The Lowdown on Strategic Investments

This kind of cash infusion can be a boon to your small business, but beware: There can be complications

By Tom Taulli

Editor's Note: This is the first in a weekly series on financing a small company by noted finance author and blogger Tom Taulli.

A fast-growing company recently called me up for some advisory work. One of its main competitors—a multibillion-dollar company—was making overtures for an acquisition. The sides started to talk and found they had both synergies and major disagreements about valuation and strategy. So the discussions moved to another approach: a strategic investment.

Such investments are the lifeblood of the venture capital industry and an increasingly popular tool for large companies. Some even have their own venture capital entities, known as corporate venture capital, or CVC, arms. Perhaps the most famous is Intel Capital, which has invested $7.5 billion in about 1,000 companies since 1991, according to the company. Notable transactions include investments in Clearwire, Broadcom (BRCM), MySQL, Red Hat (RHT), and Research-in-Motion (RIMM).

CVCs usually have their own Web sites or micro-sites within the parent company main site—and they are valuable resources. Here are some links:

•T-Mobile Venture Fund

•Chevron Technology Ventures

•Nokia Growth Partners

•Motorola Ventures

•Intel Capital

Financial Gain Not the Only Reason

If a company does not have a formal CVC arm, it can be difficult to find the right person to approach about making a strategic investment in your company. Keep in mind that some companies, such as IBM (IBM) and Cardinal Health (CAH), avoid strategic investments altogether. To see which companies do make investments, take a look at the National Venture Capital Assn.'s member list.

There are myriad reasons for strategic investments. But interestingly enough, financial gain is usually not the top priority. Instead, a company will often make a strategic investment to get a "window" on new technologies or to promote its current business.

Take Nokia Growth Partners. This CVC focuses on opportunities in "mobility, communications, and the Internet." Some of its investments include Kyte (a video system for social networks and mobile phones), Morpho (mobile graphics), and ViVOtech (electronic payments). Or look at the pharmaceutical industry. Major companies like Merck (MRK) and Pfizer (PFE) make strategic investments in biotechnology operators to fill their drug pipelines.

Strategic Investors Allay Customer Fears

While strategic investments come in many forms, there are some generalities. For example, a strategic investment is often a minority stake and part of a syndicate of other investors (usually venture capitalists).