Financial Investor, Strategic Investor

By Sam Vaknin
Author of "Malignant Self Love - Narcissism Revisited"

In the not so distant past, there was little difference between
financial and strategic investors. Investors of all colors sought to
safeguard their investment by taking over as many management
functions as they could. Additionally, investments were small and
shareholders few. A firm resembled a household and the number of
people involved - in ownership and in management - was
correspondingly limited. People invested in industries they were
acquainted with first hand.

As markets grew, the scales of industrial production (and of service
provision) expanded. A single investor (or a small group of
investors) could no longer accommodate the needs even of a single
firm. As knowledge increased and specialization ensued - it was no
longer feasible or possible to micro-manage a firm one invested in.
Actually, separate businesses of money making and business
management emerged. An investor was expected to excel in obtaining
high yields on his capital - not in industrial management or in
marketing. A manager was expected to manage, not to be capable of
personally tackling the various and varying tasks of the business
that he managed.

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

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

The financial investor represents the past. Its money is the result
of past - right and wrong - decisions. Its orientation is short
term: an "exit strategy" is sought as soon as feasible. For "exit
strategy" read quick profits. The financial investor is always on
the lookout, searching for willing buyers for his stake. The stock
exchange is a popular exit strategy. The financial investor has
little interest in the company's management. Optimally, his money
buys for him not only a good product and a good market, but also a
good management. But his interpretation of the rolls and functions
of "good management" are very different to that offered by the
strategic investor. The financial investor is satisfied with a
management team which maximizes value. The price of his shares is
the most important indication of success. This is "bottom line"
short termism which also characterizes operators in the capital
markets. Invested in so many ventures and companies, the financial
investor has no interest, nor the resources to get seriously
involved in any one of them. Micro-management is left to others -
but, in many cases, so is macro-management. The financial investor
participates in quarterly or annual general shareholders meetings.
This is the extent of its involvement.

The strategic investor, on the other hand, represents the real long
term accumulator of value. Paradoxically, it is the strategic
investor that has the greater influence on the value of the
company's shares. The quality of management, the rate of the
introduction of new products, the success or failure of marketing
strategies, the level of customer satisfaction, the education of the
workforce - all depend on the strategic investor. That there is a
strong relationship between the quality and decisions of the
strategic investor and the share price is small wonder. The
strategic investor represents a discounted future in the same manner
that shares do. Indeed, gradually, the balance between financial
investors and strategic investors is shifting in favour of the
latter. People understand that money is abundant and what is in
short supply is good management. Given the ability to create a
brand, to generate profits, to issue new products and to acquire new
clients - money is abundant.

These are the functions normally reserved to financial investors:

Financial Management

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

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

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

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

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

5.. To prepare 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 required from time to
time by the Board of Directors of the Firm.

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

7.. To collaborate and coordinate the activities 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 venues.

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

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

10.. Otherwise, to initiate and engage in all manner of
activities, whether financial or of other nature, conducive to the
financial health, the growth prospects and the fulfillment of
investment plans of the firm to the best of his ability and with the
appropriate dedication of the time and efforts required.

Collection and Credit Assessment

1.. To construct and implement credit risk assessment tools,
questionnaires, quantitative methods, data gathering methods and
venues in order to properly evaluate and predict the credit risk
rating of a client, distributor, or supplier.
2.. To constantly monitor and analyse the payment morale,
regularity, non-payment and non-performance events, etc. - in order
to determine the changes in the credit risk rating of said factors.
3.. To analyse receivables and collectibles on a regular and
timely basis.
4.. To improve the collection methods in order to reduce the
amounts of arrears and overdue payments, or the average period of
such arrears and overdue payments.
5.. To collaborate with legal institutions, law enforcement
agencies and private collection firms in assuring the timely flow
and payment of all due payments, arrears and overdue payments and
other collectibles.
6.. To coordinate an educational campaign to ensure the voluntary
collaboration of the clients, distributors and other debtors in the
timely and orderly payment of their dues.
The strategic investor is, usually, put in charge of the following:

Project Planning and Project Management

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

1.. The selection of infrastructure, equipment, raw materials,
industrial processes, etc.;

2.. Negotiations and agreements with providers and suppliers;

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

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

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

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

7.. Project planning, implementation and supervision.

