Forget the Mega-Millions jackpot, I want Google to buy my small company for a ridiculously large sum. That would be the ultimate dream for any small company owner…wouldn’t it?

Well... When a business owner contemplates an Exit Strategy, one source of funding should be high on the list. Strategic Investors come with many advantages for the small company seeking an injection of capital or an outright purchase.  Strategic investors, almost by definition, will likely place a higher value on your company if they sees synergies or competitive advantages from the deal.  Many large companies have in-house venture capital departments that seek out growth opportunities amongst small entrepreneurial firms.   Receiving funding from a Google or UPS can have its advantages. In addition to higher valuation multiples, funding from strategic investors can boost the credibility of an emerging company’s technology and business model. The strategic investor could also boost sales significantly by distributing the products through its distribution channels.

But, despite these reasons and advantages to pursue strategic investors, entrepreneurs should also be aware of the risks and long-term implications of accepting that generous offer from a large corporation.

David Wanetick, Managing Director at IncreMental Advantage, a strategic advisory firm, lists a few of these concerns in a recent article on Axialmarket.com:

1. Strategic Interests Diverge: Company strategy is dynamic and relationships can sour if the interests of strategic investors begin to diverge from those of the entrepreneur in whom they’ve invested.  Maybe an internal unit dislikes the competition, or maybe a champion leaves the parent – leaving the acquisition adrift.
2. Competitive Overlap: Strategic investors may invest in several competitors in a given market segment to hedge their bets. There is then a risk that some of the target companies’ trade secrets and intellectual property will be compromised or find their way to competing companies.
3. Customer Acquisition Limitations: Having a strategic investor can block or complicate customer acquisition opportunities.  Honeywell may not want to buy product from a GE owned company  - even if the technology is spot on.
4. Exit Strategy Issues: Strategic investors can introduce problems during exits. Honeywell might be an ideal buyer but hold off on bidding because GE was an early investor.

I have seen situations where an acquiring company uses its share value to make multiple acquisitions but then performs poorly in integrating the acquisition, losing key employees and letting technology rot.  Even worse, bolting a large company sales engine to a weak delivery process can wreak havoc with the acquired company’s reputation.

Wanetick offers two final pieces of advice for those entertaining a strategic investment:

• Find a technical champion within the large company, that can advocate and influence the money people. Technology champions can dramatically enhance your negotiating leverage.
• Partner with a strategic investor as late as possible in your company’s development. Otherwise, you are more beholden to the changes in strategy that they may impose on you that hamstring your freedom of action.

 Like most things in life, the dream but-out comes with a few downsides, but for the right deal it can be a perfect union.