Deciding When to Make Follow-On Investments and When to Exit

Joe Johnson, Ph.D.
Entrepreneur. Investor. Startup Expert.

Although angel investing comprises a wide range of constituent activities, at its most basic, a successful angel investment always includes both the initial funding of a good startup and the engineering of a profitable exit. While achieving that happy event is not a simple task, it must be considered from the very first steps of the process.

Prior to investing in a company, it’s wise to consider the necessity both of possible follow-on investment and of having an articulated exit strategy. Clear identification of your goals, as well as those of your target startups, can help you to invest wisely with an eye toward the future. Familiarity with a startup’s own exit strategy as well as your own expectations can facilitate a more open relationship.

Considerations When Evaluating Follow-on Investments and Exit Strategies

Angel investors who are focused on their own areas of professional expertise may already have some insight into the common exit strategies of companies in those industries. This knowledge can be invaluable for an investor. New investors lacking relevant industry experience will need to perform the research necessary to answer some of these questions:

  • How have other startups in the industry exited?
  • What is the average time to exit in the industry?
  • How common are mergers in the industry?
  • Have similar startups required additional angel investment?
  • How much investment does the company believe required to achieve exit?
  • What resources (such as patents and other intellectual property) does the company have?
    • How have companies with similar resources exited? Have they required further investment?
  • What growth opportunities are available?
  • Is the team ready to engineer an exit?
    • Are the financials appropriate for an exit?
  • Are team and board members of the same mind with regard to an exit?

Keeping all of these factors in mind, what sort of exit seems most plausible? Once this has been determined, it’s important to craft a timeline and to ensure that the startup team is prepared to meet with knowledgeable individuals to help guide them through the process of engineering a successful exit. Having the answers to these questions at hand can also assist angels both in determining whether follow-on investments may be necessary and in evaluating when and how much investment may need to occur in order to result in profitability sufficient to permit the investor to make a successful exit.

Follow-On Investments

Not all angels make follow-on investments. As a new angel, you’ll need to carefully consider your own positive and negative indications – those that will compel you to make additional investment in a target company and those that will be your signal to walk away.

Follow-on investments are usually made either to help a company reach additional investment rounds or when a company has run through their initial funds yet still seems promising. Angels make follow-on investments in approximately 30% of the companies in their portfolios.

When considering whether to make a follow-on investment, it’s important to keep one’s eyes open. Throwing money at a failing enterprise is pointless, though buttressing one in need of capital (and with a proven history of success) can help to impel them – and you – to a successful exit. Consider your altered rate of return when making follow-on investments and whether an additional investment will serve to dilute your shares.

If the possibility of follow-on investment is discussed early, consider putting it in the term sheet and including a dilution protection clause.

Planning for Exits

Many startups have a clear exit strategy outlined in their business plan. They know whether they’re trying to entice a big fish to either acquire or merge with them or are planning to remain at the helm and take the company public. In order for the startup-angel relationship to be based on a fully and mutually honest foundation, the planned exit strategy of all parties must be clearly articulated in order to facilitate the angel’s ability to determine how and when (to say nothing of whether) they’ll be generating a return on their investment.

The likelihood of a particular type of exit may differ from industry to industry and it’s important to bear in mind that angels are not required to remain onboard through the exit process. It’s certainly possible that an angel may choose to exit prior to a company’s being ready for an IPO by selling his shares to the principals.

Although the length of time that an angel remains invested in a company is up to the angel, the average period is between 3 and 5 years. Longer-term investments often result in decreasing value for the angel, thus making them ever more unattractive over time.

These are some of the many are some ways in which an angel maymight exit:

Mergers & Acquisitions (M&A)

When a company is sold to another person or entity, an angel investor can cash out his shares and (hopefully) realize a return. In order for this to be a viable option, there must be at least one party prepared to make a reasonable offer for the company. Selling a company can be a challenging task and navigating the process can be extremely difficult for individuals without M&A experience. Basil Peters, an expert on exits, suggests that companies seek the assistance of a well-regarded M&A consultant to shepherd them safely (and prosperously) through the process. For many angels, this is one of the most preferred exit strategies.

Going Public

Many startup founders daydream of an IPO. While it’s traditionally been a common business goal, the likelihood of achieving an IPO has diminished. Additionally, it can require years before a company is ready to go public – years that an angel may not be willing to wait.

If an angel investor does remain onboard through an IPO, they can sell their stock afterward for a profit.

Shareholder Buyback

Once a company is profitable or has undergone additional investment rounds, they may be in a position to buy back shares from early shareholders. This often serves as an exit strategy for angels who don’t want their shares diluted by new rounds of funding – which is also why some angels decline to participate in follow-on investments. Company principals may also offer to buy an angel’s share to maintain control of their company.


Is one particular exit strategy superior to another? When evaluating a business plan during the due diligence process, investors must keep one significant caveat in mind: business plans almost always change over time, including the potential exit strategy. While it’s important that a target startup considers its profitability and exit strategy, it must also be prepared to pivot in response to (or anticipation of) market shifts. So, what does this mean for investors?

Investors who maintain an active relationship with their portfolio companies should help those startups to identify when they should be building exit teams and transitioning toward their proposed exit strategies. Knowledge of the time required to engineer a successful exit can help to ensure that the process is begun at the right moment. For example, a merger can take 6-18 months to facilitate. Rather than starting when the company is already peaking, the exit strategy should optimally be initiated in advance so that the sale is concluded during the peak, thereby securing a higher ROI. If an exit is engineered after the peak, neither the company nor its investors will net as much profit and may, indeed, experience difficulty in generating a successful exit of any sort.

According to Basil Peters, only 25% of saleable companies are able to engineer a successful exit. While 25% manage a poor exit, a shocking 50% of saleable companies fail to engineer any kind of exit at all. While the economy and industry can have an effect on whether a company sells and for how much, the fact of having a viable plan in place to achieve the desired exit strategy can be a strong factor in determining the level of success experienced.

Planning for a successful exit requires aligning the goals of the team and board, getting financials in place, and securing a knowledgeable advisor with a history of successful exits. Startups which attempt to secure their own exit with a team that has never before engineered an exit face a steep learning curve which can greatly extend the process and decrease the probability of eventually achieving a successful sale.

For investors interested in selling their shares, openness is important. The target startup should be aware of the angel’s exit plan and timeline. This might be mentioned in the term sheet, but should definitely be discussed during due diligence in order to ensure that everyone is on the same page.

In a way, angel investing might be considered to still be in its infancy, and a studied look is required to help both angels and outsiders better understand the processes potentially affecting a successful exit. While a couple of studies have illustrated angel investing’s profitability, more research must be done to not only help angels invest and exit wisely, but to help startups thrive in the current business environment. Knowing how you want to exit and whether you’re interested in follow-on investments can help you to determine how best to work with a target startup. To date, the best advice remains to invest in your industry of expertise and to remain involved after investment.

About the Author

Dr. Joe Johnson is an entrepreneur, investor, and startup expert. He is the founder and principal of GoodField Investments and the GoodField Foundation (

Joe has a Ph.D. in Entrepreneurial Leadership and an MBA. He is the author of the upcoming book on The Science of Why Most Entrepreneurs Fail and Some Succeed.

Most importantly, he is the incredibly blessed husband of one amazing wife and father of six wonderful children. He resides in Bradenton, Florida. For more information on Dr. Johnson and his work, go to