Bure Valley Group is an investment introducer platform which links successful investors with exciting, innovative UK startups seeking funding. This content is for information purposes only and should not be taken as financial or investment advice.
Most angel investors have an end-date in mind when committing money to a startup. There are multiple reasons for this, but a significant one is that angel investors, typically, like to invest in a company during its “growth phase” – i.e. the beginning – when there are exciting developments and returns can be high. Once a startup matures, however, experienced investors know they will start “feeling the itch” to find opportunities elsewhere.
As an investor, therefore, this means having a clear exit strategy in mind for each startup you commit to. The matter and timing of this will vary depending on your financial goals, attitude to risk and the startup in question. In this article, our investment team at Bure Valley Group offers five strategies which you may wish to consider for your future investments.
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#1 Initial Public Offer (IPO)
Not all startups plan to “go public”, but many do – selling parts of their business to investors on the stock market via shares. This opens the opportunity for angel investors to be bought out (if they so desire) and reimbursed. However, there are risks associated with a startup’s plan to go public. First of all, this route can be costly, and involves making more company information and data publicly available. Secondly, as a big undertaking, going public can be highly distracting for a company’s board – possibly detracting from efforts which could otherwise grow the business.
Sometimes startup investments go wrong. Perhaps there’s a cashflow or liquidity issue, leading the leadership to consider the option of merging with another company. Not only could this help to stabilise the business, but it also opens an avenue to give money back to initial investors. As such, whilst it may not be the first option that a startup might pitch to investors, the latter likely will want reassurances that the business could viably be sold in a future merger acquisition.
#3 Private offer
Rather than going public, a startup may plan to offer its shares to certain individual investors – or a group of them – in the future to raise capital. This route holds advantages in that it is often less expensive than IPO, and less time is required to work with underwriters/brokers.
#4 “Cash cows”
Of course, there may be exceptional circumstances where, as an angel investor, you wish to stay invested with the startup you put your faith in. One example is the “cash cow” – a special type of startup which does not wish to exit. Instead, it builds enough capital to sustain itself for years, offering increased profits by cashing in on their products/services. As a result, their aim is to keep growing sales and to continue paying out dividends to shareholders. If, however, you eventually wish to cash out, this business is likely to have the funds to pay you quickly.
#5 Venture capital
At some point, a startup may grow to such success and notoriety that large firms with lots of capital to invest take notice – i.e. venture capitalists. In which case, as an original investor you may choose to engage in secondary purchase (selling your equity to the VC) or allow yourself to be bought out by the startup’s management (“repurchase”). One of the great aspects of venture capital funding for growing businesses is that it can open up doors to business contacts which can be vital for increasing profit opportunities. It also gives you a huge cash boost quickly – thus allowing the business to scale up rapidly. However, venture capital can have its downsides. In particular, it can take a long time for company founders to make a successful pitch. Moreover, scaling too quickly – before the company is ready – could lead it to fall flat on its face.
Conclusion & invitation
The type of exit you plan for your startup investment is important. Also important, however, is the timing. Naturally, both you and the founders will likely wish to sell for as much as possible. To get the best selling price, however, requires careful planning and a balance. In particular, rather than selling once the business is very profitable, it is often wiser to consider selling when the growth rates are very high.
The equity held by the business owners also matters. Startups which have lower valuations in the early years tend to take less time and capital to grow. This means that founders are likely to hold a greater ownership percentage of their company when the time comes to sell compared to, say, a startup which has been heavily fueled by venture capital. As an investor, you will need to bear this dynamic in mind as well when discerning when your exit date is likely to be.
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