What are Strategic Investments?
The term “strategic investments” is used in two different ways in the financial world. In the first sense, it applies to investments made by individuals or companies with the goal of generating safe, steady returns, usually with the advice of a consulting company which keeps up with trends in the market and addresses the needs of the customer. This term is also used to describe a company's decision to invest in another, smaller company, usually a startup, with long-term strategy in mind, rather than simple profit.
In the second sense, strategic investments are often used to raise capital and credibility for new companies which are struggling to make their way in the market. Larger companies make strategic investments in smaller ones for an assortment of reasons. For example, a big company might invest in a smaller company which makes similar products, or in a small company which will eventually become a client of the big company. Forward-thinking companies may also want to make strategic investments in companies working on new and innovative technologies and ideas.
Companies may opt for a strategic investment instead of an acquisition. For the smaller company, this arrangement is often beneficial as it allows the company to remain autonomous, and it encourages other investors to get involved, since they believe that they may profit from their investments. Larger companies also benefit from these arrangements because they carry less risk than acquisitions, allowing the bigger company to receive benefits from the smaller company when it does well, or to jettison the investment if the situation does not work out.
Startups are not the only companies which may open themselves to strategic investment. Existing companies which are struggling may also promote strategic investment to get an influx of capital and protection. These companies rely on their past history of success to market themselves to potential investors, usually providing evidence that they are reforming their business practices or developing new products which could become profitable in the future.
When a company invests in another company as a strategic investment, it usually does so in exchange for a share of control over the company. This allows the company to protect its investment, and to shape the direction of the smaller company's business and product lines. Strategic investments may also be made with the understanding that the larger company may express a desire to take over the smaller company at some point in the future, once the small company has proved itself viable and productive.
@@Mammmood - Strategic Investment Group is another company that works with investors. They work with both private and institutional investors, so I think they would cover both bases in terms of what the term “strategic” really means—private investments and investments made by companies.
And yes, an important part of what they do is risk management. There is no truly risk-free investment, except cash, and that is subject to inflationary and deflationary pressures.
@Mammmood - There are many companies like that. Actually I think the term “strategic” is used correctly. It doesn’t necessarily mean conservative investments. It means a certain dedication to risk management so that you can reduce your exposure to possible losses.
@Charred - Unfortunately I think the term “strategic investments” is too general a term to lock it into any of the neat, tidy definitions in this article. For example, I invest in the futures market in agriculture. For the record, the brokerage firm I use is Midwest Strategic Investments.
I can invest in grain, livestock and yes, even swine. The company helps me makes these investments and they do advise me so that I don’t lose my shirt, but it is still a futures market, so there is nothing really conservative about it.
I’ve made a number of investments in my life, including stocks and real estate. All of them carried with them a significant degree of risk. After being burned in the dot com bubble of the 1990s I realized I needed to have a more diversified portfolio. So in addition to stocks I have a strategic investment fund. This fund invests primarily in conservative, long-term growth investments like bonds, government and corporate, with a primary focus on preservation of capital while ensuring growth.
Now it’s not as flashy as some of my stock market bets from prior years but at least I won’t lose my shirt. Diversification is still one of the smartest things you can do to keep yourself safe in a volatile market and ensure you have money left over to retire on.
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