How the Right Exit Strategies Help Angel Investors Make Money

How the Right Exit Strategies Help Angel Investors Make Money

It is said that exit ignorance when investing in startups is not heavenly; rather, it is a costly affair. Producing an exit strategy for oneself is never a good idea for entrepreneurs, but it is a must for investors!

 Exit opportunities can take many forms, but it is critical that the founders are aware of the importance of providing an investment return. Entrepreneurs need to select active angel investors with exit experience and the ability to sell the startup.

 Understanding the Function of Angel Investors

The role and relationship of an angel investor with a startup are time-bound.

Lead investor interactions with startups play a critical role in value creation, which has a significant impact on exit returns.

It is one of the most important decisions for entrepreneurs because it affects prospective rounds of investment in the company.


Some Facts:

It is critical for the entrepreneur and investor to agree on an exit strategy so that expectations are properly managed on both sides.

Following the lead investor's deal is also one of the most complicated decisions to make when investing through an angel network because it is impossible to make an objective comparison of which lead investor is better.

Startup investments are not like loans that must be paid back with interest.

 When the angel investor sells his stake for cash, he realises a profit.

 Angels should be patient and not expect high returns after three years of investing.

Not all exits are happy ones: half of them are sub-standard, sub-optimal, distressed sales, but the investor receives his capital back in cash or equity swap.

Many investors, ironically, regard an exit conversation with the entrepreneur as a bad thought process rather than one that guides them toward value creation.

 An exit strategy does not imply quitting, but rather planning to maximise profit with funded startups.

 If a startup fails the ideal time to exit, the most likely outcome is that it will fail or become dormant.


Exit Opportunities

 While we are still learning the best practises for exits, here are a few of the most important exit opportunities:

  • When a VC (financial investor) ends up buying out the angel investor's equity.


 This is the best possible double-digit exit return for angel investors.

  • When a strategic acquisition (strategic buyer) occurs, the angel investor stake is purchased.


 This strikes as an average exit with limited cash returns.

  • AcquiHire exits when a startup fails and a forced merger occurs with an equity swap to prevent further erosion of investor capital.

While investing in the right opportunities is critical, legal documentation that helps protect angel investor rights is also critical.

 One important term in exit events, for example, is liquidation preference.

It is a phrase used in venture capital SHA (shareholder agreement) to clarify which investors are paid first and how much they are paid in the event of a liquidation event, such as the company's sale.

The objectives of VCs and angel investors are never the same, and their shares in upsides are never the same.

To summarise, exits are random, but success still necessitates full-time efforts.

 Investors should plan on taking an exit between 6 and 12 months.

 Not every startup is ready for an exit.

Even if it is ready for exit, only one-third of them expect to be successful.

It's a lengthy process, and founders should not be in charge of exit transactions because they have a direct impact on the business.

You also don't want inexperienced founders learning how to manage investor exit with VCs or strategic buyers.

The prudent approach is to have an IB (investment banker) take on the mandate in order to maximise the chances of the desired exit occurring.

Create an exit team composed of the founder and an investment banker to boost your exit probabilities and watch your returns multiply!


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