Exit Strategy For Angel Investors: What Is The Right Time And Risk Involved?
A good exit strategy will be able to help you cash out and make a profit if there with subsequent funding rounds
The life of an angel investor can be incredibly exciting as well as rewarding. You get to meet young and promising entrepreneurs, listen to their ground-breaking ideas, envision how they can change the world, and most importantly, participate in their growth journey. However, this high-profile lifestyle also comes with a fair share of risks.
A study by IBM Institute states that 90% of Indian startups fail with the first five years of inception, and thus the importance of planning your exits even as you make your investments. A good exit strategy will be able to help you cash out and make a profit if there with subsequent funding rounds. But what is the right time to exit and what’s the risk involved?
2021: A pivotal year for investors and startups
Angel investment has undergone a major transformation, alongside the startup ecosystem, over the past few years, Startups have improvised and adapted continuously and have managed to tide over the pandemic.
Innovation is being embraced by both the startup ecosystem and the investor community, especially in sectors that have seen positive tailwinds amidst the global crisis.
The angel investment ecosystem has in fact provided much-needed respite to the country’s startups by helping them weather the storm and recover from the disruption and offering the necessary handholding and mentoring along with funds. Several startups which have emerged over the recent years have witnessed angel investors and angel networks relooking their approach to investing. Investors are now looking to manage cash better and seeking milestone-based investments along with customer traction. As angel investment ecosystems like ours have provided much-needed respite to startups by helping them weather the storm and recover from the disruption by offering the necessary handholding and mentoring along with funds, the startup ecosystem is regaining its footing and investor sentiment is gradually moving away from staying completely muted.
The right exit strategy
When we talk about the right exit strategy or the perfect time to exit, there is no cookie-cutter approach to make an exit or yield returns. However, it is vital to understand that startup investments are not like a loan that will be repaid with interest. Angel investors look at the ROI when they trade their stake in the company for cash. This means that making a successful exit won’t happen overnight.
The exit can either be a financial exit when a VC buys out the angel investor’s equity, a strategic exit where an acquisition takes place resulting in buy out of the angel investor’s stake, or an acquihire exit, in which the startup that doesn’t seem to be profitable goes through a merger with an equity swap to halt further depletion of investor capital. Liquidation, IPO (Initial Public Offering), and family succession are some of the most commonly seen exits.
Therefore, an ideal time to exit a startup would be when the business is registering high growth rates and gaining traction while making substantial profits. However, this would vary for each company. Investors simply need to consider the circumstances of the venture, market scenario, return on investment, etc., and accordingly make a decision. While there is no secret formula for an exit, what’s certain is that angel investors need to be on the lookout to make successful exits and yield maximum returns on their investment.
Successful exits may be arbitrary, but they still require full-time efforts, involvement, and patience to gain the expected ROI. There are undoubtedly risks involved, but the right strategy and timely exit can be highly rewarding
-By Nandini Mansinghka, Co-Founder & CEO of Mumbai Angels
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