Recently I met Chris Spencer-Phillips (S-P) and Chris Brigden of First Flight Placements; they are aware of the difficulties that experienced investors have when finding companies to invest in and they are also aware of the difficulties young companies have raising funds. They propose a different approach... and it is one that is working well.
What should be on that slide called “Exit” in the pitch? What is realistic for both entrepreneur and business angel (or investor)? Put it another way, if you’ve just bought $250,000 of shares, how can you get it back?
An average, successful Business Angel investment takes seven years to fruition. At the end of that time the investor may be forgiven for wondering if his money is ever going to be returned along with an uplift to cover the risk.
Surprisingly there are only four ways to get the money back – Company Sale, Initial Public Offering, Share Buy Back and Dividend. Simplest by far is the company sale although that has its potential complications. So let’s look at each in turn:
- Company Sale. The easiest option for all parties is when another company purchases all the shares in the investee company. The owner of a share simply receives their portion of the value paid for the company. There are variations though: the buying company may purchase the company assets leaving all liabilities in the investee company which then can pay it’s owners dividends or buy back it’s shares leaving enough to manage an orderly dissolution (time for the tax advice I think!).
- Initial Public Offering (IPO). The investee company launches on a public stock exchange raising more capital. This is the “Holy Grail” of investment… everyone heard about Google, Facebook, etc. but these are the outliers. In the more standard IPO there are two issues for investors. Selling at the time of the IPO suggests low confidence in the future of the company and may negatively affect the IPO price. Sell the shares later but be dependent on the liquidity of the stock.
- Share Buy Back. The investee company could make a unilateral offer to purchase the investor’s shares subject to the Share Holders’ Agreement. The difficulty for any investor is knowing what is a fair price for the company. The CEO may be aware of something that could dramatically improve the value just after the sale is agreed.
- Dividend. The investee company can pay dividends to the shareholders. The difficulty is that most investors would like the potential dividend re-invested to increase the asset value of the company so it can be Sold, complete an Initial Public Offering or Share Buy Back.
In this Era of Organic Growth I would argue that any company with Dividend on its Exit slide is the one I would vote for. It shows me that the mindset of the management team is to build something that has real value to its customers. Something with real value is easier to sell at a time that the management team decides.