As we near the end of the book, we will take a deep dive into the supporting and harvesting sections and examine the five major participation roles the angel investors tend to engage in. The roles are:
- Silent Investor
- Reserve Force
- Team Member
- Controlling Investor
The silent investor is very popular amongst the pure financial investors. They do not have an interest in taking an active role in the company but rather invest and hope for returns (Amis & Stevenson 2001). For the experienced entrepreneurs, the silent investors may be the diamond in the rough, especially if they already have a great management team and the board, and only need funding. Contrarily, the newbies may not want to take an interest in solely working with silent investors. They should hope for angel(s) willing to take part, either as a reserve force or a coach.
The reserve force angels are ready to help the entrepreneurs with hurdles they run into, on-demand. They usually serve as a “hotline” for the entrepreneurs to access when needed (Amis & Stevenson 2001).
The angels willing to take on the role of a team member, whether full-time or part-time, mostly end up micromanaging the entrepreneur, notably if they represent a majority interest (Amis & Stevenson 2001). This form of interaction could cause friction between the angel and the entrepreneur and harm the relationship if not managed properly.
Perhaps one of the most crucial roles an angel investor can assume in a relationship with the entrepreneur is the Coach. They tend to have the highest impact and don’t assume control of the company. The Coach angel provides support, advice, and assistance, and meets regularly with the entrepreneur (Amis & Stevenson 2001). The new entrepreneurs should form good relationships with such investors and learn from them as much as possible.
Lastly, the Controlling Investor is an investor that eventually becomes an entrepreneur by taking control and manages the company. The controlling investors have a high impact and are usually the ones that invest the majority of the capital, hence gaining voting control and control of the board (Amis & Stevenson 2001).
Although most of the categories of angels will participate in the company one way or the other and have some impact on the decision-making process; perhaps, the most crucial contribution any angel can make is to help the company get to the next round of funding. According to the authors, the best two ways of figuring out how to contribute are “to ask the entrepreneur what they want and do a lot of deals, so you know what they need” (Amis & Stevenson 2001).
Once the company secures the next round of capital and positions itself for success and produces positive cash flow, it is time for the investors to think about the harvesting or the exit strategy. Usually, the exit strategy would be defined in the earlier stages, such as Structuring and Negotiating. There are seven Harvesting methods described and discussed in this book; five positive and two negative.
The five positive methods are:
- Walking harvest
- Partial sale
- Initial public offering (IPO)
- Financial sale
- and Strategic sale
The two negative methods are:
- Chapter 11 and
- Chapter 7
I will briefly discuss the differences between the methods and see which methods may work best for entrepreneurs.
The walking harvest method is defined as the cash distribution directly to the investors regularly (Amis & Stevenson 2001). This should be an attractive method as it is simple and allows the company to continue to operate smoothly and produce positive cash flow.
Partial sale refers to the sale of shares to the management, or an investment firm specializing in buying minority positions. This usually happens when the investor wants to exit the company that does not seem to have good exit prospects (Amis & Stevenson 2001).
The IPO may be the most attractive and popular method, and it is suitable for the company but not necessarily for the angel investors. It is ideal for the company as it raises more capital, especially in a bull market (Amis & Stevenson 2001). It could be a loser for angel investors, especially if they are “locked-up” and do not get the original IPO prices (Amis & Stevenson 2001).
In the Financial sale, the buyers buy the entire company with cash, and the value is usually determined based on the cash flow. The financial sale is good for the entrepreneurs and investors, but not necessarily for management and employees as their jobs are not guaranteed (Amis & Stevenson 2001). The financial sale is an excellent method as the size of a business is not an issue. The financial sale buyers look for positive cash flow and value.
Lastly, the strategic sale is “perhaps the best and most likely harvest method for a successful company” (Amis & Stevenson 2001). Contrary to the financial sale, the strategic sale buyers are typically industry players that will pay value beyond what the cash flows might suggest (Amis & Stevenson 2001). The strategic sale seems to be a win-win for entrepreneurs, investors, and management and staff. Since the buyers are industry experts, the management and staff may remain as they are usually responsible for the company’s success.
As we all know, not every business can be successful and have a stable exit. Some, unfortunately, fail and others… they fail miserably.
According to the authors, Chapter 11 bankruptcy is usually the step where a company attempts to save itself and give it another chance. It is better than Chapter 7; however, the likelihood of earning a return is significantly reduced. Large amounts of money are wasted on lawyer’s fees and reorganization expenses, and the company will likely lose the management and investors (Amis & Stevenson 2001). At this point, investors should think about saving their time and emotional energy. For the investors, Chapter 7 makes more sense at this stage. Chapter 7 bankruptcy means that everything is lost, with no returns, no equity, but no more wasted time and liabilities (Amis & Stevenson 2001). At this point, the only ones getting paid are the lawyers and few debtors as long as there was no fraud involved (Amis & Stevenson 2001). Once the funds are depleted other debtors can not collect their debt or go after the company. Once the judge makes the ruling, the case is concluded. Declaring chapter 7 may be the most humiliating experience for everyone involved. As a debtor who experienced and dealt with companies that filed Chapter 7, it is especially painful as we did not know about it until the very end.
As I conclude the harvesting section, and perhaps the entire book, I have to admit that I learned a great deal from its contents. I approached the book from the entrepreneur’s point of view rather than from the angel investor, primarily because I could not see myself as an angel. I am sure this will change in the future as many entrepreneurs eventually become angels. However, it helped me develop a strong sense of understanding of how the angels operate and the different ways they interact with entrepreneurs.
I look forward to expanding on this knowledge and hopefully approaching an angel investor soon with a project/idea of my own.
Amis, David, and Howard H. Stevenson. Winning Angels: the Seven Fundamentals of Early-Stage Investing. Financial Times Prentice Hall, 2001.