Monday, July 6, 2009

The Ten Outcomes of an Angel Investment by John Huston

One of my favorite podcasts is the Frank Peters Show. In a recent interview with John Huston who is the current President of the Angel Capital Association, he outlines the ten possible outcomes of an angel investment. I list them below here but recommend you listen to the podcast or read the full text here.

1)“Grand Slam Homerun” -- Exceeds a 10X in five years (>58% IRR)

2)“A Lucrative Exit” -- <58 10x="" 1="" a="" at="" br="" but="" irr="" least="" return="">
3)The “Harry Houdini” -- Escaped with a 1X return; No loss

4)“Lost a Little” -- Didn’t lose it all (<1x 0x="" a="" br="" but="" not="">
5)“My Grandkids’ Company” -- Company is successful but there’s no exit in sight. Maybe it will occur after my grandchildren inherit the portfolio?

6)The “Zombie” -- A walking dead venture which will never become a great company, nor will it die so I can declare the loss.

7)“Deductible Loss” -- It died without a tail and I got to declare the loss (or sold my shares for $1.00 to record the loss)

8)“Funeral Expenses” -- Not only did I lose all my original investment, I had to also cover the costs of winding down the venture, plus pay accountants to provide the final accounting needed so I could take my tax deduction.

9)“The Worst Gets Worse” -- “The loss that keeps on losing” due to ongoing litigation expenses even after the company has no value.

10)“Angel Hell” -- In addition to losing all my investment plus a considerable amount of my time, media coverage, tarnished my reputation, plus damaged my relationship with co-investors.

John mentioned that loss of the investment dollars in a deal is the least worry. He cites loss of c0-investor relationship, tarnished reputation, and loss of time as even bigger concerns in a losing venture.

Best regards,
Hall T.

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