Strategic Investor vs Financial Investor

Curious about investors, here we present this article on Strategic Investor vs Financial Investor will be an eye-opener for small businesses, who try to find the right investors.

In the not so distant past, there was little distinction between financial and strategic investors. Investors of all colours sought to safeguard their investment by taking over as many management procedures as they could.

Also, investments were small and shareholders rare. A firm resembled a household and the number of individuals involved – in ownership and in management – was correspondingly limited. Somebody invested in industries they were acquainted with first-hand.

Strategic Investor vs Financial Investor

As markets increased, the scales of industrial production (and service provision) developed. A single investor (or a small group of investors) could no longer accommodate the demands even of a single firm. As knowledge increased and specialization occurred- it was no longer viable or possible to micro-manage a firm one invested in. 

Honestly, separate businesses of money-making and business management emerged. An investor was expected to excel in receiving high yields on his capital – not in industrial management or in marketing. A manager was anticipated to manage, not to be capable of personally tackling the diverse and varying tasks of the business that he managed.

Thus, two classes of investors appeared. One type provided firms with capital. The other type provided them with know-how, technology, management skills, marketing techniques, intellectual property, clientele and a vision, and a sense of direction.

In many cases, the strategic investor also provided the required funding. But, more and more, a separation was preserved. Venture capital and risk capital funds, for example, are purely financial investors. So are, to a growing extent, investment banks and other financial establishments.

The financial investor symbolises the past. Its money is the outcome of past – right and wrong – decisions. Its exposure is short term: an “exit strategy” is sought as soon as possible. For “exit strategy” read speedy profits. 

The financial investor is always on the attention, searching for willing customers for his stake. The stock exchange is a famous exit strategy. The financial investor has a smallish interest in the company’s management. Optimally, his money purchases him not only a good product and a good market but also good management. But his interpretation of the roles and operations of “good management” is very different to that delivered by the strategic investor. 

The financial investor is comfortable with a management team which maximizes value. The price of his shares is the most significant indication of success. This is “bottom line” short-termism which also represents operators in the capital markets. 

Invested in so numerous ventures and companies, the financial investor has no interest, nor the resources to get extremely involved in any one of them. Micro-management is left to others – but, in multiple cases, so is macro-management. The financial investor experiences quarterly or annual general shareholders meetings. This is the measurement of its involvement.

The strategic investor, on the other hand, portrays the real long term accumulator of value. Paradoxically, it is the strategic investor that has the greater impact on the value of the company’s shares. The quality of management, the rate of the opening of new products, the success or failure of marketing strategies, the level of customer happiness, and the education of the workforce – all rely on the strategic investor. 

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That there is a healthy relationship between the quality and decisions of the strategic investor and the share price is a small wonder. The strategic investor symbolises a discounted future in the same manner that shares do. Indeed, slowly, the balance between financial investors and strategic investors is pivoting in favour of the latter. 

People understand that money is generous and that what is in short supply is good management. Given the capacity to create a brand, generate profits, issue new products and formulate new clients – money is abundant.

These are the functions normally reserved for financial investors:

Financial Management

The financial investor is predicted to take over the financial management of the firm and to directly appoint the senior management and, specifically, the management echelons, which directly deal with the finances of the establishment.

1. To regulate, supervise and implement a convenient, full and accurate set of accounting books of the firm reflecting all its actions in a manner commensurate with the relevant legislation and regulation in the territories of functions of the firm and with internal guidelines set from time to time by the Board of Directors of the firm. This is normally achieved both during a Due Diligence procedure and later, as financial management is implemented.

2. To implement ongoing financial audit and control systems to monitor the performance of the firm, its flow of funds, the adherence to the budget, the expenses, the income, the cost of sales and other budgetary things.

3. To timely, regularly and duly organise and present to the Board of Directors financial statements and reports as needed by all pertinent laws and regulations in the territories of the functions of the firm and as deemed required and demanded from time to time by the Board of Directors of the Firm.

4. To capitulate with all reporting, accounting and audit requirements imposed by the capital markets or regulatory bodies of capital markets in which the securities of the establishment are traded or are about to be traded or otherwise listed.

5. To organise and present for the approval of the Board of Directors an annual budget, other budgets, financial plans, business plans, feasibility studies, investment memoranda and all other financial and business documents as may be needed from time to time by the Board of Directors of the Firm.

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6. To alert the Board of Directors and to alert it regarding any irregularity, lack of compliance, lack of adherence, lacunas and problems whether real or potential concerning the financial systems, the financial processes, the financing plans, the accounting, the audits, the budgets and any other subject of a financial nature or which could or does have a financial implication.

7. To collaborate and coordinate the actions of outside suppliers of financial services hired or contracted by the firm, including accountants, auditors, financial consultants, underwriters and brokers, the banking system and other financial platforms.

8. To maintain a working relationship and to develop more relationships with banks, financial institutions and capital markets with the purpose of securing the funds required for the operations of the firm, the attainment of its development plans and its investments.

9. To fully computerize all the above actions in a combined hardware-software and communications system which will integrate into the systems of other associates of the group of companies.

10. Otherwise, to begin and engage in all manner of actions, whether financial or of other nature, conducive to the financial health, the growth prospects and the fulfilment of investment plans of the firm to the best of his knowledge and with the proper dedication of the time and efforts required.

Collection and Credit Assessment

1. To create and implement credit risk assessment tools, questionnaires, quantitative techniques, data gathering techniques and venues in order to correctly evaluate and predict the credit risk rating of a client, distributor, or supplier. 

