Angel Investment and Exit Strategy


Wanna get the money out of an Angel Investor’s pocket? Plan Your Exit Strategy.

Boy Exit Strategy

There are options for your exit strategy. You may offer Shareholder buy backs after you build your business successfully, or you may plan to build your business to initial public stock offering (IPO)? You may plan to exit when your company is built and sold in three to five years.

Before you present your business to your Angel investor, plan your exit strategy.

Angel investors are usually patient and will wait long term to get paid back, but they want to see how they are going to get that big ROI.  Selling shares is common for angel investors that hold equity ownership positions with the sale or a merger of your company is common for debt holding investors.

Exits via a sale or merger is the most common exit,  as IPO’s are rare.

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The most likely exit for a company is an acquisition.  

What type of companies might want to acquire you?

Why would they acquire you?

Do you fit into their strategy?

Why don’t they just try and build it themselves?

Will you generate enough excess cash flow to financial buyers to generate a return? 

Look for strategic fit: Which acquirer can help you expand into a new market, or offer a new product to their existing customers?

  • IPO: least likely exit

IPOs  they’re sexy, they’re flashy, and they get all the press.

Too bad they are rare.  There are millions of companies in the U.S., and only about 7,000 of those are public. In Canada, this year finished with four new issues on the TSX with a value of $577 million, PwC survey.  The TSX Venture exchange contributed two new issues with a value of $5.6 million to bring the quarter to six IPOs worth $582.6 million on Canada’s major exchanges.

Many public companies have spun out from existing companies.

Running the race

The IPO?

Spend millions preparing for the road show, where you grovel to convince investors your stock should be worth as much as possible. (You even do a “reverse split,” if necessary, to drive up the share price.)

Unlike an acquisition, where you work with a single company, you are dependent upon the analysts. If the romance fails, you’ve blown millions. And if you succeed…..?

In short, IPOs are rare, and they make the headlines in the very, very rare cases that they produce 20-year-old billionaires. But when you’re founding your company, consider them just one of many exit strategies. Realize that there are a lot of ways to get returns for your angel investor, and just as many ways to get value out of your company.

Elephant in the Room

Pros of IPOs

  • You’ll be on the cover of Newsweek.
  • Your stock worth in the tens–to millions of dollars.
  • Your investors will stop bugging you.

Cons

  • Only a few number of small businesses actually have this option available as few IPOs completed annually.
  • You need financial and accounting rigor from day one far above what many entrepreneurs generally put in place.
  • You’ll spend your time selling the company, not running it.
  • Investment fees can take 6 percent off the top, and the transaction costs of an IPO can run in the millions.
  • Money to grow the business: With an infusion of cash derived from the sale of stock, the company may grow its business without having to borrow from traditional sources, and it will thus avoid paying the interest required to service debt. 
  •  This “free” cash spent on growth initiatives can result in a better bottom line. New money for marketing and advertising, more experienced personnel, research and development of new products and/or services, renovation, new construction and other needs to expand the business and improve profitability.launching or exit.

LinkedIn IPO Skyrockets. Doubling in price right out of the gate, LinkedIn’s stock price has been selling for as high as $92.99 a share…

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