Strategic Investors As a Supercharge Power for Deep Tech Startups: The Contrast with Financial Investors

Based on our experience as a deep tech startup, we at RVmagnetics have been interacting with highly professional entities, interested in investing in our technology, the team, and the vision. We have the utmost appreciation for the interest and we feel fortunate for our unique position, this is why the team keeps doing what it does best in the measurement world. This blog represents solely our own views.

The experience also helped us understand the interest of our clients and potential investors. We managed to architect a model of communication that can serve best for each type of interest – be it in the form of financial, strategic, hands-on, or independent, short or long term involvement with the company.

With this short article, we will be delving into an exciting aspect of startup financing that surely has a significant impact on our projects' success as an R&D and a deep tech company. With a very general diversification – economic and management literature puts a diversifying line between financial and strategic investors.

For starters, let’s define these, in line with the common definitions as well as with a bit of our own learnings.

Financial Investors:

The primary focus of financial investors is to maximize the financial Return on Investment. This largely includes investments in startups to earn profits their appreciation over time. These investors take different approaches, such as venture capital, angel investments, and private equity firms. It is not absolutely necessary for a financial investor to have specific expertise in the industry, sometimes even the knowledge of industry details are not needed to invest in a startup in this case, and thus their involvement may be limited to providing occasional general guidance and most importantly, capital.

There are a few notable, famous examples of these:

• OpenAI: perhaps one of the more noted innovative companies of 2023, becoming literally a household name of course comes with relevant financial interest too, when VC firms such as Sequoia Capital, K2 Global, Thrive and Andreessen Horowitz become backers for OpenAI. (Altogether the VCs have put in just over $300 million a valuation of $27 billion – $29 billion”)
• SpaceX: even though Elon Musk is now somewhat of a Strategic, yet an Angel Investor himself, where he can afford to acquire Twitter and “X” it – back in 2008 SpaceX got its own capital from Founders Fund in the amount of $20 million
• Angel Investors in this regard deserve attention too – as especially larger quantities of companies cannot require a strict focus in all of them, thus the simple dollars and cents do the job Elad Gil is one good example of this. He previously worked at Twitter as a Vice President, attended the Massachusetts Institute of Technology however his more notable achievements within the frames of this article is his successful exits from Cruise Automation, Instagram, Oculus VR, etc. The man has invested in over 224 companies and has had more than 42 exits
• Rapper NAS, being a mix of the two, is a founder of a VC fund (QueensBridge Venture Partners (QBVP)), however, he has a rather unique approach to the decision-making process of which company to choose and why. Currently his listed portfolios amount to 43

Who Are Strategic Investors?

More often than not these are corporate investors or venture arms of a corporate, looking to establish strategic investment, not only in the form of financial capital but also through a more involved operational overview of the startup (or, the specific strategic task of a startup). The strategic investor usually seeks to gain competitive advantage across markets, access new technologies, and create new value for their current operations which a startup is ready to align with their go-to-market strategies. Strategic investors tend to bring in industry experience, and technologically and operationally critical resources (e.g. tech, tooling, space to operate in, etc.) for the startups they invest in, in addition to financial capital. Strategic investors add more freedom to the operations of the company as opposed to strict deadline-based financial investments, as the goal of the investments is longer-term strategic returns. This is especially true for deep tech startups:

• FirstPartyCapi­tal(FPC): A UK-based early-stage VC fund, driving innovative investments in martech in the UK and the world. A recent case was their investment in Astus (a corporate barter company): they announced a partnership with an investment portfolio focusing to accelerate adtech and martech solutions. FPC has already raised $10 million and invested in 13 companies since it was founded in 2021
• Nvidia, a multinational tech giant is also getting in with the autonomous and semi-autonomous robots. The cooperation is with an Uber spinout Serve Robotics in the form of $10 million, as the co-founder and CEO Ali Kashani noted about the strategic investment “Nvidia is one of the most critical companies to the robotics space as a whole, and they’re also investing in the tools, so it just makes sense for us to work close together given this is a developing space.” funds the startup will use to further expand its sidewalk delivery robot service outside Los Angeles and San Francisco

In summary, financial investors are primarily motivated by financial returns and typically offer capital without direct involvement in the startup's ope­rations. On the other hand, strategic investors invest with specific business objectives in mind and often bring more than just financial support, leveraging their industry knowledge and resources to benefit both the startup and themselves.

