In order for angel investors to have seed capital for new corporations, they require ways to get money out of deals from the past. A feed back mechanism is required to maintain liquidity in the financing system.
A traditional means of taking out angel investors was merger and acquisition activity. This is now common only for well-developed companies. Few young companies with merely promising technology get acquired.
A weak stock market has made initial public offerings nearly nonexistent in the past ten years. There is abounding skepticism about tech IPOs. No change in this viewpoint is apparent on the immediate horizon.
Fortunately, a new way is emerging that provides liquidity to those funding early stages. The trend seems to have developed as a liquidity strategy for venture capital firms, which have entered more seed money deals with angel investors. Angel investors have been able to exit with substantial profits by the input of capital from private equity firms, hedge funds, and late stage venture capital money.
Venture capital firms are expanding upon their early positions with angel investors. This results in liquidation of the seed money positions of the angels. The VC firms take a greater investment in the late stage of emerging companies.
Private equity firms are flush with cash and have emerged as a driving force in the capital market. This is a bright spot for not only growing companies but also their early stage investors. It’s also a promising trend for new corporations, which rely upon angel investors having cash for new investments.
So angel investors now have a viable secondary market for stock obtained in seed money funding. They don’t need an acquisition or IPO of the companies they backed.
The future situation to assess is how well the secondary purchasers make out on their investments. If the late stage deals work well, more of this liquidity source for angel investors is likely to occur.