An exit strategy for angel investors refers to a planned method through which the angel investor can realize a return on their investment and “exit” from their involvement with the startup. Exit strategies are typically implemented when the startup has reached a certain level of success or maturity. Here's an example of an exit strategy for an angel investor:
Scenario:
Let's consider a hypothetical startup “TechCo” that has developed an innovative software application and has received angel funding of $200,000. The angel investor holds a 15% equity stake in the company.
Exit Strategy: Acquisition
After a few years of operation, TechCo has successfully gained traction in the market, acquired a significant user base, and demonstrated steady revenue growth. At this point, the company attracts the attention of a larger technology company, “BigTech Inc,” which sees strategic value in integrating TechCo's software into their product offerings.
Acquisition Offer:
BigTech Inc. makes an acquisition offer to purchase TechCo for $10 million. This offer values the entire company at $10 million.
Angel Investor's Exit:
As the angel investor owns a 15% equity stake in TechCo, their ownership is valued at 15% of $10 million, which equals $1.5 million.
Exit Process:
The angel investor agrees to the acquisition offer, and the acquisition process begins. The necessary legal and financial due diligence is conducted, and the terms of the acquisition are finalized.
Realizing the Return:
Upon completion of the acquisition, the angel investor receives $1.5 million from the proceeds of the acquisition. This represents a return of $1.3 million on their initial investment of $200,000, resulting in a significant return on investment (ROI).
End of Angel Investor's Involvement:
With the acquisition, the angel investor has successfully exited their investment in TechCo. They no longer hold equity in the company and are no longer involved in the company's operations. The angel investor can now use the proceeds to invest in other startups or allocate the funds as they see fit.
It's important to note that exit strategies can vary based on the specific circumstances of each startup and the preferences of the angel investor. Other common exit strategies include initial public offerings (IPOs), mergers, or the sale of the angel investor's equity stake to another investor. The timing and terms of an exit strategy are typically outlined in the investment agreement between the startup and the angel investor.