July 26, 2011 Leave a comment
I was involved in a conversation the other day with a company that had taken investment from a customer, and given them a seat on the board. They had very clear views on the ingredients that made their relationship with the customer/investor work.
- The motivation for the investment is good for the company. In this case the investor wanted to buy from the company but didn’t think the company was well enough capitalised to support the product in the long term – a problem solved by their investment. In other cases, a a customer may try to become an investor to prevent their competitors getting access to the technology, or even to “kill” the technology altogether.
- The investor respects the confidentiality of other customers. In order to protect the confidentiality of other customers, many of who would be competitors of the investor, the company articles of association had clauses added to allow the board to exclude directors from the meeting and from receiving papers containing information about other customers.
- The company, investor and their competitors have a common goal. In this case the goal was to reduce fraud in the industry as a whole. This meant that although the investor could gain a competitive advantage from the technology it also stood to gain more by shareing it with others. Otherwise there could have been a conflict, with the investor trying to prevent the company selling to their competitors.
- The investor adds credibility. Having an investor that is seen as a leader and innovators within its industry may add significant credibility. On the other hand, taking investment from an industry pariah may do quite the opposite. It’s not always easy for companies coming in to an industry to know which companies are which, but it is important to find out before taking investment.
- The purchase and investment were separate transactions. The deal for the customer/investor to buy from the company was negotiated by the relevant operational team and the investment was negotiated by corporate finance. While there was communication between the teams, each transaction was negotiated without linkage to the other.