Planning for growth and exit
A key part of the investment strategy for an Angel investor is to consider how you are going to follow your deal, support the achievement of high growth of the investee business and achieve a successful exit. It is important to note that Angel investors stay on average 8-10 years in a deal before achieving a successful exit. However you may also look at a partial exit or liquidity during this period.
Following your investment
If you follow your investments, providing access to appropriate business and financial advice and support, your investment is more likely to have a successful outcome. You may decide that you have the relevant experience and time to take an active role in the business post investment, either on behalf of your own individual investment, or on behalf of a Syndicate. This may involve taking a seat on the Board as a Director, or as a Board monitoring role, or bring specific access to expertise, financial, technical or markets. Or you may act as a passive investor and leave the role to an agreed Lead investor who should keep you informed of progress in the growth of the business.
Accessing Further Growth Finance
You should be aware that you are likely to need to provide further follow-on investment to enable the business to move to the next stage of growth. You should plan this into your investment strategy for your portfolio from the outset so that you can plan to follow your investment. Deciding on how much further finance is needed will normally be done with the management team as part of the initial due diligence and should be part of the ongoing relationship with your investee business. You and your own angel syndicate would normally wish to maintain your investment position by providing further equity, but you may need to mobilise further co-investment alongside your investment to meet the growth needs of the business through other angel investors, or VC or Private equity funds, but could be other alternative sources of finance including equity crowdfunding, debt, venture debt, peer to peer lending, factoring, R&D grants.
You may also identify the opportunity to take the business to the next level of growth and raise more significant levels of risk capital by launching the business onto the public markets through AIM or IPO.
Achieving a successful exit requires making a strategy right from the outset of your investment and working closely with the management team so that your interests are aligned. Not surprisingly, these exits don’t occur overnight; they typically require years of market positioning work and a year or more of deal planning. However you can assist the process through both strategic advice to the management team and helping to make contacts and supporting negotiation discussions, with regular reviews of exit plans and overcoming tensions between your as the investor and the team about he optimum timing and approach to achieving exit.
You should always take advice from legal or financial experts who are experienced and skilled in these transactions so that the prospects of achieving the desired financial return from the exit are maximised and ongoing risks minimised.
Remember your money may be tied up over 8-10 years before an exit can be achieved and this is why Angel finance is called “Patient Capital”!
The five main types of exit events
The sale of the entire issued share capital to a third party as a trade sale – this is the most common exit, although occasionally by way of a “buy-out”, where the investee company is acquired by an entity funded by a private equity investor, a bank and/or a management team. It can take a lot of planning and market intelligence to identify the right buyer for your portfolio company and requires considerable alignment of interest between the investors and the founders both in timing, target and price. The time and effort involved should not be underestimated and it is useful for one of the syndicate to take a lead role in coordinating this.
The buy-back of the Angel’s shares by the company itself from its own resources, or by the entrepreneur. This is relatively unusual as an exit for angel investors.
Purchase of shares
Purchase of angel investors shares by a VC, VCT , PE or Corporate VC investor. The entry of a more significant investor party can enable the original angel investors to gain a partial or full exit. This can be a useful opportunity but the terms of the share purchase will require considerable negotiation to avoid dilution of the angel shares by the incoming investors. Visit Business growth Fund or British Business Bank.
Some financial organisations are offering Secondary Markets to enable angel investors to exchange their shares for financial liquidity. This is new area and further Secondary Markets may develop including sector specific opportunities. UKBAA Member Secondary Market Providers
You may also identify the opportunity to take the business to the next level of growth and raise more significant levels of risk capital by launching the business onto the public markets through AIM or IPO. This is not usually a direct exit for the Angel Investors, but can enable some liquidity at the time of public market entry when other investors come on board.