What Every Business Angel Should Know About Exits
Angel Investors Should Prepare The Founders for Exits Right From the Beginning.
March 27, 2022
If you are reading this, you must be either a business angel or you have been toying with the idea of becoming one.
Early exits are essential for the portfolio of a business angel. As an Angel investor, you might be able to afford to lose money. You are betting on startups after all. However, it can be so disappointing to keep losing money. Every day, business angels say goodbye to angel investing because the journey of co-creating value with entrepreneurs can get tricky.
The exiting of the first investments is essential because they allow the angel investor to achieve gains and liquidity.
When we think of startups’ exits, we immediately look for the obvious: types of buyers, potential competitors, planning the exit and getting the timing right. These are all important but it is even more important that you make sure that the founders, other shareholders and you, are on the same page.
The alignment between you and startups shareholders is key to optimising the exit. Make sure you gradually speak about and clarify the momentum and the exit opportunity of each startup, the willingness, openness and involvement of the founders to collaborate on the Exits Strategy.
Why is it essential to plan an exit strategy as early as possible?
The investment deal is going to lay the grounds for defining your final returns. The conditions of the agreement will end up either facilitating or holding back the exit opportunity. Here is a tip: make your first investment in a way to have at least 10% of the company so the dilution in the following rounds won’t become a problem in the future. Also, the clauses of the contract must influence the outcome. You don’t want to be surprised by the rights of preferred shareholders.
The timing factor (startup momentum) strongly impacts the exit process. Thus, you must consider the startups with the characteristics to be sold, given the market-specific circumstances.
When you start early to plan the exits, you will optimise returns by identifying the "how" to exits. With this, you can take advantage of the Momentum or be prepared to build the Momentum.
When is the best time to Exit?
How entrepreneurs see exits are different from investors.
First, it’s essential to understand that the exit's perspectives are different from entrepreneurs and investors. Angel's Fund lifecycle and Company lifecycle are not always aligned.
Thereby, it is crucial to work on the expectations of investors and founders. A good relationship between entrepreneurs and investors, with aligned goals, can allow you to find the sweet spot of both expectations.
Be open to analysing every exit opportunity with founders because the time to exit is unsure, but you should be ready for the moment. You should take advantage of any possibility to understand the market dynamics.
Ask yourself: “Do Founders have any experience in selling a company or building relationships with potential acquirers?”
Founders have different profiles and needs. Here is where you can play the role of a catalyst:
- Understand the Founders’ profile.
- Create empathy.
- Be present or pro activated.
- Support the founder in critical issues.
- Be aware of the new rounds plan and potential acquirers' approach.
- Share information about the industry with founders.
- The Angel should know as much about the startups invested and their industries landscape.