In continuation of my angel investor series, this week I am going to talk about harvesting.
The authors of Winning Angels: The 7 Fundamentals of Early Stage Investing talk about the seven different types of harvesting when it comes to investing. Five of them are positive and two of them are negative. Let us break them down:
- Walking Harvest- The company distributes the cash directly to their investors on a regular basis. This strategy is also very unlikely to fail as long as management is willing to agree and everything continues to perform competently.
- Partial Sale- The investor’s stake is sold to management, an outsider, or to another shareholder. This strategy is helpful because the investor can exit with an otherwise non-liquid investment.
- Initial Public Offering- The company will sell a percentage of its shares that they list on the NASDAQ, NYSE, or another exchange. This creates a market for investors’ shares. “Liquidity for investors and the potential to capture outstanding multiples, particularly in a bull market; from the company’s perspective, having a publically traded stock generally makes it easier to raise more capital.” (David and Stevenson, 295)
- Financial Sale- The company is sold to any financial buyers who will then purchase it for its cash flows. The financial buyers who are purchasing your company are usually purchasing the entire company with cash. If you have cash flow, you are increasing your likelihood or executing a sale.
- Strategic Sale- The company is told to an industry buyer who purchases the company for strategic reasons, such as marketing synergies. There is a higher likelihood that management is encouraged to stay around in this scenario. This is also the best harvesting method for a successful company.
- Chapter 11- The company is reorganized and the investors will typically lose most of their upside in the company. The benefits for this type is that is saves you from Chapter 7 and gives you another chance to make it.
- Chapter 7- The company is liquidated and he investors will get very little or nothing, depending on their place in line. While it may seem morbid, the upside is that there is no more wasted time and no more outstanding liabilities.
“There are six fundamental value events, which, one attained, signal a good likelihood of a new or eventual harvest.” (David and Stevenson, 303). They are profitability or cash flow break-even, acquisition of certain strategic partnerships, development of a brand name, a VC investment, demonstration of a new product of service offering in the marketplace, and the creation of a great team.
This section was very interesting. On page 317, the authors talk about how to prepare for the ultimate exit, which could be your death. When you start a business, you usually do not think about what will happen if you die next week, the same goes with investors. This section gave some good information about what to plan for when harvesting your business and what to look for so you can plan for your harvest.
Thank you for stopping by
and reading my blog.
Until Next Time,
Amis, David, and Howard H. Stevenson. Winning Angels: the Seven Fundamentals of Early-Stage Investing. Financial Times Prentice Hall, 2001.