Consider this question for one second before you begin to read this article: What would be your answer if an Angel Investor asked you how he/she could exit from your business angel investment in the future?
If your off-the-cuff answer to this question is that you would like the Angel Investor to hold on for as long as you would in the business or that you are not sure at this stage on the exit strategy, then we strongly suggest that this is a part of your investment proposal that requires additional work.
What options could you offer to your Angel Investor?
Consider the exit options for an angel investor that chooses to invest into you. Perhaps a shareholder buy back when you have built a successful business? Or how about building a successful business that you can take to an initial public stock offering (IPO)? Or perhaps you intend for your angel investor to exit when your company is successfully built up and sold in three to five years? All of these proposed exit strategies will be an attractive scenario for an angel investor.
Why you should have a well defined exit strategy
Before he or she invests in your business, an angel investor will expect to see an exit strategy. While angel investors are patient and willing to make long-term angel investments, they need to see how and when they’re going to reap the return on their angel investment. The sale of shares to the company’s principals is a common exit strategy for angel investors who hold equity ownership positions; the sale or merger of the company is a common exit strategy for debt-holding investors. Don’t be surprised that your prospective angel investor wants a time-frame set.
Although there are a few viable and more than satisfying exit strategy options for angel investors, depending on the size of the business and industry you are in, exit via a sale of the company is generally the most realistic and preferred. There are too many start ups that try to convince an angel investor their plan is for an IPO. Although this sounds great on paper, it fails to happen more often than not. Selling the company to a strategic buyer is very realistic and as companies like Google and Microsoft continue to buy up small companies within IT, there are immense opportunities.
Understanding the different types of exit opportunities that are available to an angel investor is important, but an entrepreneur should also consider what types of UK Limited Company shares that should be offered to an Angel Investor, as transferring the wrong types of shares can have serious repercussion on the investor’s ROI.
Successfully selling your company will also display a golden track record when angel investors consider you for your next business.
What returns should you expect?
Entrepreneurs and angel investors regularly wonder what the returns are in angel investing. The completion of a recent University of Washington research project provided robust data on this subject that has never before been available.
Their findings in this study were based on the largest data set of accredited angel investors collected to date, with information on exits from 539 angels. These angel investors have experienced 1,137 ‘exits’ (acquisitions or Initial Public Offerings that provided positive returns, or firm closures that led to negative returns) from their venture investments during the last two decades, with most exits occurring since 2004. Analysis indicated that it is not unusual for group-affiliated angels with strong returns to hold their investments for more than ten years. While the average hold period was 3.5 years, exits with a less than 1x multiple took only three years to achieve. The average years to exit were 3, 3.3, 4.6, 4.9, and 6 years, demonstrating the importance of patience and non-liquidity in angel investing.
If you have invested any of your own funds into your own business then explaining this to an Angel investor may well convince them that you have a serious financial vested interest in your company and its long term success.
A final consideration to shaping your exit strategy is: what your angel investments growth strategy is. Your ideal growth strategy will be influenced by your where you see your business in the next 5 years. Always remember that angel investors are searching for future growth potential and an appropriate exit strategy.