It is now time to reap what you sow. Our journey with Amis and Stevenson has taken us through Evaluating, Valuing, Structuring, Negotiating, Supporting and now Harvesting. This is the point when an Angel investor has the opportunity to receive the benefits of their investment. It is important to note that while we are now discussing Harvesting and this is the ending outcome for the investor, a discussion and inclusion of the details around Harvesting should happen when building the investment agreement.
Harvesting reminds me of conversations I have had with friends that farm. They have gone through the process of selecting the land, identifying the right crop, planting the crop, tending the crop and now it is time to harvest.
Amis and Stevenson write about the Seven Harvesting Methods of Angel Investors. (pg. 289) They identify these methods as: (pg. 290)
- Walking Harvest – When investors support keeping a positive cash flow and cash is regularly distributed directly to investors
- Partial Sale – Management, other Shareholders or External entity purchase the investors stake
- Initial Public Offering (IPO) – A partial number of total company shares are sold openly on an exchange
- Financial Sale – Company is sold to buyers with interest in the cash flows
- Strategic Sale – Company sold to industry buyer interested in strategic value
- Chapter 11 – Company is reorganized and investors typically suffer a diminish in value
- Chapter 7 – Company is liquidated and investors get little or nothing
Obviously, investors will hope to avoid Chapter 7 and Chapter 11 as these outcomes reduce or remove any value. These situations are related to the business struggling and failing. The role of the investors may change before or during these situations to provide help in reprioritizing, realigning and reforming the company to improve performance.
I have met investors that follow the Walking Harvest model and enjoy a continued cash flow as additional income. They feel the business is designed to deliver consistent revenue and have faith in the company’s leadership to drive performance.
The majority of investors I have met talk more about the sale of a business or IPO. They are not looking for a sustained revenue stream over time, their hope is for the big win. Similar to playing the lottery, they are focused on the company being setup for a sale that brings immediate financial windfall or an IPO that can include many multiples in the value of their stock. The growth of internet-based companies has brought a perception of very large acquisition payouts.
In my own experience as an employee, I have identified opportunities to acquire companies that had a perceived value. Had action been taking immediately, the cost of acquisition would have been reasonable as the business was new and not fully tested. However, even with repeated revisits to the opportunity not actions were taken for years. This business ended up becoming the focus of some major retailers and was ultimately acquired for one billion dollars. The investors in that business succeeded in a Strategic Sale.
Harvesting may be the moment of realizing the value of being an investor, but determining the type of harvest should be decided early in the investment journey. An investor should understand their position and desired outcomes. Identifying how each of the methods may impact an investor can help in planning for the right method and prepare for the methods that are not desired.
Thanks for stopping by.
Amis, David, and Howard H. Stevenson. Winning Angels: the Seven Fundamentals of Early-Stage Investing. Financial Times Prentice Hall, 2001.