Questions

What exit strategies do angel investors want/prefer for a service business?

Reading up on it, I know VCs are not keen on investing in service businesses. But, angel investors are more likely to invest in a service business startup. So I'm curious, what type of exit strategy do angel investors prefer? In an ideal world, I would like to keep the business (not sell it) and keep it as a private corporation, no public shareholders to answer to. That's the goal, but might change . Thanks.

8answers

Keep in mind that investors invest for returns. Telling a prospective investor that you want his or her money to grow your business but don't plan on ever generating a liquidation event that pays him or her a dividend is not likely going to work; angel or not.

You may be better served with debt financing where returns are generated in the form of interest payments not equity value growth.

BUT, if equity financing is the plan, you're going to want to develop a strategic exit plan right from the start.

That means identifying prospective buyers, strategic channels etc and characterizing the value drivers for each right up front.

You'll find prospective buyers come in a number of forms; competitors, bigger versions of you, strategic partners, private equity, etc. Each will value your business in different amounts for for different reasons. Understanding this is vitally important for you to navigate to securing the right money, from the right sources, with the most favorable terms.

Once you've qualified and quantified each of them, then determine what (specifically) you're going to need to do to align your business with those prospective buyers generating the highest returns.

This will drive your business model and go to market strategy and define your 'use of funds' decisions. This in turn result in a better, more valuable business whether you exit or not.

Do it this way and you'll have no trouble raising money from multiple sources.

You can learn more about the advantage of starting with a Strategic Exit plan here: http://www.zerolimitsventures.com/cadredc

Good luck.

Steve


Answered 8 years ago

(I've built/sold a service company + raised angel investing 2x + invested in 23 companies as an angel)

The term angel investor can be misleading. Assuming you mean an investor who want's equity for capital, then most never invest in services businesses. Why

1) Too much risk, as it's VERY people dependent
2) Hard to scale - continues to cost money
3) The upside vs. the risk isn't there (1000x returns).

I'm not saying you can find someone to invest money into your business, but they'll likely want some kind of ownership (control) + dividends (ROI) on their money.

That kind of angel is typically another successful entrepreneur with an complimentory (or unrelated) service company looking to diversify + add value through advice, etc, or high net-worth individual that want's a better return on his money then market rates (typically 12%+ per annum).


Answered 8 years ago

I'm happy your a re negotiating exit strategies already but may I ask - do you have a working business model (not a working business, a working business model)? If not, I would start with that...
As tou your question - exit strategies are fluid. You need to have one but why commit on one now? As long as there are options on the table for the investors to see their money back - if it's an IPO, M&A or distributing dividends the investor should be happy.
You may also change you mind about an IPO once you have the business up and running, so "never say never".
BTW- Uber is a service company ... if you have a good idea that can scale and you will be able to show the investors how fast they will see their money back - you will find investors.
If you wish, you can call to discuss negotiations and pitch strategies.


Answered 6 years ago

I've run 2 service businesses and as the previous answer calls out, investors usually invest for returns. Whether it's product or services, it's about returns.

Investors in service businesses are usually looking for the singles and doubles, whereas the product investors are often looking for homeruns with many strikeouts.

Service businesses more often than not leverage their operating cash flow to expand the business and reinvest their profits. IPOs are rare. Acquisitions are occasional. More often than not it's bankruptcy or building a sustainable business. When it's a sustainable business there should be something worked out at the board level on how to return the winnings/profits to the investor.

Depending on the difficulty of the service business, the operating cash might be locked in the business for several years while it clears the initial hurdles of building for scale.

Hope this was helpful. Feel free to reach me here for more information.

Brian


Answered 5 years ago

Take for example that I am an Angel Investor in your company. As an angel investor, I first look at the horizon and the projected ROI (return on investment). In general, I hold an investment from 3 to 5 years and expect to cash out and make a profit at the end of this period. Hence, I am very unlikely to invest in a start-up that forecasts an exit event in more than 5 years. The exit route has a direct impact on the projected ROI as it is not equal to sell a business to a competitor, plan an IPO or sell part of the company to a venture capital fund. First, I asked myself who would be interested in buying the company and why. A potential buyer may be interested in acquiring
(i) the user base,
(ii) the technology and (iii) the brand, as the Diversity & Inclusion solutions are built around it. Also, there are different exit routes that could be followed.
1. M&A Route: This exit strategy is built around a potential sale to
(i) a competitor or
(ii) a business partner offering complementing products or services.
2. VC Route: In this case, a stake of a company can be sold to a venture capital fund. A VC may be interested if there are obvious synergies with other portfolio companies or the expected return on investment is lucrative in their eyes. What if they can grow the company exponentially and list it in 2-3 years?
3. IPO Route: A well-executed IPO at a high valuation means one thing a skyrocketing return on investment for the founders and early investors. It is not easy to achieve, though. Looking at Crunchbase stats, it takes 9 years on average for a SaaS company to exit. The cost of an IPO is also considerable and the combination of all the above makes it the least preferred exit route in this case.
When developing an exit strategy, start-up founders need to take into consideration the profile of the investors they will be pitching. What is their horizon? Will they be interested in subsequent funding rounds? What were the exit routes of some of their portfolio companies? What was the ROI they managed to achieve so far? Few investors will jump from joy if the forecasted return on investment is well below the average ROI they have managed to achieve so far.
Besides if you do have any questions give me a call: https://clarity.fm/joy-brotonath


Answered 9 months ago

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