[VICTOR V. BUBUIOC] Winning Angels: Insight Into Entrepreneurial Financing: Part 7: Harvesting

[BUBUIOC INC.]

“The only people who buy at the lowest price and sell at the highest…are liars”

-Mark Twain

After the few weeks of talking about the various stages of Entrepreneurial Financing by Amis Stevenson it is appropriate to end this series with an entry on Harvesting.

Harvesting is important in many ways. It is after all the most valued measurement of success, the endgame.  Generally, the pros “spend 75% of their time on harvesting” (p. 307). Furthermore, the successful investors recognize the importance of making harvesting a priority right from the start: “the likelihood of a good harvest is determined long before the harvesting equipment is brought out of the barn” (p.287)

In the book Winning Angels, we learn about seven harvesting methods. Five are positive with various levels of success while the other two are negative. Of the five positive methods, most would likely guess that it is the somewhat exciting Initial Public Offering or IPO. However, the most common and lucrative one is in fact the strategic sale.

Figure 50.1 on page 290 gives a great overview of the seven harvesting methods:

Positive

Walking Harvest: The company distributes cash directly to the investor on a regular basis.

Partial Sale: The investor’s stake is sold to management, to other shareholders, or to an outsider.

Initial Public Offering: The company sells a percentage of its share on a publically traded exchange (NASDAQ, NYSE…)

Financial Sale: The company is sold to financial buyers.

Strategic Sale: The company is sold to an industry buyer for strategic reasons.

Negative

Chapter 11: The company is reorganized and the investors typically loose most of their investment. Chapter 11 is better than Chapter 7 since the company has the possibility of making another run.

Chapter 7: The company is liquidated and investors, depending on their place in line, get little or nothing.

Taking a closer look at the most lucrative harvest method, the strategic sale, it’s easy to see why: Strategic Sales are valued beyond tangibles such as cash flow. The “Best” Strategy has unlimited return potential: “The supreme art of war is to subdue the enemy without fighting.” ― Sun Tzu, The Art of War.

Consider this: In 2006, Google purchased a small still unprofitable startup for a staggering $1.6 billion, all stock purchase. That’s right, over one and a half Billion Dollars for an unprofitable startup. What was more surprising was that the startup was under increasing scrutiny and threat of copyright-infringement lawsuits. At the time of purchase many investors did not like or understand the investment, which was largest to date for Google. That company is YouTube. BusinessWeek estimates revenues for YouTube at $4 billion for 2012 and $5 billion for 2013. Tremendous growth is expected to continue as the web giant flexes more muscle.

There are many other examples of small companies being bought by baffling amounts of capital. While some are extremely successful, the majority are not. What’s worst, is that more and more entrepreneurs start a business with only one goal in mind: to become a strategic sale. This is not necessarily a bad thing on it’s own. The problem is that most of these entrepreneurs and by extension the investors involved get distracted from what makes a company a worthwhile strategic investment in the first place. Whether you start a business or invest in one make sure the parties involved are not in it only to be bought by a giant. The chances for this happening are not great. Instead, you should go with the basics, the fundamentals, and the simple things that make a difference. Doing so will ensure success even if you don’t get bought by a Google or Microsoft. Enjoy the journey.

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Posted By BUBUIOC INC. to VICTOR V. BUBUIOC at 7/01/2013 11:27:00 PM