ENT 640: Winning Angels: The 7 Fundamentals of Early-Stage Investing

ENT 640 Week 8: Harvesting

ENT 640 Week 8: Harvesting

“Harvesting is the endgame of early-stage investments, the financial score by which you will measure your success. (pg.287)” There are seven harvesting methods, five are positive ones and two are negative.

Positive:

  1. Walking Harvest
    1. Owners take cash out as it is earned or have positive cash flow and continue to own the business
    2. No way to get a valuation
    3. Risks are created through the relationship between the owners and managers
    4. This is known as a back-up option method
  2. Partial Sale
    1. Investors sell their shares through a buy-out agreement
    2. Sale price is negotiated and usually 3 to 5 times profits
    3. There is no risk after the sale occurs
  3. Initial Public Offering
    1. “IPOs allow the management team to continue to run the company, although with significant scrutiny, while also providing liquidity to investors and creating a major new channel for raising capital. (pg.294-295)”
    2. Liquidity for investors and easier to raise capital for the company
    3. Restricted stock cannot sell for 6 months, the company will depend on the investment banker and won’t be able to control the exit strategy.
    4. Returns depend on when you sell and the market
    5. The market is the biggest risk
    6. Most VCs prefer IPO where everything is public
  4. Financial Sale
    1. Purchasing the entire company based on current and expected cash flow
    2. Management cannot predict employment based on the financial buyers wanting to make changes.
    3. No risk after the sale is made, before risk of leaking information to competitors
    4. Financial buyers will purchase any size of business with positive cash flow
  5. Strategic Sale
    1. This is the best method for successful companies, “The best returns generally come from strategic sales. (pg. 297)” The buyer will receive more benefits from this type of sale including, marketing, operational and financial benefits.
    2. Faster negotiation and management is expected to stay.
    3. They may have to share information with competitors
    4. The entrepreneur may receive a consulting contract or option in the company
    5. The strategic buyer is usually a partner in the company and they can plan the strategic sale from the beginning

Negative:

  1. Reorganization Bankruptcy
    1. Develop contract to show that investors can take control of business when it begins to fail
    2. Own equipment or name of company to assume possession
    3. Earning a return is unlikely
    4. Gives the company another chance
    5. Loss and cost of money for reorganization expenses, loss of time and energy
  2. Total annihilation
    1. Time and energy saved on negotiations
    2. Rules must be followed
    3. Risk of investor lawsuits
    4. A clear-cut end with the final decision of a Judge

There are six fundamental value events to determine a good harvest. “VCs spend 75% of their time on harvesting. (pg.306)”

  1. Profitability or cash flow break-even
  2. Acquisition of certain strategic partnerships
  3. Development of a brand name
  4. A VC investment
  5. Demonstration of a new product or service offering in the marketplace
  6. The creation of a great team

To have a successful harvest it depends on having experienced investors, a good management team that focuses on value before exiting, a good market, and wealthy strategic buyers.

References:

Amis, David, and Howard H. Stevenson. “Harvesting.” Winning Angels: The Seven Fundamentals of Early-stage Investing. London: Financial Times Prentice Hall, 2001. N. pag. Print.

 

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One thought on “ENT 640 Week 8: Harvesting

  1. MacKensie,
    I agree. Having a good exit strategy and management are essential to any business’ end game. Whether or not an entrepreneur wants to take a company “public” there should be a contingency plan just in case. I remember watching “The Social Network” movie which was a loosely based portrayal of Mark Zuckerberg’s creation of Facebook. One of the main issues of the movie became during Harvesting. From pressure from initial angel investors they had to ask themselves when and if they should take the company public, what would happen to their user base, and what would happen to the overall culture of the business. All of these points where considered and eventually they did take the company public with an overwhelming response from the stock exchange. There are no guarantees in business and hard decisions must be made. Taking calculated risks is the nature of any business and sometimes they have a great reward

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