[This is the final article in a 4-part series of articles on fundraising]
Formal investor roadshows work well with large and mature funds and companies. This is largely because the people showing up at these meetings tend to be already aware of the fund managers and investor education is minimal.
If you have worked in an investment bank, you are probably familiar with ‘non-deal roadshows’ — which is basically a short briefing with prospective investors to introduce the company. No formal communication of offers are made at these meetings though there might still be interest and queries on the company’s future direction, strategy and whether they are exploring the idea of raising capital. The same way pretty much works with funds.
Unless you are an established fund manager, the first step of any fundraising is almost always investor education i.e. to get the word out and let everyone know that you are in the market. A few basic approaches are:
1. Curating a fund presentation deck There are no set guidelines, no ideal pitchbooks. Ultimately when you bring your deck into a meeting, investors will see what they like to see. I personally recommend no more than 15 pages: 30% strategy, 30% team, 40% case studies and track record. If you have additional slides, chuck them into the appendices.
Many GPs tend to overload the slide deck with generous servings of macroeconomic and industry data to try and “educate” investors, painting a rosy outlook of the geography or sector. I think many LPs will not say this but don’t you think that as large institutional money managers, they’d have good access to all that macro research?
Case studies on the other hand can be relatively more effective as they are personal, relatable and demonstrate more credibility for the presenter.
The best deck I’ve personally seen so far was at a face-to-face meeting in which the deck comprised of only two pages showing four case studies, each case study highlighting three metrics (i) entry equity (ii) exit equity and (iii) exit multiples. A 1–2 pager teaser also works just as well for less formal or extremely brief meetings, or if you are sending to preliminary prospects.
2. Leverage social media, expound thought leadership Social media platforms such as Facebook and Twitter used to be associated largely with casual and informal information shared by our personal contacts. Today, this is very different. Social media has become a ‘broadcasting’ tool to showcase not only personal experiences but also professional updates — a career move, promotion, transition into a new role or even starting a new venture.
Thought leadership articles such as a written publication on a particular topic or subject can be useful in kickstarting the fundraising process. Write about stuff related to your experience, background and relate them to your investing strategy or industry. While it might all appear to be academic, this can be effective in piquing the interest of your professional circle.
3. Conferences and speaking engagements Investment focused conferences (especially those that have a strong focus on private equity and venture capital) have been fairly effective in elevating publicity for new funds coming to the market. Speaking and sharing your views on a panel discussion is another way to demonstrate thought leadership to the investor community. Because some of these events are covered by media, there is good chance that your new fund gets mentioned as part of the news reporting.
In addition to that, many LPs typically also attend these events to get acquainted with new funds or share their perspectives on the macroeconomic outlooks as well as where they are allocating capital over the next 2–3 years. Some conferences also offer 1-on-1 meetings with other delegates at the venue, so look out for these features when choosing which ones to attend.
While mass events may not be in the format of your traditional roadshows, they serve as an excellent non-transactional platform to meet and engage potential investors and set the stage for a more formal and orchestrated meeting down the road.
4. Enlist a reputable figurehead Getting a publicly renowned senior professional on your fund’s advisory board is a good way to reinforce credibility and galvanize initial interest amongst potential investors. It also aids publicity depending on how influential your figurehead is.
However, many new fund managers equate the presence of a senior figurehead to a successful fundraising i.e. “If I have the former minister on my advisory board, LPs will invest in my fund”. Unlike the initial public offerings in which retail investors flock to buy shares of the company upon the entry of a large cornerstone investor, private funds people are not discerning and will still place emphasis on the executive team’s operating capability rather than the reputation of a few non-executive industry influencers.
Much like any fundraising exercise, it is important to ask “what does this person bring to the table?” and “how does he/she create value or fit into the overall investment strategy of the fund?”. Too many people overplay the publicity card, forgetting that real substance is in execution.
