Stop The Merry-Go-Round! I Want To Get Off!
Most people receive their paychecks bi-weekly or monthly. Freelancers get paid when milestones are hit, or the project is delivered to the client.
In both cases, the cash flow is predictable.
However, this is not valid for Angel investors.
The way you earn money as an angel investor is very different from how you make money in the public markets. And, in order to truly appreciate what it takes to be a successful angel investor from a purely financial standpoint, you must first understand how exits operate in this world.
But what exactly do I mean by "Exits"?
Simply put, it is the selling of the company you invested in, to another entity - whether it is a public corporation, a private company, a private equity firm, or new investors directly through an IPO.
Not surprisingly, these exits do not happen quickly; they often involve years of market positioning and a year or more of transaction structuring.
How to develop an exit strategy?
Consider the time horizon and estimated ROI!
When we talk about the right exit strategy or the perfect time to exit, there is no cookie-cutter approach to make an exit or yield returns.
- A financial exit occurs when a VC buys out the angel investor's equity.
- A strategic exit occurs when an acquisition occurs, resulting in the buy out of the angel investor's stake.
An acquihire exit occurs when a startup that does not appear to be profitable goes through a merger with an equity swap to prevent further depletion of investor capital.
Some of the most typical exits include liquidation, IPO (Initial Public Offering), and family succession.
And you must remember: exit strategies have a direct influence on the predicted ROI since selling a firm to a rival, planning an IPO, or selling a portion of the company to a venture capital fund are not the same.
Know when to hold'em,
Know when to fold'em!
Timing is key. But how does one know when it’s time? It’s not like a company is a baby that has a 9 month gestation period. Every company is different.
While there is no secret formula, an ideal time to exit a startup would be when the company is experiencing high growth rates and establishing traction while earning large profits. This would, however, differ from one firm to the next.
Investors need to have realistic expectations on how soon a company will be positioned for an exit. One merely needs to analyse the venture's characteristics, market situation, return on investment, and so on, and then make a decision.
Summing it up
Successful exits may be arbitrary, but they still require full-time efforts, involvement, and patience to gain the expected ROI.
There are undoubtedly risks involved, but the right strategy and timely exit can be highly rewarding!