Institutional vs. Strategic Funding for Automotive Companies
The Distinction Between Institutional and Strategic Investment in the Automotive Industry
Institutional investment, not to be confused with venture capital, refers to large financial institutions, such as PE firms, that provide capital to companies with stable cash flows and reliable assets in exchange for financial returns.
On the other hand, strategic investment involves companies within the automotive industry making targeted investments in other companies or technologies to enhance their competitive position or expand into new markets. Strategic investments are driven by specific business objectives, such as acquiring advanced technology, diversifying product offerings, or accessing new customer segments. Most strategic investment comes out of automotive corporate venture capital funds.
The Case for Institutional Investment for Automotive Companies
Institutional investment plays a crucial role in the automotive industry by providing stability, liquidity, and long-term financial support. Automotive corporate venture capital requires substantial cash on hand for R&D, manufacturing, and expansion. Institutional investors, with their expertise, resources, and network, can provide the necessary funding to fuel innovation, enhance production capabilities, and ensure sustained growth. Moreover, institutional investment, such as private equity for the automotive aftermarket, brings credibility and confidence to the industry. Lastly, it allows automotive companies to access a broad network of potential customers, suppliers, and partners, facilitating collaboration and market expansion.
Advantages of Strategic Investment for Automotive Companies
Strategic investment, including corporate venture capital investment and full acquisitions, enables companies to stay ahead in a highly competitive industry by acquiring cutting-edge technologies, intellectual property, and key assets that provide a competitive advantage. Secondly, strategic investments allow automotive companies to expand into new markets or segments, diversifying their product offerings and revenue streams. Furthermore, such investments foster innovation and collaboration, driving research and development efforts, and accelerating product development cycles. Ultimately, strategic investments like automotive corporate venture capital position automotive companies for long-term growth, market leadership, and resilience in the face of evolving industry trends and consumer demands.
FAQ
What are other types of institutional investment besides private equity (PE) firms?
Family offices, pension funds, sovereign wealth funds, and hedge funds are other types of financial institutions in our network that we reach out to on behalf of our clients. It’s important to note that many of these don’t even have websites.
Explain why you work with corporate venture capital (strategics) but not venture capital firms?
The key distinction between venture capital and corporate venture capital investment lies in the source of funding. Venture capital involves investment from external firms or individuals seeking high-risk, high-return opportunities in early stage companies, while automotive corporate venture capital refers to investments made by established corporations in startups or emerging companies to gain strategic advantages and foster innovation.
I’m in the automotive aftermarket and not looking for investment, I’m looking to sell 100% of my company. Would you still target institutions as well as strategics?
Yes, but primarily private equity automotive aftermarket groups. The reason PE firms would be your best type of institutional (financial) buyer is because many are operators with industry expertise, not just investment vehicles that only provide capital. If your company is large enough, they would look at your company as a platform investment. If it’s not large enough for a platform, your company could be a great “bolt-on” or “add-on” for one of their platform investments.
I’m in the autotech space and hoping to sell my company. Would you still target institutions and strategics?
Technically, yes. We generally target strategics, so tier 1s and other suppliers, as these groups are looking for cutting edge technology to fulfill their demands as discussed above. However, in some cases these groups are owned by PE firms, which sometimes makes more sense to go to them first.
Who would be the mix of folks you would reach out to if I were to try to sell my company?
If you are in the automotive aftermarket space, it would generally be 50/50 financial and strategics. If you are in the autotech space, we would expect 10/90 financial and strategics.
How have you built your network and how do you know who to reach out to?
Please see our Proprietary Database page as well as our Automotive Investment Banking page. We outline this in more detail there!
What are the timelines for founder exit between institutional investment and strategic investment?
It depends on how we structure the deal based on your goals. It can occur in full at deal close or it can occur over 5 to 10 years, depending on if you are retained in a management/leadership role and sale and if you wish to keep your ownership until the shares appreciate. We spend a lot of time up front with you to make sure the right parties are engaged to best achieve your goals and to not waste effort and time.
Will institutional (financial) buyers value my company differently than a strategic would?
If there are synergies to be had, these are most often realized through M&A involving strategics or PE firms with the right platform. Regardless, Capstone runs a competitive bidding process to ensure the best offer is always realized.
When it comes to investment, do you try to form syndicates?
Most of our clients and prospects we work with seeke investment with a lead investor along with several others, particularly if their companies are more technology driven. We work with all potential investors, from GM Ventures to smaller Tier 2 suppliers.
Would you provide some pro bono advice to me around other questions I have?
Yes! If you have more questions and/or wish to strategize under NDA, please reach out. All we do is private placements, from automotive corporate venture capital to global PE. We look forward to chatting.
