Fundraising is just sales. As in all sales processes, you need to build a pipeline, take rejection, and keep plugging.
Unfortunately, I see fund managers making the same errors in fundraising, repeatedly. Based on what NOT to do, here’s what I recommend you actually do:
- Build a pipeline of actually qualified leads, instead of “networking” (a.k.a. going to parties). It’s easy to think you’re “working”, when you’re actually just spending a lot of money on travel going to conferences chatting with people who don’t convert.
- “GPs should operate first on listen/qualify mode, instead of immediately going to sell-mode”, observes Dave Perretz, Founder at Signal Fund Services. “They forget they are selling a financial service/product to buyers of financials services/products. If you don’t understand how LPs build multi-asset class portfolios, then you won’t be able to identify how you fit into their portfolio.”
- Focus on differentiation. Perretz continues, “GPs don’t realize they are 1 of 300 pitches that LPs receive in a year, and must differentiate in some way.” Erik Brue, General Partner at NevCaut Ventures, said, “The thesis needs to be tighter the more “emerging” you are.”
- Use a real CRM, not just a spreadsheet. You need a formal process to track each lead’s pipeline and conversion status on an ongoing basis. Build an adequate drip campaign (email, touchpoints, events).
- Only do your fundraising yourself, or get an agent who’s a high-credibility representative, and preferably a full-time team member…not a third party who views you as just another item on their shelf. If the agent doesn’t have a deep understanding of your particular’s firm model, they can’t represent you well. See Should Small Emerging Managers Use Placement Agents? Erik Brue observes, “Leverage your network and your prior invested companies. You cannot be shy.”
- Test, iterate, evolve the narrative as you pitch more, instead of sticking strictly to your version 1.0 narrative. Entrepreneurs need to be stubborn, but that doesn’t mean pigheaded and ignoring market feedback. If numerous people say they’re not investing because of X, maybe you should change X.
- Target investors who a priori you know will likely resonate with your pitch, e.g., because of your common industry background or their history of investing in funds like yours. Don’t waste your time with people you’re meeting just because they have a big bank account.
- Prioritize in your story/deck the most impactful content, instead of throwing the kitchen sink at your audiences. Whenever you spend time on non-impactful content, you’re reducing your efficacy. In particular, emphasize in rapidly declining order of importance:
- traction (MOIC, IRR)
- resume/background of principals (past performance is predictive of future results).
- thesis.
- Focus on selling what you can definitely deliver, not just future returns, which you cannot guarantee. Returns are impossible to guarantee, and hard to differentiate on, because almost every other emerging manager of every investing strategy also is focusing on selling returns. Of course, if you have strong historic returns, you should emphasize that. But you still can’t make promises. Instead, I recommend emerging managers focus on other Unique Sales Propositions, e.g.:
- Access to innovation in an emerging manager’s particular vertical or technology sector
- Delivering on an LP’s strategic imperatives, e.g., to invest in women-led funds
- Show your operational alpha expertise: A focus on process increases the odds of healthy returns, separate from the pure alpha of the underlying investment’s performance.
- Access to a community of like LPs, e.g., your Annual General Meeting that can provide opportunities to meet relevant people.
- Customer service, e.g., helping LPs with critical introductions
- If you have a good track record, focus fully on the fundraise (not deployment) to shorten the process and close as quickly as possible. It’s very hard to start a fund from scratch and deploy all at the same time.
- Get to first close as quickly as you can. All your fundraising meetings and conversations change after that.
- As with startup fundraising, build FOMO and momentum around the round. Do regular mini updates with good news.
- Even after LPs commit, keep on selling (gently). From first close to second close, you may find LPs want to increase their investment. Rupa Popat, Founder & Managing Partner, Arāya Ventures, said, “I had 9 fund investors 1.5-2x their investments from first close to second close.”
- Don’t rule out larger ticket potential investors. Popat reports, “Several family office investors wrote me “get-to-know-you” cheques to get to know me ahead of future funds.”
You’ll likely present your fund to various investor audiences during your fundraising journey. When presenting before an audience, please keep these principles in mind:
- Hold the microphone at a 45 degree angle. Rock stars don’t do this just because it looks cool. It gives you the best sound quality.
- Submit your decks in PDF, not Powerpoint, to make sure that the formatting looks the way you wanted.
- Always, always, always use a big font. Average LP is over 40 and their eyesight is declining.
- When presenting to a crowd, minimize text on the page. You want people to focus on you, not reading your deck.
- Focus on traction & resume, NOT thesis. Your traction & resume ARE your thesis. People don’t invest because of a thesis, alone. They’ll invest in your thesis ONLY if they believe you are qualified to execute on that thesis. So focus on your qualifications, which logically should lead into the thesis.
- Talk about success stories from your career, not from others’ careers. I.e., don’t talk about how Chris Sacca made ludicrous returns from Lowercase Fund I unless you worked personally on that fund. LPs will assume you don’t have any good stories yourself about situations in which you were personally involved, so you’re just using their valuable time on someone else’s story.
- Show details on what you did in prior jobs. Don’t use logo pages of past employers, alone. If you show a Google logo, I’ll assume you’re a summer intern unless you actually provide your title.
Further reading:
- The Top Ten Lies GPs Tell LPs
- Fundraising hacks for VC and private equity funds
- Databases of limited partners investing in emerging VC funds
Thanks to my coach Ben Dattner for his review and Rupa Popat for thoughtful contributions!