Strategic Investors are the best – and most overlooked – source for funding a business on the best possible terms
At some point most entrepreneurs require outside capital to get their business up and running. Then, as the business grows, additional funding may be required for a host of reasons: to upgrade software or manufacturing capacity, to open new locations, make an acquisition, finance a major marketing program or an expansion of the business.
To raise this financing most entrepreneurs look to banks, angel investors, or venture capital companies. But raising money from these sources can be costly, time consuming and complicated. This is especially true for early stage companies with no established record of profitable operations.
An often overlooked source of capital for your business is strategic investors. A strategic investor is another business, or the owner of a business, that has a vested interest in the success of your company. Here is an example that showcases the advantage of first approaching strategic partners when your company is setting out to raise capital. This is a real like case study that illustrates the advantages of seeking out strategic investors, before going the more conventional financing sources.
This situation occurred when I was raising capital to fund one of my start-ups. The company was HUmed, a company that developed and marketed patient education books and videos for those suffering from chronic medical conditions including asthma, diabetes, high blood pressure and migraine headaches.
Initially, I took the conventional route and approached venture capital companies in New York and Chicago. Two of them expressed interest in providing the financing, but the terms they offered were not acceptable. The prospective investors insisted on having a controlling interest in the company.
Then an idea occurred to me. Instead of raising capital from professional investors, I would to reach out to other prospective sources of capital that had a vested interest in HUmed’s success.
The funding source we went to was the owners of privately owned commercial printing companies. They were offered a deal where, if the printing company owner made an equity investment in HUmed, his/her printing company would get all of the company’s printing business, as long as the required specifications were met, and their prices were within 2% of prices quoted from other qualified printers. Our first step was doing research to find privately owned commercial printers with the manufacturing capabilities to handle HUmed’s printing requirements.
We came up with a list of about fifteen companies that matched these criteria, and sent letters to their owners requesting a meeting. In my introductory message we explained the how, if HUmed was a success, they stood to win in two ways: their printing business had a major new long-term client, and they personally had the opportunity to make a personal capital gain and earn ongoing dividends from HUmed. About half of the company owners we approached expressed interested in talking with us.
This strategy enabled us to raise the required funding in weeks, without going through the extensive due diligence protocols required by banks and venture capital companies. Furthermore, here was the most important benefit to us: we only had to give up a 20% equity interest in HUmed. If we had raised this money through conventional sources it would have taken at least six months to close on the financing and we would have given the investors a 50% stake in HUmed.
It is usually easier to negotiate better terms with a strategic supplier, because they stand to gain in two ways. If your company succeeds, the investor’s core business has an important new long term client, making it more valuable and, they stand to make significant capital gains and earn annual dividends.
My only regret is not coming up with this funding strategy when I was raising capital for Hume Publishing, my first start-up.
