By Daniel Karp
Navigating the complexities of strategic investments can be both beneficial and challenging for startups and strategic investors. According to CBInsights and others, strategic investors are becoming an increasingly important stakeholder in the venture ecosystem, and can provide multiple benefits to portfolio companies. However, concerns may arise from customers and partners about the relationship between the strategic investor and the portfolio company. At Cisco Investments, we have dealt with these complexities in the past, and developed a set of guiding principles to manage through them in an unequivocally simple and startup-friendly manner.
A strategic investor can help enable the overall success of a portfolio company, for example, by providing access to large prospective customers, feedback on early versions of the product, or services to portfolio companies. Savvy strategic investors recognize the opportunity to differentiate themselves by introducing innovative solutions from portfolio companies to their customers and partners, in a programmatic and scalable manner. That go-to-market acceleration can come in many forms, and is typically seen by startups as the holy grail of an engagement with a strategic investor. Other benefits include increased brand visibility and market validation. This can subsequently help startups recruit employees, partners and customers with relative ease.
Along with the benefits come potential challenges in the relationship between the startup and the strategic investor. At Cisco Investments, we are sometimes asked how we would react if a competing strategic investor were to invest in one of our portfolio companies, or if a portfolio company were to hire executives from the ranks of our competitors. Some entrepreneurs fear that taking such actions would negatively impact their relationship with Cisco as an investor and partner.
At Cisco Investments, we believe in empowering our portfolio companies. As such, we understand when our startups may decide it is in the company’s best interest to accept a strategic investment or hire an executive from a competitor. In our view, startups which are calculative in how they enhance their ranks with top-notch executives and engineers, which augment their offering with multiple partnerships, and which out-execute other players in their space, are a great testament to our investment thesis.
Another challenge could be customer relationship management. Specifically, some customers may express concerns about the nature of the relationship between the strategic investor and the portfolio company, especially as it relates to the potential of the strategic investor eventually acquiring the startup. Cisco Investments is fully aware of this potential effect on a startup’s customers and partners. We alleviate such concerns by articulating to our customers as well as helping the startup articulate to their customers that the lenses we use to evaluate our investments versus acquisitions are slightly different. In fact, history shows that Cisco has acquired only a small percentage of Cisco Investments portfolio companies.
We have also learned to constructively manage overlapping areas. Often when this happens, our first reaction is to examine the partnership and perhaps deprioritize it. However, Cisco Investments’ view is to find ways to diffuse such sensitive situations by taking into consideration our roles as investors and proponents of the startup. We seek to leverage other unique ways in which we can still provide value to our portfolio companies as we attempt to work through those sensitivities.
We fundamentally believe that nimble startups and talented engineers that identify and solve pain points for customers are the ones that redefine categories and markets. Thus, they are the ones from whom we learn the most and to which we are able to add the most value, even if it means going that extra mile to make our partnership successful.
About the Author: Daniel Karp heads investment and acquisition opportunities in Israel and Latin America. In these regions, our active portfolio includes: Elastifile, StratoScale, illusive Networks, CTERA, Jungo Connectivity, Celeno, Guardicore, Prospera, QWILT and Innovid.