Private Equity Vs. Strategic Investment

Types

• Examples of private equity firms are venture capital, growth capital, distressed investments and mezzanine capital. The benefits of doing business with these guys is that you will certainly be fitting a rather specific business model that they have proven works time and time again. It's one that they are successful at. You'll essentially be relinquishing control to be guided. In business that's sometimes a really great thing.
  
  

Considerations

• The bad thing is that you usually give up a huge percentage of equity, way past majority. That's how they ensure that you are going to follow what they know is a proven strategy, usually resulting in a company sale or initial public offering (IPO). However, remember that a small percentage of a really large number can be a nice payoff and the smarter move in the end. Most people that end up here were aiming for it or even working towards it hand in hand with a private equity firm. When successfully and intentionally executed, it can be a great business strategy.
  
  

Types

• What if you're not one who wants to fit the corporate mold? Then you may not be a big fan of private equity investors. Getting into Forbes is great but you don't want to relinquish control in order to make it happen. You want to get there on your own or at least with you at the helm. In that case you may lean towards strategic investment firms. These firms are similar to private equity in that the companies they invest into fit a certain business model. However, they are not necessarily looking for the payoff due to growing and selling your firm or taking it public. These guys will strongly consider the market impact you will provide for thier brands while operating. For instance; Microsoft has a venture arm that will invest in your technology firm if you are developing patentable software built around one of their products. If your company is successful, it's going to drive their product brand.
  
  

Considerations

• Intel is big player in this space. According to them, "Since 1991, Intel Capital has invested more than US $9 billion in over 1,000 companies in 46 countries." They are not micromanaging these firms. They are using them as vehicles to promote and ultimately deliver their processors. They will have strategically invested their money into your firm to boost their own product sales.
  
  These firms will generally not take a majority stake and will also not be the already successful micromanaging guide or partner that a private equity partner would be. There will be more creative freedom on your part. You will be at the helm with strategic capital.
  
  Is that good.... or bad?
  
  

Significance

• Based on what you envision for your company, you'll view one or the other as more appealing. In either case they are very hard paths to go down. You'll pitch endless amounts of potential investors before the stars align. Match the business model of your firm to the business model of the investor and you'll be much more efficient in pitching potential stake holders.
  
  A business model consists of the processes and direction that you've implemented in your firm, regardless of the industry. That has to fit what the equity partners use as their model. The model can sometimes span industries. One minor example would be do you both want to sell/go public in five years? If you both agree, then the similarity of the models is what would imply compatibility in a partnership. Almost every industry has both types of investing, but some forms of equity are more frequently linked to one industry than others. The main one that comes to mind is technology and strategic equity firms. The reason for that is the model of promoting another's software/hardware through additional technical products and services is very common.
  
  A few examples; if you built an internet service provider (ISP) company then you should seek out an investor savvy with technology firms. One that already owns complimentary businesses and has knowledge of exactly what to do to propel your ISP to the next level. Or perhaps you've worked out a model where Microsoft software could be distributed and utilized with all of your clients. In that case you could look to go for strategic equity. After all, the more clients you gain the more Microsoft software that would be distributed.
  
  Perhaps you built a retail store and want to franchise. Then you'd be looking for a venture capital firm with a portfolio of franchised retail or department stores. There are private equity firms for all types of businesses. The strategic equity firms on the other hand are most abundant in the technology sector but by far not limited to it. Oil and minerals, textile, services, retail, distribution, and so on, all have very profitable strategic investment firms operating in their industries as well.