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.
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Also, investments were small-scale and shareholders few. A firm resembled a household and the number of individuals 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 support the needs even of a single firm.
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As knowledge improved and specialization ensued - it was no longer feasible or possible to micro-manage a firm one invested in. Actually, separate businesses of money generating and business management emerged.
An investor was expected to excel in obtaining high yields on his capital - not in industrial management or in advertising. A manager was expected to manage, not to be capable of personally tackling the numerous and varying tasks of the company that he managed.
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Thus, two classes of investors emerged. One type supplied firms with capital. The other kind 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 actually maintained. Venture capital and risk capital funds, for example, are purely financial investors. So are investment banks and other financial organizations.
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The financial investor represents the past. Its funds is the result of past - right and wrong - decisions. Its orientation is short term: an "exit strategy". This is sought as soon as possible.
Exit strategies bring fast profits. The stock exchange is really a popular exit strategy. The financial investor is always on the lookout, searching for willing buyers for his stake.
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The financial investor has little interest within the company's management. Optimally, his money buys for him not only a great product and a great market, but also great management. But his understanding of the rolls and functions of "good management" are extremely different to that offered by the strategic investor.
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The strategic investor, however, represents the real long term accumulator of value. Paradoxically, it's the strategic investor that has the higher 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 degree of consumer satisfaction, the training of the workforce - all depend on the strategic investor.
Indeed, gradually, the balance between financial investors and strategic investors is moving in favor of the latter.
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