Angel Investor Series- Harvesting

Hi Friends,

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,
Dani

References:

Amis, David, and Howard H. Stevenson. Winning Angels: the Seven Fundamentals of Early-Stage Investing. Financial Times Prentice Hall, 2001.

9 thoughts on “Angel Investor Series- Harvesting

  1. Devon

    Dani,
    I really liked this section of our book because it clearly explained how to take a deal to fruition and harvest the profits of the work the angel and the entrepreneur had set out to accomplish. you did a nice job with the explanations for the different methods of harvesting and the six fundamental value events.

    Devon

    Liked by 1 person

  2. Carter Jones Huchko

    Hi Dani,

    Thinking about the exit is usually hard to imagine. I like how in the structuring chapter it states that a clear exit strategy is wanted, and I can definitely see why. It seems like from these options, already having mapped out what the plan is would cut down on a lot of confusion and emotion. This exit strategy seems very important in the overall ROI but without actually ever performing as an angel investor it’s hard to imagine and connect with.

    Carter Jones

    Like

  3. Tom Huchko

    Dani,

    Great job on explaining these clearly! Who knew there were so many ways to exit a business? I always thought you could basically just sell your shares and cash out whenever you wanted.

    That is an interesting point! It is important to think about what will happen in a business if you were to pass away while the investment was still happening. I am sure that this happens from time to time. It is always good to think ahead of course!

    I enjoyed reading your blogs over this course, hope to see you in future courses!

    Thank you,
    Tom

    Like

  4. Kari

    I agree that the harvesting section of “Winning Angels” was an eye-opener for the “ultimate exit”. As you communicated, death, sickness, or even changing careers is something that we rarely think of when planning our business and relationships with others. This section definitely made me consider those possibilities and to put clauses in contracts pertaining adverse events. Additionally, I strongly believe having an exit plan, no matter what, is essential to a good business plan.

    Like

  5. Tony

    Dani,
    Nice review. The exit strategy feels so much like retirement and life insurance. You don’t like to plan for your death, but it can happen at any time. The typical person also seems to be lacking in retirement planning to ensure the lifestyle they want can be afforded. While it would be nice to guarantee a harvest, the reality is that anything is possible. I think it is good to plan for the exit and payout. While I understand this phase is about harvesting, it sure seems like this is a discussion that should happen in the early planning to understand how the different scenarios will impact you. Thanks for the read.

    Like

  6. Michael Walton

    Not that I plan to go anywhere any time soon but this statement has a lot to do with why I am considering the sale of my business. You said “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”. So, while I believe that I have many years ahead of me, I have been thinking about the best way to exit. I do know that my wife really wants nothing to do with the business so if something were to happen to me, it is best that the business is behind me so that she doesn’t have to worry about it.

    Like

  7. Turner Votipka

    Dani,
    The ultimate exit caught me off guard as well. The idea that a business, which is a lot like our babies, would just go away or not be ours anymore is a crazy thought to me. We often do not think about the chance of failure because we do not want to worry ourselves too much, but having plans regarding it and all other exit options are necessary. This was a very well written article and extremely thorough on the entire chapter! Well done!
    Turner

    Like

  8. Hailee Barbarits

    Dani,

    This chapter changed my mind about exiting. Exiting should be a great thing! Reaping the fruits of all the hard labor should be the next-to-best part of running a business. I always saw exiting as a negative thing, but selling it off seems much more appealing to me after reading this chapter.

    Like

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