One of the discussions I often have with emerging managers is about capital formation. I often hear such anguish in their voice about the process, so this likely will be a multi-article topic
You will see many of the same investor names on the emerging manager circuit — some are great, seeking to groom the next generation of investors, while others are looking to harness emerging manager alpha and extract their chunk of flesh in that process.
I would tend to steer clear away from promoters of conferences / private off-sites. Yes, there are a few legitimate groups, but the bulk of them are far from it. You are better off saving your marketing dollars. There is some good that does come from participating in such events — you do get to practice your pitch and learn what resonates prior to participating in higher stake discussions. TBD if you should pay for that privilege. Jason Calacanis has a scathing blog post on this point.
There are a number of elements that make fundraising difficult. Not everyone (no matter how good you are) might want / need your product. What do I mean by that? You need to remember what pain point / goals the investor might be solving for (i.e., protecting purchasing power, generating yield to pay near-term obligations, maximizing long-term value).
Multiple criteria boxes need to be checked off for you to secure a commitment
Think about what needs to occur, if you are a hedge fund (“HF”), you need to find an investor who:
· (a) desires / has interest in HF exposure
· (b) has capital to commit right now
· (c) has a new spot in their HF portfolio (i.e, is NOT increasing their exposure to an existing manager)
· (d) believes you are the best option in their review of the opportunity set
· (e) is confident that you fit their platform’s risk parameters
Where I see many emerging managers fall flat is in (a). From time to time, friends would offer me the opportunity to invest in their funds — I’m always flattered! But they fail to understand (a) — I’m way too young to be buying certain products (i.e., uncorrelated HFs with 8% — 10% returns). AND I clearly fail (b) — Taco has much work to do to become a social media influencer.
So how do you successfully navigate the gauntlet of fundraising?
· (a) Establish that your product makes sense for the investor portfolio; don’t try Selling Ice to an Eskimo
· (b) The investor has or will have a budget for your product; qualify the investor! If they don’t have the capital to allocate (i.e., Taco), you’re just wasting your time. Many investors will NOT do Fund I altogether (that’s just part of their governance docs) — you are cultivating a relationship for future fundraises, don’t expect anything in your Fund I
· (c) The investor is seeking new exposure away from portfolio incumbents; it is always easier to default to something known vs. a new relationship
· (d) The investor deems you to clearly be the best at what you do within the review of the opportunity set; I’ve written on this in Competitive Advantage
· (e) You fit the investor’s risk parameters; What’s that? Here are two examples: (i) The investor is seeking to deploy $100mm and only be <10% of the vehicle (implying you’ll need to $1.0bn in size) which effectively puts that investor out of reach for many emerging managers or (ii) the investor wants to see a 5-year track record — anything shorter than that would be a waste of time
You will need to check every box to arrive at a commitment. Life is about crawling and walking prior to running. As I’ve written about in Finding Fundraising Product Market Fit, you’ll likely need to raise from ultra high net worth (“UHNW”) and family offices (“FOs”) when you first start out. Their list of requirements are likely less onerous than that of foundations and endowments (“F&E”), institutions, and sovereign wealth funds (“SWFs”). Think about it like the NCAA tournament — your reward for successfully fundraising initially is the opportunity to fundraise again, but at a larger scale and with a more sophisticated investor.