To Fund Or Not To Fund — That Is The Million Dollar Question
The world is awash in dollars, the biggest question on every prospective fund managers mind is — “how do I get a piece of that?”
Ok, well maybe not as blunt… it goes along the lines of — “how can I raise my fund so I can invest in amazing companies that have huge potential for success?”
My friend and alumni is currently in the process of raising funds — and truth be told, it’s a long drawn out process — he’s been at it for 24 months. That’s dedication… and it’s a fairly decent $200 million size fund.
If you ask the right questions, you’ll get better answers… and here’s some advice I got from senior fund raising professionals when I asked them about raising funds.
If you’re raising your fund for the first time, have a strong vision and elaborate it through your investment strategy or thesis. Be bold, but not too audacious. Be clear about what you really want.
You will have one chance to meet investors and make that first impression. Asset allocators are interested in your viewpoint — how you see things — so paint a picture of the future that you see and the opportunities that exist.
This is not just story telling, although that works very well… it’s being able to foresee what the future will be like and not be run-of-the-mill.
Investors are by default risk takers, but why would they take a chance with you, a new fund manager whose fund has no track record, whose team might not have worked together previously and whose fund has not even started?
You need to presell your idea. Many have in the past, and many will continue to do so. In order to help you with that, here are a few pointers to keep in mind…
Be focused, laser focused. Investors can feel the energy when a new fund manager knows what they’re good at, and how they want to move forward.
Have you executed such deals before, or do you have someone on your team who has? Show and tell, don’t sell. Explain to the investor what you’ve done in the past, how you sourced it (was it unique or proprietary), how you executed it and how you generated value. If you haven’t generated value, explain what you’ve learnt — they maybe expensive lessons, but the investor will notice your scars and trust you more because of your honesty.
No Track Record, Don’t Worry…
This is the catch 22 for new fund managers, when you don’t have a track record — what do you showcase? You don’t.
Investors are smart, many fund managers try to present their previous employers as though they did everything themselves. Let’s just say we know you were part of the large team that worked on it, and we know you attended one out of the 100 meetings so you have an idea. But do you really have the experience to narrate the nuances of the deal.
It’s going to be difficult to prove that, but from a legal standpoint — there are also restrictions on how you portray your performance at a prior firm. (Some managers would even play that point to their advantage and justify why they can’t come up with a track record — so be it).
Having worked with heavy weight brands — I can testify to the power of a brand. But that doesn’t cover your shortcomings as an individual.
I’m not saying you need to have an Ivy league education or work experience at one of the bulge bracket investment banks, or big four consulting firms but there’s no denying that can and will help.
So what’s the solution — bring in references and testimonials. Social proof is probably the best way to market yourself (and not just your fund).
I personally learnt this earlier on in life.
Are you going to be trusted as an individual or by the logo on your business card?
If the investor were able to call up anyone you provide as a reference, would it validate your history of success?
When you’re starting out, you’re basically selling yourself and not your fund. Once your fund is established, the fund’s branding will sell itself.
Hey, even funds with track records now have disclaimers… you know, “this is subject to market risk, past performance is not an indicator of future…”
The Dream Team
When you’re starting out, don’t go it alone. Will Smith got it right in the song, “Just the two of us…” — two seems to be a good start.
Start off with a small team, a lean mean fighting machine — two seniors, two mid levels and two juniors and a good controller or CFO and assistant. Then as the fund size grows, scale up.
And even if the team you put together isn’t the dream team, but the best you could do — think about how the best consulting and investment banks work… up or out. Build quality, not quantity.
Quite often with startups, you’ll see egos (emotions) and economics (carried interest) — that’s part and parcel of it. “Deal” with it, to use the pun.
Seed & Pre-Seed
As a fund manager or to-be general partner, investors want to see how much skin you have in the game. Do you just talk with your mouth or speak with your wallet?
This is not easy, I know some friends who would go to the extent of mortgaging their home to make it happen, they’re not just putting their liquid net worth at stake, they’re putting their entire net worth at stake.
But this speaks volumes to the investor… it shows that they’re also willing to risk something to gain something.
Limited partners are more interested in co-investing these days, not just in the deals, but also in the general partners — which is all the more reason for you to give up a stake so you can seed your ‘startup’.
And why stop there, go a step further and identify one or two deals that are ready to be invested in. Even better, find one anchor investor who you brought in to finance that one deal and showcase that to other investors.
You can always acquire that for the fund or ‘pre-seed’ that into the fund when it’s set up. This reduces the blackbox feel to the fund structure that investors are sometimes wary about.
Investors always want to know you’re not just going to sit back and collect fees before you do a deal. Again, show and tell, but don’t sell.
Private Equity & Venture Capital are long term games… we’re talking 10 to 20 years. Are you in it for the long haul?
When asked how long it would take to build a Silicon Valley like ecosystem in any part of the world, Brad Feld’s answer was — be ready to spend 20 years.
If you’re entering fund raising, make sure you have a personal financial backing for at least two years. On average, everyone I talked to who has experience in fund raising — told me that it would take 24 months. So by the time you’ve closed your first deal, it will be 32 months.
Be ready for that journey… if you can’t survive that, don’t start the journey. And if you’ve started and failed, don’t worry… life goes on and you can look for a job again.
Originally published at jpmartin.com.