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Experts in their field and divine in name they may be, but business angels cannot see the future any more than we can. After speaking to Peter Cowley, Cambridge-based entrepreneur and business angel, I ask, in such an uncertain sphere as angel investment what is the true worth of an exit strategy?
Hearing Peter talk about various businesses he has invested in during his time as a business angel, demonstrates just how much unanticipated change can befall a young company. For instance, Peter tells me about a recent success story he has been involved in - Plumis - a company that has had to endure running out of funds twice, two 5-month-long stints where the directors ceased paying themselves and moving entire market sectors before turning around its fortunes. Peter says Plumis now operates as a ‘very well protected’ innovative mist-based fire suppression system business with ‘good gross margins’, but it is clearly a very different company from the one he invested in originally. This is not to say his investment was an imprudent one merely because the company has evolved. In fact, it is likely an example of why angels often invest in the team above all else. But it does beg the question, if so much uncertainty faces start-ups, why is an exit strategy, that is forecast five or six years in advance, so important?
In fact, when I ask about Peter’s own personal experiences of exits, he says: ‘the exit I had a few years ago bore no relation to the discussions nor plan that we had at the beginning’. 'That is a [particularly] bad example of exit planning’, he jokes. But perhaps it isn't. Perhaps an exit plan’s value has very little to do with a company’s actual exit. Take Peter; he has an investment portfolio of around thirty start-up businesses and has only seen one exit to date. Yet he has scrutinised an exit strategy for every company he has invested in. Why?
First, an entrepreneur’s exit strategy is an important tool for a business angel like Peter, as it can be used to evaluate the entrepreneur; to see if they understand the market they are attempting to enter and whether they want to move towards a shared goal with the investor (to an exit opportunity). Peter says he expects an entrepreneur’s exit strategy to detail the exit type (usually a trade exit), time frames, associated business values, who would likely buy the business, as well as to have industry-specific case examples to back these claims up.
Secondly, exit planning is a good template for an angel to apply his/her own knowledge, expertise and instinct to a company’s long-term business plan. When evaluating an opportunity, Peter explains he wants to see a business that will mostly likely be bought out and as this buy out is likely to be based on a multiple of EBITDA (he cites 8/10/20 times, depending on growth prospects), the business plan needs be based on a method of monetisation that is likely to lead to profitability. Although clearly backed by sound reasons, Peter describes this process as ‘crystal ball gazing’, thus conceding himself it is a rather inexact science when it comes to predicting future markets.
When it came to analysing the exit strategy for SyndicateRoom, the equity crowdfunding platform that I founded, Peter was critical and openly disagreed with what I thought an exit might look like. Peter still invested in every round to date though, proving that the theoretical exit I described is almost meaningless but the thought behind it was critical to attract Peter’s investment. According to Peter, he invested on the strength of the founding team rather than any early exit “dreams”. Points for our co-founder and CTO Tom Britton.
Peter is a board member of the Cambridge Angels and Investment Director at Martlet - the Corporate Angel division of Marshall of Cambridge. He was also dubbed one of the ’10 Business Angels all entrepreneurs should know’ by AngelNews as well as one of the ’21 Business Angels you need to know about’ by iBusinessAngel.
Business angel investment is a fine balance of intuition, experience and reason, which often leads to almost paradoxical explanations of rationale. The importance of an exit strategy - a vital plan for a future that is likely never to be realised - is a perfect example of this nuanced behaviour in action.
This article forms part of a series in which I interview some of the most prolific UK business angels and find out what they are really thinking about when asking questions of entrepreneurs. View my previous interview with Jonathan Milner about the importance of the team for Business Angels.
