Having seen many Angel investors be washed out by dilution and the preferences held by later investors into a company, particularly VC’s, I have adopted a stratey of looking for capital efficient investments (that won’t need VC to exit).
These tend to be B2B business with some real IP. Its necessary to develop some sales – to quality customers, but not necessary to scale the business to show value. Acquirers need to see that “the dogs will eat the dogfood”, but you don’t need to feed every dog to do this. Just the big dogs that acquirers are likely to care about. Then sell the business, not on the PE multiples of the investment business, but on the acquirers PE – the value of the futures sales and profits they will make pushing the product through there much larger distribution channels.
Yes, product sales need to be scalable – but that scaling does not need to be done by us to prove value.
Typically, we are looking at total lifetime investment values of up to $5m – so a 10X return on a $50m exit. Which just happens to be the average published exit value.
Till now this has been intuitive – a belief that this is an effective strategy.
The American angel Capital Association (ACA) have just published some data looking at the returns achieved on 105 investments within the Launchpad Venture Group portfolio.
Turns out that those investments that were done on a capital efficiency basis – Thinking about future capital requirements and giving preference to capital efficiency (where the diligence team did not think it would need to raise more than $5M in outside capital over the course of the business) increased returns by 35%.
Capital efficiency and future planning – less capital at risk, spreading your investments over more (smaller capital need) deals, less dilution and likely earlier exits, with a 35% better return. What’s not to like?