Asking a business team to consider an “exit strategy” before they’ve proven that their business idea works can lead to wishful thinking, with less foundation than the high growth sales forecast that precedes it. Here are six reasons why many companies and investors are wary of “exit expectations”; high growth start-ups take note – forewarned is forearmed.
I’ve had a couple of conversations recently with people whose plans depend on a large number of Business Angels: companies who simply want a rich one; and those organising events for potential business angels. So it got me thinking that it may be possible to work out just how many business angels there are in Australia using publicly available information… so let’s see what we can do.
To make a substantial profit on an investment, a reasonable sum needs to be invested. Ten times return on $10,000 is only $100,000 and since most companies are looking for $500,000 that would require 50 angels! So let’s start with $100,000 as our minimum investment (a host of just five angels required to reach $500,000).
According to popular wisdom there is a 5:4:1 ratio for returns (see my blog “The real results… UK & USA BA exit statistics” for more details). That is 1 out of 10 investments pay for the rest. To have a chance of getting that one in ten, then let’s assume (and this is a big assumption) we invest in ten companies. So that means we have a pot of $1,000,000 to invest.
What about follow-on investments. Again popular wisdom suggests that an investor should participate in following rounds so as not to be diluted. Let’s assume our investor is lucky and only follows his investment in three deals costing $330,000 a time. That means our Investor will need an additional pot of $1,000,000 for reinvestment.
So our Investor has set aside $2,000,000 for angel investments (which works out at just over one million sterling which, by a happy coincidence, is average investment pot size – see the previously mentioned blog). That’s not going to be their whole wealth. In fact I would be surprised if anyone puts more than 5% of their wealth into these high risk investments. So that means the investor’s total wealth is $40,000,000 (minimum).
So how many people are there in Australia with a personal wealth of more than $40 million? One way to estimate this is to take the BRW Rich List of 200 wealthiest people. The 200th most wealthy person has a fortune of $210 million which is a bit more than our $40 million. Fitting a power law curve to every tenth member of the rich list we get a formula of wealth = 8933 * (rank/10) ^ -1.274 (for those who are statisticians the correlation coefficient is 0.95). Solving this equation for the case where wealth is $40 million, we get a rank of 698. In other words, using all my assumptions, there are about 700 people in Australia who could fit our profile of a Business Angel purely on money alone.
Restrict your search for Business Angels to Sydney (which has 20% of Australia’s population) and this is 140 people.
Restrict your search to the people who have an aptitude to be a Business Angel and your 700 reduces to… what do you think?
Would you like me to recalculate using different assumptions? Make your request below and I’ll see what I can do.