Exit goal alignment crucial in angel investing: American angel investor John Huston
Acronyms abound in the business world - think GFC, Ebitda, Opex, Libor, OCR. Now visiting American angel investor John Huston has added a new one - EGC. It stands for exit goal congruence and means the investor's desire to eventually sell the company and make a return is matched by that of the entrepreneur.
It's the most important thing for any angel investor to consider before they commit their money, he said. Huston became an angel investor in 2000 after retiring from a 30-year career in banking and founded the first Ohio TechAngel fund in 2004 with 50 investors. It later became a founding member of the US Angel Capital Association.
Speaking at today's 7th annual New Zealand Angel Summit in Auckland, Huston said he invested only in tech companies in his home state because he liked to know the entrepreneur who he would be making rich. He said goal alignment with the entrepreneur was key to achieve his aim of putting between US$3 million to US$5 million in the pockets of that entrepreneur once the company was sold.
"I want to get my money back so I can help other entrepreneurs," he said. There was more benefit to the local community to have 20 entrepreneurs make US$5 million each who then infect others to have a go than putting US$100 million into the hands of one entrepreneur, Huston said. He pointed to the wealth created in accounting software company Xero by outside investors that could have helped many other small companies.
His favourite of the 50 angel investments he's made is an ecommerce company that sold for US$19.7 million within 22 months. "The return wasn't large but the two co-founders, one was Indian and the other Chinese, those two families shared US$10 million of the US$19.7 million. They can send their kids to any college they want or buy a ski house or a boat. It will have a profound impact on them."
Catherine Mott, the founder of Blue Tree Allied Angels in Pittsburgh, said there needed to be a "champion" for each company angel investors put money into. Her fund has invested US$30 million in 46 companies in the Pittsburgh area.
Her key advice to would-be angels is to diversify, have patience and do good due diligence before committing money.
"You need someone who can create and build a good due diligence team. One person can't do proper due diligence alone which is why they join a group and tap into many people in the group who can efficiently perform due diligence," she said.
The former banker said that lead investor may or may not sit on the board if the investment goes ahead as that could require different skills.