The Art of the Buyout: Or How to Collect Your Money

One of my favorite scenes of the 1983 Monty Python classic “The Meaning of Life” comes in the very beginning. In fact, the scene is technically a whole separate mini-movie unto itself. It’s about the Permanent Assurance Company, which is depicted as a boardroom full of very old, crotchety men. The gist of the story is that these graying men, fed up with the corporate world, decided to take it over. They turn their building into a “pirate ship,” themselves into corporate raiders.

What ensue are high-flying antics and much bloodletting–which in the parlance of multinationals is called “mergers and acquisitions.” If you have never seen the movie, or don’t remember the scene, it’s worth revisiting for its twisted take on hostile buyouts and takeovers–obviously, what else would you expect from Python.

Now you on the other hand, as an angel investor, might find the scene hilarious in a surreal sense. But when it comes to reality, your ideal depiction of the buyout would be a little less violent, much more joyous event. Try a wedding, with flowers and good food, a toast with brut, and you the bride’s father, handing her off to her suitor, who then promptly hands you a sack of cash.

Doesn’t Matter How, Just Get Out

That’s the symbolic happily-ever-after you’re looking for–the bride of course being the startup or entrepreneur who you’ve helped grow to become a successful enterprise, the suitor being a larger competitor in the same industry, the sack of cash your heady returns on investment.

That’s not to say a buyout is the only way for you to realize returns on investment. But it is perhaps one of the more common ways, and perhaps one of the soundest ways to ensure your returns. And a buyout doesn’t necessarily have to happen with a competitor. The possible suitor could also be a private-equity group, venture capital firm, or some other investment vehicle. The other primary way to collect on your investment, or exit strategy, is for the startup to go public, thereby loading up on equity from a market.

No matter how you do it, get out. There is some disagreement over how soon angel investors should plan their exit strategies. But the general rule of thumb for you should be exiting in three to seven years.

Evidence backs this up. A study [1] recently put out looked at nearly 100 U.S. angel investor groups and more than 500 single investors, and it found that, when investors exited their investment in 3.5 years, they scored returns of 2.6 times. And they didn’t even need a pirate ship!

But get this other finding from the study: when angel investors didn’t get out–and instead “double-downed” (or re-invested) in the startup–they lost more money the majority of the time. About 70 percent of the time to be exact.

Homework And More Homework

The way to succeed then is to ensure your startup gets bought out relatively soon after you help launch it. But how? One of the best ways is to do your homework–your due diligence–before ever handing over any capital to the entrepreneur.

Of course, there are more to the art of exit strategies than what I’ve mentioned in this post. So do additional homework by networking with other angel investors, tapping into the collective wisdom of such online communities as Venture Hype.

Note:

1. Angel Investors in Groups Achieve Investment Returns In Line with Other Types of Equity Deals