Why you should think twice before taking money from strategic investors

Will it be wise to get in bed with a strategic investor? What are the pros and cons?

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With the increasing appetite not just from institutional but also strategic corporate investors, startups are pulling in more money than ever before.

These strategic investments generally come via a direct, “off balance sheet” investment by the corporation itself – like when Honda picked up a stake in Grab, for example – or through corporate venture capital funds specifically created to back startups.

In 2017, corporate VC firms investing for the first time hit a record high, according to data from CB Insights.

Landing strategic deals generally signals a vote of confidence in startups; it creates buzz and associates them to a household name. But it often comes at a price, says Pravan Malhotra, International Finance Corporation’s internet investments lead for Asia.

“There’s a lot of value that these strategics can bring – they can accelerate startups’ go-to-market plan and scalability. But you need to evaluate going on one side: can you still work with other players in the market?” he opined, speaking onstage at the Tech in Asia Jakarta 2018.

Helen Wong, partner at Qiming Venture, backer of Chinese companies like Xiaomi and Mobike, takes the same view. “Most of the time, they tie you up and you can’t talk to other partners. In the end, you may also find that what you get from them is not what you expected.”

“You might as well work with VCs like us, we are on your side,” she quipped.

Is ‘strategic’ really strategic?

Wong suggests thinking long and hard about what value a strategic investor brings to your business.

“A lot of entrepreneurs tend to overestimate it. You’d think the investor will give you so much traffic… but does that traffic really convert for you? I think that’s a critical issue.”

Take the case of Chinese ecommerce firm JD and its giant investor Tencent, maker of super app WeChat. JD had a good traffic entry point in WeChat, but it might have not necessarily translated to more users.

“JD was resting on its laurels, thinking ‘I’m pretty good, I’m the son of Tencent, I have all this traffic.’ It didn’t pay attention to this small guy coming up from nowhere and penetrating in lower-tier cities,” Wong said, referring to Pinduoduo, which raised almost US$2 billion in a US IPO this year.

The flip side