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.