As a result, the costs of raising money from a strategic investor outweigh the benefits. If you have other options, you should avoid raising money from a strategic investor.

When you’re a late stage company, a strategic investor can provide new value in an environment where you’ve exhausted many of the easy ways to create value. You also start to think about an eventual exit. The benefits of raising money from a strategic investor might begin to outweigh the costs, so you will want to think about doing so.

Investor support for startups’ external and internal activities

There’s a wide spectrum of support that an investor can provide a startup. At one extreme, we can provide capital without any interference. At the other extreme, we can effectively serve as core team members, helping with everything from building the team to designing the product to identifying and building out distribution channels to raising future funding to structuring an exit.

However, based on my experiences, there are 4 specific types of support that great startups can benefit from:

  1. Identifying and helping recruit/transition team members
  2. Thinking of and helping structure partnerships with other companies
  3. Preparing for and raising future funding
  4. Structuring an exit

There are also certain types of support that, if an investor finds themself giving a company, are usually an indication that things aren’t going well:

  1. Designing and providing feedback on product
  2. Identifying, building out, and measuring the return of different distribution channels

What’s common across the 4 types of support that great startups can benefit from is that they’re external activities. Specifically, they’re about connecting the startup with external talent, companies, and financing opportunities.

What’s common across the types of support that great startups don’t need is that they’re internal activities. Specifically, they’re activities that require detailed immersion to do well. As such, great startups do it themselves. So if an investor finds themself being requested to or feeling the need to contribute in these areas, that’s often a negative signal.

The corollary to this analysis is that you should invest in startups who either don’t need you, or benefit from your support in external activities. You shouldn’t invest in startups who need you to perform their internal activities.

Two takeaways from Souq’s exit to Amazon

Earlier this week, Amazon announced that it acquired Souq, the largest horizontal e-commerce company in the Middle East, for $650M.

The transaction has been covered at length elsewhere so I won’t repeat this coverage here. Instead, I’ll share my two key takeaways from the transaction.

First, it’s proof that big tech exits do happen in the region. After Turkey’s leading food ordering marketplace Yemeksepeti’s $589M purchase by Delivery Hero in 2015, this takes us a step closer to producing the Middle East’s first billion dollar tech company exit.

Amazon, which has a track record of growing on its own in international markets, chose instead to acquire Souq. This decision reflects the quality, size, and strength of the company that Souq’s team built. Souq is a big entrepreneurial success story.

Second, making money as a regional tech investor is possible, but not easy. Souq is reported to have raised $425M of funding prior to its exit and its last $275M round is said to have been completed at a $1B post-money valuation.

The second fact suggests that investors in the company’s last round only got their money back or made a return because of the liquidation preference on their investment. In its absence, they would have lost money.

This also shows that headline private market valuations should often be taken with a grain of salt.

Regarding the first fact, since the Souq team also walked off with money from the exit, the return to the average investor in the company was less than $650M / $425M = 1.5X. That’s not a great return for a risky and illiquid asset class like venture capital.

In other words, depending on what the liquidation stack looks like, some investors made money on the exit but many others didn’t.

Just because you have shares in a company that achieves a large exit doesn’t mean you make money.