NEW YORK, United States — People often ask me why we brought strategic investors into Moda Operandi (M’O) so early. Just months after our launch, in our Series B round of financing, our first strategic investor, Condé Nast (Advance Media), became a minority stakeholder in the business and obtained board observer rights. Then, in our Series C round, last summer, two additional strategic investors -- LVMH and IMG -- came into the business as well. LVMH was granted a board seat.

There are advantages and disadvantages to bringing strategic investors into a company. Some start-ups avoid bringing “strategics” on board in the early years, if not all together. But sometimes, in order for a business to grow and succeed, it's important to add select strategics to the investor mix. Today, I'll address the pros and cons of adding strategic investors to your company -- as well as how and when to do it.

The Pros:

Industry knowledge and relationships: One of the key benefits of partnering with a large strategic investor in your industry is their deep knowledge, expertise and network of relationships. Founders who do not have extensive experience in their company’s area of business may find the involvement of a strategic particularly helpful. Few, if any, founders will have the robust relationships, nevermind the industry wherewithal, that a large strategic can bring to bear. For example, at M’O, I have valued the ongoing insight and advice offered by our LVMH board representative. His deep knowledge of the industry sometimes provides a very different perspective from those of the other financial investors on our board, which helps to bring balance to our analysis and strategy.

Access to shared resources and business terms: Often start-ups can take advantage of shared resources that strategic investors extend to the company. These may relate to finance, HR or even logistics. In other cases, start-ups are able to enjoy better terms due to the larger negotiating power the strategic wields. For example, a strategic can help secure lower costs from third party vendors on everything from insurance premiums to credit card processing fees. But beware. Extending a strategic’s negotiated terms across a company’s multiple business units can sometimes be tricky. And the integration of a strategic’s back office functions with that of a start-up partner -- even if quick and frictionless -- may cause problems in the long run if the start-up eventually decides to move in a different direction.

Synergistic collaborations: This is one of the real benefits of a start-up aligning with a strategic, as it often leads to a “win win” for both parties. Case in point: M’O’s partnership with Condé Nast also meant an alignment between M’O and Condé Nast’s flagship fashion brand Vogue. Around the time of Condé Nast’s investment in M’O, we negotiated a partnership between M’O and Vogue, creating direct links from Vogue.com’s runway coverage to M’O’s store, where featured looks could be bought. For M’O, this has led to increased traffic from a customer base that loves fashion and has a propensity to buy. For Vogue.com, this partnership provides a turn-key sales solution that keeps its readers happy and engaged, while delivering a revenue share against sales from its customers back to the company at large.

Industry credibility: Not to be undervalued is the fact that an investment from a major strategic player in your business bestows an immediate stamp of approval and credibility upon it that might take your company months or years to amass organically. Sometimes dropping a partner’s name can be a really useful thing when that partner is a 800-pound industry gorilla.

The Cons:

Competitors may be hesitant to work with you: If a strategic investor owns a meaningful part of your business, there may be understandable concern from other strategics about doing business with your company. For example, at M’O, when we took on LVMH as an investor, we wondered whether this partnership would impact any of our existing designer relationships. Moreover, we wondered whether it would make it more difficult for us to work with a brand owned by a rival major luxury group. Fortunately for us, so far, this has not proven to be a problem for M’O as LVMH’s stake in the business is relatively small and we already had a large number of non-LVMH vendors working with us prior to the investment.

The strategic may want to integrate you too deeply into its organization: Many strategics invest in a business because they eventually want to acquire it in full. Therefore, the strategic may exert pressure on your company to heavily integrate with its back office features, so that you are indirectly locked into working with the strategic. Prior to the launch of our business, Lauren and I spoke to one strategic investor who wanted to “take care of all of M’O’s backend operations” so M’O wouldn’t need to worry about these things. Had we agreed to this, this may have made us employees of the company and limited or prevented our ability to realize the full value of our start-up’s standalone potential.

