Angel Investors: The Harvesting Strategy

To wrap up this series on angel investors, I am going to discuss harvesting strategy. Some would say this is the most important step in the process. Knowing how, if and when you will see a return on your investment is crucial. There are seven harvesting methods, five positive and two negative. The positive harvesting methods include:

• “Walking harvest (This method is unlikely to fail, but there is no potential to get valuation based on someone else’s perceived value of the business… The returns are essentially a cash flow stream…)
• Partial sale (This method allows the investor to exit an other wise non-liquid investment, but the investor is unlikely to get an outstanding valuation. The return price is based on fairness and other factors.)
• Initial public offering (The benefit of this method are liquidity for investors and the potential to capture outstanding multiples, but the drawback is that investors will have restricted stock that cannot be sold for six months… There is a high variability on returns, which means there is a risk of selling too soon or too late.)
• Financial sale (The major benefit of this method is that, if there is cash flow, the likelihood of selling the company is very favorable. The major drawback here is that management cannot count on continued employment. The return on this investment consists of whatever the buyer thinks they can get from the sale.)
• Strategic sale (Seen as the best harvest strategy, a strategic sale will produce a faster negotiating time and will most likely allow management to keep their positions, but, in doing so, the company may find themselves in a position where they must disclose important details about the company with the public. The return profits range from 10x to 40x.)” (Amis & Stevenson, 2001)

The negative harvesting methods include:

• Chapter 11 (Filing Chapter 11 bankruptcy is less likely to cause a company to go under than filing Chapter 7 bankruptcy; however, this significantly decreases the chances of seeing a return.)
• Chapter 7 (Filing Chapter 7 bankruptcy is pretty much the end of the road for a company. Most, if not all, of the initial investment is lost and there is no return, figuratively and literally speaking.)

As you can probably tell, it is very important to have a solid exit strategy determined during the planning stages. Doing so will at least soften the blow if things go south. It also helps an angel investor determine whether or not the deal is for them in the first place.

Resources

Amis, D., & Stevenson, H. H. (2001). Winning angels: The seven fundamentals of early-stage investing. London: Financial Times Prentice Hall.