The afore listed along with our own experience and visions helped us understand that when a tech startup considers a financier that can benefit from the success of the operations of the said startup – the project they fund is usually not just about direct financial returns. There's a lot more to it now!

What is the Right Balance between Strategic Investment and Financial Investment?

Consider a scenario where a corporation provides financing to a startup hoping to create demand for its own products (of course, hope is not a strategy, but for the sake of this scenario, it’ll do). In this case, the success of the startup is parallelly proportional to the success of the core business of the corporation. These benefits are not directly financial, and they are „strategic“ only if the Return on Investment calculations have been performed properly – these strategic investments will play out.

It turns out that the strategic benefits in question can shape our financing decisions and impact the way we perform our projects. When an R&D lead; Tech representatives from both investing and solution ends are involved in project planning – setting expectation and accountability systems, being driven by results of the ongoing marathon instead of the financial deadlines is something the strategic investor can inspire, at the same time, short-term quick, rough and clear outcomes can be generated due to the tasks of a financial investor.

In the strategic logic of the investment – the talent working in the project has both more ownership, creative and operational freedom, as well as responsibility for the outcomes. In the end of the day, if a solution doesn’t work out – it affects their own, already somewhat personal involvement in the project.

There is the other side of the coin as well however, this we have seen being mentioned by like-minded startups in the ecosystems we are active in (e.g. EIT manufacturing, Bind 4.0 Open Innovation, etc.) as well as in management literature where there's a common notion that Strategic Investors may be less strict than purely financial investors. Even though this seems rather relevant for most Deep-tech startups, each case can be unique, and a startup with purely technical management might lack the entrepreneurial push from within. When it comes to pulling the plug on underperforming projects, as it's not just about the money, a strategic investor (be it an internal or external one) might avoid the tough decision due to personal involvements, political considerations, vague strategic objectives etc.

Moreover, taking on a new project, purely judging its technological potential, and not accounting for its profitability potential, as well as lacking focus in the utmost critical stage of Objective Definitions, Negotiations of Conditions of the Outcomes, and Expectation Settings – 9 times out of 10 will bring the teams back to the start. Due to this, a lack of credibility or a “soft budget constraint” may arise as an obstacle for both parties.

One interesting solution might be the combination of the two; consider a situation where both strategic and independent/fi­nancial investors finance a project together.

This approach of syndicated financing might push the entrepreneurial buttons of the team while also improving the long-term project outcome, and relationships with all the stakeholders of the project. An independent financial investor will likely strengthen the potential termination threats, and a strategic investor will bring in value otherwise unmatched for a long-term commitment to the global success of the project.

Conclusion

At RVmagnetics, we have always believed that the right strategic investor can supercharge our journey, especially within a specific application area – we have a few main sectors we are ready to direct our capacity to and make us unstoppable in the deep tech landscape, at the same time – each of these sectors requires focus, thus choosing the focus may be highly dependant of both strategic and financial investors. In other words, what can startups in the deep tech, R&D, and overall innovative technological space take out as a conclusion:

As our customer flows are not as similar to most B2C service and product providers, and as our solutions are usually novel to the market of highly professional, tech-savvy demand, it is important for us to be backed by like-minded, goal-oriented and technologically aware strategic investors, however, in this new world of recessions and hardships, inviting a financial investor for parts of our activities, which can be entrepreneurially defined for short-term success – is a wise approach to the financial, technological and overall the global wellbeing of the startup.