Bias to work with the strategics’ products: Certain strategics may expect you to work with them on one or more of their products. To be clear, this may be a boon and exactly what you are looking for. However, this may also reduce the flexibility your company has to make changes to its business.

It may be harder to maximize value at exit: If a strategic investor has a large stake in your business, there may be an external perception that the strategic will be favoured in the exit strategy your company pursues. This might possibly dissuade other bidders from coming to the table if and when your company goes into play. Furthermore, in the event of a competitive bid for your company, a strategic may have negotiated a position that grants it a significant advantage over other suitors. The negative effect of this upon the founders and other investors and equity holders is that they may not be able to maximize the value of their investment. However, by the same token, the very involvement of the strategic in the business in the first place may have made the business’ likelihood of success and perceived value (and its stakeholders’ ultimate exit value) much greater.

So, should you accept money from strategics? And, if so, when?

There really is no right or wrong answer. Each company needs to weigh the pros and cons of bringing in a strategic for itself. In the case of M’O, we felt strongly that our chances of success were increased, not hampered, by bringing on strategics. We believed that, in our competitive industry, having a large strategic group as a backer increased our competitive advantage and areas of differentiation significantly enough to counteract any potential downside. But to be clear, each company needs to look at its own situation. And, in the end, the specific terms of a strategic’s proposed deal – balanced against the longer term goals of the company’s founders, executives and other investors -- will help determine whether or not a particular partner makes sense.

Now, if you are going to take money from strategics, timing is important. My advice is to not give up a meaningful stake of the business to a strategic until your company has established momentum and independence first. Without a separate vendor base, customer base and basic infrastructure, taking on a meaningful investment from a strategic could mean losing control of your company. Get yourself up and running, work out the kinks, build a presence, then talk to strategics.

How do you manage against disadvantages? If you decide to take money from a strategic investor, there are things you can do to mitigate potential downsides.

Avoid having too much of your business with one strategic group: As you know, it is a good rule not to have all of your eggs in one basket. So don’t make your strategic investor (or anyone else for that matter) such a dominant force in your business that, if the relationship sours, your business goes down the drain as a result. For example, at M’O, we have been thrilled to work with many of LVMH’s brands, including Marc Jacobs, Loewe and Fendi. However, we have been careful to make sure that LVMH and its brands do not constitute such a meaningful part of our business that it would cause us significant damage if we had to part ways. This is your basic “diversify the portfolio” thinking.

Avoid contractual terms that provide preferential treatment: Strategic investors will inevitably ask for preferential treatment when it comes to the next round of financing or the sale of the company. Try to avoid agreeing to this kind preferential treatment. You never know what the dynamics and requirements of that next round might be and you don’t want to be hindered from doing what might need to be done due to preferential treatment clauses.

Don’t integrate core functions that can’t easily be built out separately: You want to integrate some functions with a strategic; that is part of the reason you get into bed together. For example, basic back office functional integration can achieve meaningful cost savings. But make sure that you do it in a way that allows you to separate easily if necessary. More importantly, be sure to develop and manage your core skill sets and functions on your own. These are key to your competitive advantage and so you want to own and protect these, in case you need to go your own way.

Full disclosure: LVMH is a minority investor in The Business of Fashion.

Previous articles in the Finding Your MO series:

Part 1: From Big Idea to Launch
Part 2: The Need for Speed
Part 3: The Business Plan is Your Roadmap
Part 4: Making the Most of Mentorship
Part 5: How to Choose the Right Investors
Part 6: How Wise is Conventional Wisdom?
Part 7: Going International
Part 8: Managing Investors
Part 9: Acquiring Customers
Part 10: Building the Team
Part 11: Motivating and Retaining Talent
Part 12: Re-inventing Yourself
Part 13: Planning Your Time Part 14: Going Corporate Part 15: Customer Loyalty and Satisfaction

Áslaug Magnúsdóttir is co-founder and former CEO of Moda Operandi.