You made it through the fundamentals of early stage investing and now it is time to reap the rewards. Harvesting is the last stage that Amis and Stevenson write about in Winning Angels. Harvesting is defined as the process for investors and entrepreneurs to exit the business and, hopefully, with a capital gain. (Amis and Stevenson) According to Amis and Steven, there are seven ways for a harvest to take place. Five have positive outcomes and two result in negative outcomes. Here are their definitions (Amis and Stevenson):
+Walking Harvest: Cash is distributed directly to investors on a regular basis.
+Partial Sale: The investor’s equity is sold to management, another shareholder, or an outsider.
+IPO=Initial Public offering: The company sells a percentage of its shares, which are listed on one of the stock markets, creating a market for investors’ shares.
+Financial sale: The company is bought mainly for its cash flows.
+Strategic Sale: An industry buyer purchases the company and aligns it with interests in their other companies.
-Chapter 11: This is a form of bankruptcy where the company is reorganized and investors may get some return although their shares of ownership may be reduced.
-Chapter 7: This is another form of bankruptcy where the company goes out of business and everything is liquidated. Most investors will receive little if anything as the debtors are paid first.
All the ways for the harvest have advantages, disadvantages, differing returns, and risk. Obviously, the investor and the entrepreneur want to stay away from any form of bankruptcy. Throughout Winning Angels, Amis and Stevenson mention exiting over and over and how what is done while structuring and negotiation can have impact when harvest time comes. Although it sounds like the cart before the horse, the entrepreneur should be thinking about an exit plan from the very beginning as we know that is what investors are looking at: the return on investment.
If the exit strategy is built into one’s plans, then the question is, When should I sell my company?
Mark MacLeon writing for INC.com about tech companies, and Kate Harrison writing for Forbes.com about her own startup provide suggestions and questions to help the entrepreneur figure out the answer.
MacLeon says this is “one of the toughest business decisions you will ever face.” First, he suggests starting with the end in mind. What was the endgame? What were your goals when you started? Have they been met or are you on the way? What is your vision for the product or service? Does it look like you are headed to being the market leader in this area? (MacLeon)
Next, consider your stakeholders and there are many. Perhaps you have co-founders, you certainly have employees, partners, vendors, customers, and investors. Co-founders will require a decision made together, perhaps a partial sale is a possibility. If some of the investors are venture capital firms they may want to exit if they do not see you are headed to being a market leader. Remember VC’s are looking for those big returns. It does not mean you must sell right away, but you will need to have some conversations to discuss this issue. (MacLeon)
Next, he asks you to consider how long will it take you to get to the sale price you have today? He suggests if it takes two or more years to get to that price it may be a good idea to take the deal. If you are much closer than two years then wait it out. (MacLeon)
“Will this serve your mission?” asks MacLeon. If you are to sell to a large company they will have more resources and connections to help you with your mission. Be sure to do the due diligence if you plan on being part of the company, you’ll want to know that you can keep working on your mission. (MacLeon)
MacLeon’s last question, which he says is often never considered during the sale price, is to ask yourself, what else will you do? Do you love what you do, what happens when you are not doing it anymore? Only the entrepreneur can answer this question, as it is very personal.
Kate Harrison says, “Selling is all about letting go and moving on and it is very hard to do.” Some entrepreneurs may feel sad or remorse after selling even if there was a big payday. She has seven questions the entrepreneur should ask themselves to see if it might be time to sell.
- Which do I have more of: passion or exhaustion? If the passion has dwindled with no chance of it returning, exhaustion may have set in.
- Do I have a viable business model? If not, is there one on the horizon? If yes, is it one I can tolerate? Consider if the business model is not on its way to success or you do not want to run it.
- Do I have an A+ team? Can I recruit one? Can I afford them? If you are unable to pay the people to make your dream come true, it might be time to move onto another idea.
- Do my circumstances allow for the level of financial sacrifice required to run a startup? Are you in the position to give your startup the time and money it needs? Is the reward worth it?
- Could a sale solve my problems? Will a sale to a strategic buyer help meet your goals?
- Will someone buy us? The only way to know this is to speak with people who look at deals and set up an informational meeting. If both parties are interested, negotiations can begin.
- What are my other options? What else is going on in your personal life and the company?
Harvesting is the final stage for the both entrepreneur and the investor and can be very financially rewarding for both. Yet for the entrepreneur it can mean much more. The entrepreneur’s reasons for selling require personal reflection and time to make sure it is the best decision for them too.
Amis, David, and Howard H. Stevenson. Winning Angels: The Seven Fundamentals of Early-stage
Investing. London: Financial Times Prentice Hall, 2001. Print.
Harrison, Kate. “How Do You Know When It Is Time To Sell Your Company?” Forbes. Forbes
Magazine, 08 July 2014. Web. 20 June 2017. <https://www.forbes.com/sites/kateharrison/2013/12/13/how-do-you-know-when-it-is-time-to-sell-your-company/#5bb8953f2b05>.
MacLeod, Mark. “When Should You Sell Your Startup?” Inc.com. Inc., 19 Feb. 2015. Web. 20 June 2017.