Angel to Exit
Angel investment powers startups that ultimately exit in one of four ways1:
About 40% fail, losing all of the invested funds, usually within 3 years.
About 30% morph into lifestyle companies, returning only the initial investment in 4-8 years, for example through a buy-back of the ownership.
About 20% succeed marginally and exit through buy-back or sale to 3rd parties for returns of less than 10-to-1, and taking from 3-7 years to do so.
About 10% do great, grow to sale or go public, paying 10-to-1 or better in 3-7 years.
How do I invest in the 10% that do great?
Ay, there's the rub.2 While there are some predictors (better due diligence, more assistance from the angel investors, better team, etc.), nobody really knows how to predict very well which companies will fail and which will excel. That's why diversity is the solution for the investor who can invest in 40 or so diverse companies in this space.
But the minimum is often $25K!
This means to get the benefits of real diversification, and the returns that run in excess of 20% per year (when you stay in for 5 years or so), you need to invest a million dollars and spend at least a week evaluating each company and many more weeks helping them succeed. There are funds that help to accomplish this Angel return, if you can go in for maybe $50K and be part of a larger group.
So how do you succeed?
Of course that's what this series is all about. How to go from angel to exit and do so with the best chance of success, whether you are a company or an investor.
Along the way, I will tell you some of my story and stories from others, and how I went from living in my car in south central Los Angeles in the 1980s to my house with an ocean view in Pebble Beach today. I'll talk about failures and successes, lessons I have learned, and lessons I am still trying to learn. As a hint, I have come to conclude that I learn more from failures than successes. If I sound to you like a know-it-all, now you know why!
From Angel to Exit usually takes 3-7 years. On average, if you do your job well, you can get better returns than most other investments with similar risk levels, through diversification. But to succeed, you need to do certain things well and not make big mistakes. This series is a study in what things you need to do well and big mistakes you can avoid.
1 R. Wiltbank and W. Boeker, "Returns to Angel Investors in Groups", SSRN 1028592, Nov. 2007
2 Hamlet's soliloquy
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