#Dissecting Series: “Winning Angels, The Seven Fundamentals of Early-Stage Investing

HARVESTING: The 7^th Fundamental

When used broadly, harvesting is an agriculturally related word that describes collecting or extracting resources or benefits from a particular source or situation. In investing, harvesting refers to realizing returns on an investment by exiting or converting it into cash or other forms of value.

In this extract, the seventh fundamental, harvesting, seeks to relate what angel investors ultimately take away from their investments and how they can strategically ensure that the final returns are worth the ‘investment trouble’ embarked upon.  In addition, the biblical perspective of harvesting readily comes to mind, which likens the entrepreneur to a steward called to manage resources. These resources need to be managed wisely and responsibly. In other words, investors need to ensure that the start-up they are committing their resources to has a predefined exit plan by the entrepreneur.

The authors expound on the methods of harvesting both from a positive and negative point of view. Good harvesting includes the walking harvest, partial sale, initial public offering, financial sale, and strategic sale. 

The text highlights that an angel investor may choose to hold their stake in a company without selling it and continue to receive steady returns (referred to as walking harvest) in the form of distributions as the company generates profits. In contrast, a partial sale allows an investor to sell a portion of their stake in a start-up while retaining some ownership. That way, the angel investor can still realize further returns on remaining interest within the business. On the other hand, some investors wait until the start-up gets to the IPO stage (Initial Public Offer), by which a private company offers its shares to the public. Financial sales and strategic sales involve the sale of the investor’s stake. While the former seeks to improve returns by focusing on efficiency and growth through operational or strategic restructuring, the latter focuses on gaining a competitive advantage through acquisition.

Despite the harvest options available to the investor, choosing which investment harvest option is difficult. This decision is also something that the entrepreneur must make once he decides to seek out angel investors. Shava, in a peer review chapter, highlights this by stating, “Choosing between available business harvesting options may not be easy for the entrepreneur. Each harvesting option has its advantages and disadvantages. Therefore, the entrepreneur must diligently make the difficult decision to pick the one that would yield maximum returns in line with the sacrifices made in building the entity”. 

Negative harvests are bound to occur like many other things in life. The text underlies many reasons, including lousy market fit, insufficient funding, mismanagement, uncontrollable market conditions cause by fluctuations, bad strategy execution, bad scaling, financial mismanagement, low cash flow, outdated technology, or product, legal or regulatory issues, and unforeseen external factors are some of many reasons why a start-up may experience negative harvests. 

As an entrepreneur without experience in harvesting, one thing that comes to mind is that avoiding an exit strategy can affect good harvesting even when the entrepreneur realizes the need and decides to include a harvesting strategy sometime midway.

However, many investors and entrepreneurs often fear acknowledging the subject of harvesting, which may contribute to why negative harvests may occur within a start-up. Touraj Parang, in an article for Harvard Business Review, shares his experience as a founder; in the article, he states that “lack of advance exit planning led to the demise and fire sale of my first start-up Jaxtr, a promising communications solution founded in 2005 with top-tier VC backing and a large user base”. His beginning analysis states, “Several myths and biases about selling a business have rendered exit planning discussions taboo in the start-up community. And since creating and executing an exit plan is not a solitary endeavor and requires close collaboration with key stakeholders — senior leadership, board members, and significant investors — this taboo effectively shuts down any exit planning initiative before it gets started”. 

While the sixth fundamental of supporting introduces the concept of value events in the start-up’s success, the fundamental of harvesting shows the immense benefit it can help trigger harvesting opportunities, including achieving a certain level of revenue, gaining a strategic relationship, or launching a new product that increases the company’s worth with the ability to enhance the company’s value.

The fundamental of harvesting is vital for investing and entrepreneurs alike. However, for the investor, determining whether the entrepreneur has already developed exit strategies by conducting extensive study and due diligence, including looking into their background, prior endeavors, and reputation in the market to find any signs of a successful exit strategy should be prioritized. Connecting and networking is another way to find valuable insights about the start-up, or the investor can discuss directly with the entrepreneur to know more about their long-term goals.

Furthermore, according to Kirsty MacSween and Jonny Seaman, an outline of an exit strategy includes the following pointers for entrepreneurs:

• Investors expect an exit. Hence when calculating risks or rewards, investors will think about exit possibilities, and the entrepreneur should do so.
• An exit strategy gives a roadmap. Having one helps to assure investors that the entrepreneur has goals backed by plans to achieve them.
• An entrepreneur can establish their final exit once they can prove a realistic outcome of the exit strategy. This way, the investor too can adjust their expectations to suit such. 
• An exit strategy also makes the entrepreneur attractive to investors ready to buy into their exit plans as quickly as possible. 
• An exit assures that investors will cash out of the business. The opportunity to sell shares gives the entrepreneur and the investors returns on their investments.
• An exit strategy is also an escape if the start-up isn’t going as initially planned and proposed. 

Finally, harvesting results in both the investor and the entrepreneur recognizing the value and attaining their objectives. It entails generating a high return on investment for the investor, either through the sale of their ownership stake or the distribution of earnings. It enables them to profit from their investment and reinvest in new prospects. A successful harvest is the fruition of the entrepreneur’s hard work and ambition. It allows them to benefit financially, confirm their company strategy, and pursue other businesses or contribute to society in many ways.

In the end, a successful harvest provides a win-win situation in which both the investor and the entrepreneur profit from the value created during the startup journey.

References

•  Amis David, Stevenson Howard. 2001, “Winning Angels The 7 Fundamentals of Early-Stage Investing”, pgs. 287- 312, Published 2001, Pearson Education
• Herring Shava, 2020, ‘Business Harvesting Strategies for Entrepreneurs,’ Submitted: June 1st, 2020, reviewed: July 21st, 2020 Published: October 28th, 2020, DOI: 10.5772/intechopen.93442- https://www.intechopen.com/chapters/73000
•   Touraj Parang, 2022, Why Founders Are Afraid to Talk About Exit Strategies, Published in Harvard Business Review August 18, 2022, Extracted June 23, 2023 at 11:02 pm- https://hbr.org/2022/08/why-founders-are-afraid-to-talk-about-exit-strategies
• Kirsty MacSween & Jonny Seaman 2023, ‘Exit strategy: What it is and why you need one’, Published Mar 23, 2023;Updated: Apr 03, 2023, Extracted June 24,2023 at 2.22am