Early Stage Investing- Harvesting
Week 8: Harvesting
In reading Winning Angels: the 7 Fundamentals of Early Stage Investingby David Amis and Howard Stevenson, the seven harvesting methods are discussed. Harvesting is a term used as when to exit or collect funds. Five of the harvesting methods are positive while two are negative. The five positive methods are walking harvest, partial sale, initial public offering, financial sale, and strategic sale. The two negatives are reorganizing and bankruptcy.
I found it very interesting that this chapter mentioned “VCs spend 75% of their time harvesting.” So in the What Do The Winners Do section one of the bullet points was bring in a venture capitalist. You wouldn’t think that an angel investor would be interested in bringing in more investment from a VC, but really this is a positive thing. I can see why it would be positive because a venture capitalist is interested solely on the ROI and then you as the angel investor would feel more secure on the future direction of the company.
I also found that having the entrepreneur continuously mention the angel investors exit as a positive thing interesting. At first to me it would seem like the entrepreneur was just trying to get rid of the angel investor as soon as possible. But, I think this can also be a positive thing. It’s important to know where the road will end and to be able to see the light. As someone who is going through a similar situation at my current job, knowing what the goal is and an estimate of the exit gives the whole team transparency. Without this transparency and knowing what the goal is, we as a team don’t know what to work towards. Of course, growing is great, but growing how? Doing what? If the entrepreneur already knows what the answers to these questions are, I can see how this would be a leg up and be very attractive to the angel investor. The angel investor probably wants this deal to be as clear cut as possible and also for them to have aligned views with the entrepreneur. From the beginning stages, having an alignment is super important, but then if thinking about the end at the beginning, this relationship will have less bumps in the road because of the transparency from the beginning stages. All angel investors want to be able to see their returns and project them as closely as possible. By understanding what the entrepreneur wants and vice versa, the communication will be smoother and therefore at the end of the deal, both parties will hopefully have a positive exit.
Throughout this novel, the importance of a positive relationship between the entrepreneur and the angel investor is repeated. In any deal, trust is a major factor and choosing which deal is right for you will boil down to whether or not you trust the other to win in the end. If both have trust and a clear structure, then the deal is more likely to succeed than fail.
References: Amis, David, and Howard H. Stevenson. Winning Angels: The 7 Fundamentals of Early-Stage Investing. Financial Times Prentice Hall, 2001.