How can an angel get returns from investments that turn out to be mediocre?

The problem with angel investments that turn out to be mediocre is that it’s difficult for the angel investors to exit. The ideal way to exit would be via an initial public offering, or IPO. Alternatively, one could look for a large strategic investor. However, companies that are small are generally cannot go public, and potential buyers (e.g. larger, deep pocketed competitors) are unlikely to be interested in doing small deals. Often the only potential acquirer is another small company, but such companies typically don’t have the resources to pay full value for any company that they might want to acquire. Mediocre angel-backed companies tend to become lifestyle businesses that generate only enough income to pay salaries to, and thereby support the lifestyle of, the top managers.

One potential solution is to sell the illiquid shares to another angel investor, or to get the investee company to buy back your shares. There are even some online exchanges where angel investors can post the illiquid shares that they wish to sell, so that potential buyers can contact them. It helps if your shareholder’s agreement stipulates that the company must buyback (or “redeem”) your shares within a certain time period. If you don’t have such a clause, then you may find it very difficult for you to ever get any return from your investment.

One Response to “How can an angel get returns from investments that turn out to be mediocre?”

  1. Angels in India also turn to research companies which provide them research on start-ups and small companies.

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