Stop Being Short Sighted

I meet many emerging managers who desire to charge premium fees Day 1 which always surprises me. I understand the desire to be made whole relative to the opportunity cost relinquished by pursuing this entrepreneurial journey but my sense is that this strategy is likely shortsighted vs. what is hopefully a significantly larger long-term prize

I view the early discounts as (a) a cost of doing business and (b) customer acquisition cost (“CAC”). As much as I hate giving them, I am resigned to the fact. Being an emerging manager was never meant to be easy. Take solace in the fact that the dollars given up today pale in comparison relative to the dollars earned in the future from building long-term relationships

I have had robust discussions if one should seek to maximize the (a) management fee or the (b) carried interest. My answer is often times (as it always is with life), it depends. If you are building an organization and seeking to cover your personnel overhead — then I would seek to maximize your current income (the management fee). You cannot grow your enterprise unless you (the GP) are taken care of. If you are fortunate enough to have the cash in the bank to cover personnel overhead or a low burn / minimal expenses, I might suggest you maximize the carried interest. The latter is more palatable (than the former) for investors to engage with given the alignment of interest (you don’t get paid until the investor gets paid) and should grease the skids to beginning a relationship (which hopefully is a multi vintage fund investment)

There are multiple avenues through which just getting the counterparty invested would be accretive to your efforts, (a) access to their network of other limited partners / opportunities, (b) momentum (that’s one ticket closer to your goal of completing a syndication / fund raise), (c) another cheerleader rooting for your success, etc. Remember future up / cross selling is significantly easier for an existing customer (the LP) vs. a new customer. If you did what you said you were going to do, unless your product is very different / the customers appetite has changed the repeat sale should be easy (relative to the initial transaction)

In your early years, I would prioritize the management fee as (I’m assuming the audience here is PE / VC oriented) that enables the firm to grow the enterprise (investment in personnel and technology). You are seeking to survive the independent sponsor gauntlet which requires patience until you can get to a funded endeavor (committed vehicle). Focus on ensuring your near-term survival — part of being successful is just being around. For which you need to be solvent!