Between Hell and a Homerun: One Angel’s Guide

Well before any money is put into a business, angels review how the business might succeed (or fail) and make their determination from that. They might also consult the stars, bones, tea leaves, an ancient shaman, and perhaps 1-800-PSYCHIC. They want to know:

1. How will the business do
2. What will come of their investment

In short, angels peer into the future to determine a likely exit scenario. Obviously, a gold-plated exit scenario that results in martinis on a beach is the ideal exit, but more realistic exits might simply have lots of zeros behind a dollar sign.

And, smart angels are aware that a business might not succeed as planned and an exit scenario might be more about “how do I save some skin?” or even “how quickly can I run in the other direction?”

A Resource from John Huston

On The Frank Peters Show in May, show host Frank Peters featured John Huston, chairman of the Angel Capital Association. Huston provides an excellent resource called “10 Exits” in which he outlines 10 possible outcomes of any angel investment. At the “brass ring” of investing, Huston describes the Grand Slam Homerun, which exceeds a 10x return in 5 years. And, at the very bottom of the list is Angel Hell, in which an angel loses her investment, friends, and reputation. (I call this the “Kanye West” of outcomes).

In between Homerun and Hell are varying degrees of success (and failure) which sound more like names of drinks made up at fraternity: A lucrative exit; The “Harry Houdini”; Lost a little; My grandkid’s company; The Zombie; Deductible loss; Funeral expenses; and, The Worst gets worse.

How Angels Can Benefit

What I like about Huston’s list is this: I don’t believe this simply serves as a template for an angel to look back and identify what previous successes or failures were like. Rather, I believe that angels can use this as a prescriptive chart to identify how their investment is progressing and what likely outcomes may result from current conditions. (And, naturally, to mitigate losses).

So, if an angel analyzes his or her investment and realizes that it’s “The Zombie,” which Huston describes as “a walking dead venture,” then it’s decision time. And then it’s action time. Fix it up (if you can) or take it on the chin and move on.

Since every investment does result in an eventual exit, angels should spend more time thinking about them and creating conditions to maximize a positive exit. Huston’s list is available for download.