Marketing and Sales

1.. The presentation to the Board an annual plan of sales and
marketing including: market penetration targets, profiles of
potential social and economic categories of clients, sales promotion
methods, advertising campaigns, image, public relations and other
media campaigns. The strategic investor also implements these plans
or supervises their implementation.
2.. The strategic investor is usually possessed of a brandname
recognized in many countries. It is the market leaders in certain
territories. It has been providing goods and services to users for a
long period of time, reliably. This is an important asset, which, if
properly used, can attract users. The enhancement of the brandname,
its recognition and market awareness, market penetration, co-
branding, collaboration with other suppliers - are all the
responsibilities of the strategic investor.
3.. The dissemination of the product as a preferred choice among
vendors, distributors, individual users and businesses in the
territory.
4.. Special events, sponsorships, collaboration with businesses.
5.. The planning and implementation of incentive systems ( e.g.,
points, vouchers).
f.. The strategic investor usually organizes 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, local marketing and sales promotion and other network
management functions.
g.. The strategic investor is also in charge of "vision thinking":
new methods of operation, new marketing ploys, new market niches,
predicting the future trends and market needs, market analyses and
research, etc.
The strategic investor typically brings to the firm valuable
experience in marketing and sales. It has numerous off the shelf
marketing plans and drawer sales promotion campaigns. It developed
software and personnel capable of analysing any market into
effective niches and of creating the right media (image and PR),
advertising and sales promotion drives best suited for it. It has
built large databases with multi-year profiles of the purchasing
patterns and demographic data related to thousands of clients in
many countries. It owns 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 ideas which crystallized into a new
conception of the business.

Technology

1.. The planning and implementation of new technological systems
up to their fully operational phase. The strategic partner's
engineers are available to plan, implement and supervise all the
stages of the technological side of the business.
2.. The planning and implementation of a fully operative computer
system (hardware, software, communication, intranet) to deal with
all the aspects 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 specifically tailored to the needs of
companies operating in the firm's market.
3.. The encouragement of the development of in-house, proprietary,
technological solutions to the needs of the firm, its clients and
suppliers.
4.. The planning and the execution of an integration program with
new technologies in the field, in collaboration with other suppliers
or market technological leaders.
Education and Training

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

The entrepreneurs - who sought to introduce the two types of
investors, in the first place - are usually left with the following
functions:

Administration and Control

1.. To structure the firm in an optimal manner, most conducive to
the conduct of its business and to present 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 firm.
3.. To oversee the personnel of the firm and to resolve all the
personnel issues.
4.. To secure the unobstructed flow of relevant information and
the protection of confidential organization.
5.. To represent the firm in its contacts, representations and
negotiations with other firms, authorities, or persons.
This is why entrepreneurs find it very hard to cohabitate with
investors of any kind. Entrepreneurs are excellent at identifying
the needs of the market and at introducing technological or service
solutions to satisfy such needs. But the very personality traits
which qualify them to become entrepreneurs - also hinder the future
development of their firms. Only the introduction of outside
investors can resolve the dilemma. Outside investors are not
emotionally involved. They may be less visionary - but also more
experienced.

They are more interested in business results than in dreams. And -
being well acquainted with entrepreneurs - they insist on having
unmitigated control of the business, for fear of losing all their
money. These things antagonize the entrepreneurs. They feel that
they are losing their creation to cold-hearted, mean spirited,
corporate predators. They rebel and prefer to remain small or even
to close shop than to give up their cherished freedoms. This is
where nine out of ten entrepreneurs fail - in knowing when to let go.



Sam Vaknin ( http://samvak.tripod.com ) is the author of Malignant
Self Love - Narcissism Revisited and After the Rain - How the West
Lost the East. He served as a columnist for Global Politician,
Central Europe Review, PopMatters, Bellaonline, and eBookWeb, a
United Press International (UPI) Senior Business Correspondent, and
the editor of mental health and Central East Europe categories in
The Open Directory and Suite101.

Until recently, he served as the Economic Advisor to the Government
of Macedonia.

Visit Sam's Web site at http://samvak.tripod.com