2. To continuously monitor and analyse the payment morale, regularity, non-payment and non-performance circumstances, etc. – in order to specify the changes in the credit risk rating of said factors. 

3. To analyse receivables and collectables on a frequent and timely basis. 

4. To improve the collection procedures in order to reduce the amounts of arrears and overdue payments or the average duration of such arrears and overdue payments. 

5. To cooperate with legal institutions, law enforcement agencies and private collection establishments in assuring the timely flow and payment of all due payments, arrears and overdue payments and other collectables. 

6. To coordinate an educational campaign to guarantee the voluntary collaboration of the clients, distributors and other debtors in the timely and tidy payment of their dues. 

The strategic investor is, normally, put in charge of the following:

Project Planning and Project Management

The strategic investor is uniquely positioned to prepare the technical side of the project and implement it. He is, accordingly, put in charge of:

1. The preference for infrastructure, equipment, raw materials, industrial processes, etc.;

2. Negotiations and arrangements with providers and suppliers;

3. Minimizing the expenses of infrastructure by deploying proprietary components and planning;

4. The provision of corporate contracts and letters of comfort to suppliers;

5. The planning and erecting of the different sites, structures, buildings, premises, factories, etc.;

6. The planning and execution of line connections, computer network connections, protocols, solving issues of compatibility (hardware and software, etc.); 

7. Under good supervision try to manage project planning, implementation and supervision.

Marketing and Sales

1. The presentation to the Board of an annual plan of sales and marketing including market penetration targets, profiles of potential social and economic classifications of clients, sales promotion strategies, advertising campaigns, image, public relations and other media campaigns. The strategic investor also implements these plans or supervises their performance. 

2. The strategic investor is normally possessed of a brand name acknowledged in many countries. It is the market leader in particular territories. It has been supplying goods and services to users for a long period of time, reliably. This is a significant asset, which, if properly utilised, can attract users. The enhancement of the brand name, its recognition and market awareness, market penetration, co-branding, and collaboration with other suppliers – are all the duties of the strategic investor. 

3. The dissemination of the product is a preferred option among vendors, distributors, individual users and businesses in the territory. 

4. Special events, sponsorships, and collaboration with businesses. 

5. The planning and implementation of incentive strategies(e.g., points, vouchers). 

6. The strategic investor normally manages a distribution and dealership network, a franchising network, or a sales network (retail chains) including training, pricing, pecuniary and quality supervision, network control, inventory and accounting controls, advertising, and local marketing and sales promotion and other network management operations. 

7. The strategic investor is also in a directive of “vision thinking”: new techniques of operation, new marketing ploys, new market niches, predicting the future trends and market needs, market analyses and research, etc. 

The strategic investor generally brings to the firm valuable experience in marketing and sales. It has multiple off the shelf marketing plans and drawer sales promotion campaigns. It designed software and personnel capable of analysing any market into effective niches and of creating the right media (image and PR), advertising and sales promotion drive best fitted for it. 

It has constructed large databases with multi-year profiles of the purchasing patterns and demographic data related to thousands of clients in many countries. It holds libraries of material, images, sounds, paper clippings, articles, PR and image materials, and proprietary trademarks and brand names. Above all, it accumulated years of marketing and sales promotion conceptions which crystallized into a new conception of the business.

Technology

1. The planning and implementation of new technological systems up to their fully-functional phase. The strategic partner’s engineers are available to design, implement and supervise all the stages of the technological side of the business. 

2. The planning and implementation of a thoroughly operative computer system (hardware, software, communication, intranet) to deal with all the characteristics of the structure and the operation of the firm. The strategic investor puts at the disposal of the firm proprietary software developed by it and specially tailored to the requirements of companies operating in the firm’s market. 

3. The encouragement of the development of in-house, proprietary, technological explanations to the requirements of the firm, its clients and suppliers. 

4. The planning and the execution of an integration agenda with new technologies in the field, in collaboration with other suppliers or market technological leaders. 

Education and Training

The strategic investor is accountable to train all the personnel in the firm: operators, customer services, distributors, vendors, and sales personnel. The training is accomplished at its sole expense and includes tours of its facilities abroad.

The entrepreneurs – who sought to introduce the two kinds of investors, in the first place – are normally left with the following functions:

Administration and Control

1. To structure the establishment in an optimal manner, most conducive to the conduct of its business and to introduce the new structure for the Board’s approval within 30 days from the date of the GM’s appointment. 
2. To run the day to day business of the establishment (Firm). 

3. To oversee the personnel of the establishment (Firm) and resolve all the personnel issues. 

4. To secure the unrestricted flow of relevant information and the protection of the confidential organization. 

5. To represent the establishment (firm) in its contacts, representations and negotiations with other firms, authorities, or persons. 

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This is why entrepreneurs find it very challenging to cohabitate with investors of any kind. Entrepreneurs are excellent at determining the requirements of the market and at introducing technological or service solutions to satisfy such requirements. But the very personality traits which authorise them to become entrepreneurs – also hinder the future development of their businesses. Only the introduction of outside investors can determine the dilemma. Outside investors are not emotionally engaged. They may be less innovative- but also more experienced.

They are more interested in business outcomes than in dreams. And – being well familiarised with entrepreneurs – they demand on having unmitigated control of the business, for fear of losing all their money. These things distress the entrepreneurs. They suppose that they are losing their creation to cold-hearted, mean spirited, corporate predators. They rebel and choose to remain small or even close shop than give up their cherished freedoms. This is where nine out of ten entrepreneurs fail – in comprehending when to let go with Strategic Investor or Financial Investor.