Harvesting – Early Stage Investing Series

Throughout this Early Stage Investing Series we have touched on each of the major stages that should occur when investing in a business. So far, we have covered sourcing, evaluating, valuing, structuring, negotiating, and supporting. We now arrive at our final topic: the subject of “harvesting.”

Why do I have to leave the business, though?

Exiting a business is sometimes a thought that never enters an entrepreneur’s mind, but I would argue that it should. Even if you have the sentiment that your business should be passed down through your family for generations, this in itself will create an exit event for you at some point in the future so it is wise to plan for it. Then of course we have the fact that most investors (all) would like to see a return on their investment at some point. The harvest event is when the majority of this return on investment will happen. And just like most of the things we have discussed so far, there are a number of different routes a shareholder can take when it comes to cashing out.

What are the ways I can harvest and leave a business?

Below are the different ways that a shareholder can harvest their ownership in a company. This list is taken from the excellent book we have been referencing throughout this entire series called Winning Angels by David Amis and Howard Stevenson.

Partial sale – A partial sale is exactly what you would imagine, and only a single investor’s share of ownership is sold. This could be sold to a new investor, existing investor, or employees of the company.

Initial public offering – Glitz and glamour surround this option, but the truth is that it can be risky, costly, and sometimes not the most profitable choice. Even though, the coveted IPO involves turning a private company public, which long term could result in very high returns if the company continues to grow.

Financial sale – This happens when a business decides to purchase your business because of your strong cash flows. Think Warren Buffet’s Berkshire Hathaway. There isn’t always a relation between the businesses that are added to their portfolio aside from strong cash flows.

Strategic sale – If a competitor buys your business, it would be considered a strategic sale. This could also be extended to companies that are not direct competitors, but instead could benefit from owning a certain company for synergistic reasons. For example, a vehicle manufacturer might buy out a specialty parts supplier.

Reorganize (Chapter 11) – You don’t want to be in this boat, as you’ll probably lose the majority of your investment. Personally, I still remember how I invested in Kodak stock years ago only to one day find out that they had filed Chapter 11. My stock was worthless – just like 35mm disposable cameras.

Bankruptcy (Chapter 7) – The most dreaded of all, it’s game over for the business. But thankfully, we have bankruptcy laws that allow an entrepreneur to get back on his or her feet to give running a business a second try. Remember to learn from failure, but never to give up.

There is one final twist, however. Harvesting a business doesn’t always mean leaving. If a shareholder decides to enact a “walking harvest” (I left this one out of the list above) everything stays the same as it was before, but revenue will begin to be distributed to shareholders each month. If shareholders have grown very fond of the business and are even involved with its day-to-day operations, this type of harvest might be the best choice. The result will be a return on investment, and the continuation of a special idea that became a meaningful project.


Source:

David Amis-Howard Stevenson (2001). Winning angels: the seven fundamentals of early-stage investing. Pearson Education.

What did you think? Leave some feedback! :)

12 thoughts on “Harvesting – Early Stage Investing Series

  1. As an entrepreneur starting and growing a business it is difficult to imagine the time when he/she would have to leave their own business. I feel this is one of the key points that entrepreneurs do not think about because they are too busy growing and building the brand. Each member/investor of any startup should definitely have an exit strategy as well as have discussions with everyone involved.

  2. I admit when I think of my startup the last thing that comes to mind is the exit. After reading this book, it’s clear this is something that must absolutely be thought of and thought out. As you mention, it’s when the angel investor(s) or venture capitalist get their money. I feel at this point, I would opt for the “walking harvest.” It would allow investor(s) to recoup their investment, still gain a dividend if they remain invested and keeps the company alive and moving forward. Great job. Nicole

  3. Hi Austin,
    I was reviewing your blog and started thinking about if I was to harvest a business I would use a combination of the Financial and Strategic sale. This is something one could apply to their business plan. What type of harvesting plan do you favor? Why?

    1. Hi Sabrina! Right now I think my personal favorite would be the walking harvest. I feel like I would get attached to my business and wouldn’t want to leave. But I suppose only time will tell if that will be the case. Thanks for the comment!

  4. Hello Austin,
    When I had my mortgage company I never thought about selling out. When Countrywide approached me about buying out at the financial height I immediately said no even those some of those close to me thought I was crazy not too. However in hindsight I should have. In 2008 I had to close my company and would have been much better off in the long run to have sold.

  5. Austin,
    The biggest surprise for me from this book was about how much harvesting/exiting was talked about. It really opened my eyes to what the world of startups and entrepreneurs are on the financial side of things. It seems clear we can all have a vision of a service or product we want to offer or a problem we want to solve but can we grow it into something with substantial value? It seems we need to remember to spend as much time thinking about the exit as the vision because the investor’s focus is their return on investment.
    Cece

  6. I was unaware of the walking harvest. I agree that for many it offers a great solution since many folks love what they are doing and enjoy seeing their creation grow (albeit slowly). So an exit model that let’s them stay in the game as an active player makes a lot of sense. I wonder though how many investors would accept such an outcome. With so many ventures failing it seems they need to have “winners.” My guess is they would mostly push for higher valuation and growth or failure. That “decent” success isn’t something they strive for.

    — Brad http://blog.medstudentlearning.com/2017/06/selling-venture.html

  7. Great Post Austin,
    I believe I would consider the walking harvest – Once I become attached to something it can be difficult to just walk away. Maybe this is an emotion that first time entrepreneurs experience..lol However, it alerts me- and helps me to understand that beginning a business is a serious matter- you must have a business start -plan- but, you must also have an exist- you must be prepared- you never know when its time to go.
    Thanks for sharing

  8. Austin,
    I think you are absolutely right, considering how an entrepreneur will either exit the business or pick a harvesting strategy can be difficult. Most entrepreneurs open a business because they feel that they have a product or service that can fulfill a need of a customer. What was once considered a dream becomes a reality that can be open to others opinions on how the business should and should not operate. This can be a little overwhelming for a business owner to consider early on. However, have a contingency plan to as to where a business owner would or would not have their business go is the most optimal. Consequently, when investors come into play they have an idea on what should be negotiated or if an investment would be a good business move at all.

  9. Hey Austin,
    Thank you for a well written blog on harvesting. I can see how a business can have sentiment to a owner , look at how much time we all have put into building our business, its like raising a kid. However, I do realize we need a exit strategy, and I do appreciate that I can leave a legacy for my children. Very informative post.

  10. I like how the harvesting event brings together the other concepts in Amis and Stevenson. Sourcing, negotiation over the investment, and support all play a role in the eventual return.

    From the entrepreneur’s perspective, it’s a good approach to begin mulling over the circumstances in which you would sell your business or allow your shares to be bought out. And as the example of Elon Musk and PayPal demonstrated (Musk was fired as CEO shortly before it went public), even if you are removed from an active role in the company, it isn’t necessarily the end. Musk went on to become the largest shareholder after his termination through stock options he still held. When eBay snatched up PayPal, Musk made out like a bandit.

  11. Great post! Thanks for breaking down the different types of harvesting and how they will play out. You can’t wait till the end comes to figure this out, you need to think about this as you are setting up your business. And, with this information we are well informed on what we can do to leave our business. I like the walking harvest method too. But, again all of these won’t be the right fit for everyone. So, knowing in the beginning what you want to do in the end is key!

    ~Christina

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