If you have followed Matt’s writings about angel investing, you’ll know he has been a fan of the “flywheel” metaphor for angel investing and startup communities from long before VentureSouth even existed. (See here and here, for example.)
In the last few weeks, we have seen three examples of how the flywheel of investment -> company building -> exit -> reinvestment leads to strong and dynamic early-stage communities – right in line with Matt’s thesis.
1) Founders -> Angels
One of the things successful entrepreneurs can do after selling their startup is reinvest some of their gains in the next vintage of startups. We were very excited this week to welcome as a VentureSouth member an entrepreneur who had sold his previously-VentureSouth-backed company.
Seeing entrepreneurs able to apply their wealth and expertise from their first entrepreneurial journeys to help the next cohort of startups is fun – and the foundation of enduring and dynamic startup ecosystems.
(And it’s flattering that these entrepreneurs want to participate in VentureSouth voluntarily, even when we are not funding them any more!)
2) Founders -> Founders
Recently we have had the privilege of funding two companies led by CEOs of companies previously backed by VentureSouth. In February, VentureSouth members invested in Josh Miller and the team at Gradient Health; several years ago, we invested in Josh’s first startup, FarmShots, with positive results. Similarly, several weeks earlier, we invested in Meg Powell and the team at Bio54; in 2016, VentureSouth members invested in Meg’s first startup, Target PharmaSolutions – with even more spectacular results.
Being able to fund serial entrepreneurs – especially funding from “house money” – is another great flywheel in action.
3) Gains -> Investment
If you have read our guide to angel investing taxes, you know about the Section 1045 “rollover” provisions of the tax code. (If you are an angel but aren’t familiar with this, go check it out – you’ll thank us later.)
On another recent “early exit,” a significant proportion of the proceeds to our members were QSBS Section 1045-eligible. This means (simplifying a bit) that if the proceeds were quickly reinvested in new startups the gains from the first exit would not yet be taxed; and if the total hold period extends past five years, all the gains would be exempt from capital gains.
A significant proportion of those proceeds were rolled over under these rules, meaning more investment (from pre-tax dollars) directly supporting the next cohort of startups.
Wrap up
These are three examples of flywheel effects in early stage company investing. We invite you to experience some more by joining VentureSouth