Why must angel investors invest for the exit, instead of investing for a share of the ongoing profit stream over time? There are lots of great entrepreneurs and solid, profitable businesses that will never be targets for an exit at a high valuation multiple. But they will generate a solid profit stream for years to come. What's wrong with owning a piece of the profit stream from a collection of these businesses?
I've been pondering that question for some time now and Sramana Mitra apparently has been doing the same thing. She posts over at Forbes on this issue.
That brings me to the observation that I have been pondering for a while. It may not always be apparent who would buy a business like Artimus Art or La Grande Dame to provide a clear exit strategy for the investors. The entrepreneurs may not be interested in selling. This is their passion, and they want to continue enjoying the process of running and growing it.
So what if the idea of exit was removed from the equation? What if the investor and entrepreneur agreed to a different model-- the model of sharing dividends? With a $500,000 investment, if they succeeded in building a $10 million a year company with 20% profit year after year, they would collect several million dollars in dividends!
It beats me why angel investors continuously chase exits. It seems to me they can make a lot more money, or at least an equivalent amount of money, with a built-to-enjoy approach than the built-to-flip model. It would open up a much larger set of opportunities for entrepreneurs and investors to join hands.
In 1M/1M we are determined to support entrepreneurs interested in built-to-enjoy businesses. I hope, with time, the angels will, too.
I'm not sure I care for the term "built-to-enjoy", but at least she didn't say the dreaded "lifestyle". But the rest of her thought makes a lot of sense to me. In our entrepreneurship classes at Belmont University we use case studies of a number of local businesses that exactly fit this model - one or two of which were funded in this manner. At least one of those businesses has been spinning profits off to the original investors for over 15 years now.
It just seems to me that there are many more startups that fit this "dividend payoff" model than are candidates for a tech industry style "exit payoff". I guess tax policy probably favors investing for the exit (capital gains) although the exact amount of favoritism varies over time with changes in the tax treatment of cap gains vs. dividend income. But then there's risk and the time value of money to factor into the equation as well. Seems to me that a portfolio of investments in good entrepreneurs and good businesses that focused on profit sharing (dividend distributions) would be lower risk than one focused solely on exit transactions and over-time it would generate a nice income stream. Inevitably, it would also generate some number of exit transactions as well. What's wrong with this thinking?