5. Create a digital profile Don’t undermine the importance of a digital identity.
The ease of access to the Internet these days make an online profile really easy to set up. It doesn’t cost a lot of do up a simple corporate fund website even though you have nothing to show for at the beginning.
Sometimes, a website isn’t so much as to showcase (or show off) track record but for establishing some form of legitimacy. Start a corporate LinkedIn page, get on Twitter, and fill them up with content. Good things take time to accumulate and not before long, you’ll find that your fund’s digital profile and credibility will be enhanced by the fact that it has ‘been in existence’ for some time.
Closing thoughts It is true that many institutional LPs do not bank with new funds coming to the market. But don’t get too caught up with the fact that you are a ‘first-time fund’. Many large PE/VC shops started as a first fund.
Perhaps one of the things that many fund managers do is to focus too much on getting the money in and forgetting about building the core business — which is to identify and seek out good companies, invest in them, and then actually selling them or exiting those investment at a decent return. The process itself looks blatantly obvious but it is always not at easy as it sounds.
"Most big recent successes (Microsoft, Apple, Facebook, Google) were started by people with skin and soul in the game and grew organically-if they had recourse to funding, it was to expand or allow the managers to cash out; funding was not the prime source of creation. You don't create a firm by creating a firm; nor do you do science by doing science." - (from the book, Skin in the Game)
And therefore by extension: You do not start a fund by simply just raising a fund.
If you actually need OPM (other people’s money) just to start a fund, then maybe you shouldn’t be raising a fund at all. Good ‘first-time’ fund managers know an opportunity when they see one and moblize their own (financial) resources to invest even if there are no LPs present.
Real track record ultimately speaks louder than marketing pitches and beautiful presentation decks. If you can demonstrate lucrative returns on projects, this is effectively tangible proof that the your team and investment strategy works, and institutional money will naturally come.
Starting a fund can be a costly process — no different from launching a start-up. It will not be easy, so do sufficient homework before taking that leap. Learn from the experiences of others and always remember that the best way to sell is to show that the product works.
Structuring and Licensing
[This is the third article in a 4-part series on fundraising] Read the previous chapter on fund strategy.
If you aren’t an investment professional, a lawyer or a banker, fund set up and the mechanics of how LP-GP structures work can be somewhat challenging to understand.
The majority of the business community are familiar with corporate entities limited by shares. But market practice and conventional wisdom seem to dictate that most funds be structured as partnerships. It happens to be the most common and most widely acceptable structure in the PE/VC world.
If this seems complicated, just remember:
At the crux of every commercial entity—be it a corporation or a partnership — is decision making.
Playing by the rules of the game. A typical PE fund structured as a partnership looks something like this:
In the above structure, the main responsibility of operating the fund on a day-to-day basis lies with the General Partner. The Limited Partner (being “limited” by definition) contributes capital but does not have any decision-making rights (much akin to the notion of preference shares in a corporation).
The ‘rules of the game’ — so to speak — are being defined in the Limited Partnership Agreement (“LPA”). Comparatively speaking, instead of the usual board of directors in a corporation, decision making resides in the Investment Committee, which is a group of people nominated by the GP and LPs (the same way shareholders nominate the board of directors). Naturally, those who contribute a larger share of the economics get a larger say in terms of who sits on the board or in this case, the investment committee.
There are many comprehensive resources detailing the mechanics of both partnerships and corporations, but below is an extremely simplified table outlining the few key commercial ‘equivalents’ which illustrates how partnerships in funds operate as contrasted to a typical corporate entity:
The process of ‘receiving’ investors (LPs) into the fund is all about defining the ‘rules of the game’ i.e. Formalizing them in the LPA. A fund formation lawyer can help do this, but as the fund manager, you will need to provide them the game plan, as well as the ‘boundaries’ of the playing field.
Amongst a ton of many things to consider here, some of the key commercial items to take note include:
(i) Amount of management fees and carried interest (profits from exiting an investment)
(ii) When the carried interest will be paid
(iii) Redemption — if, how and when limited partners can withdraw their capital
GPs may carve out special arrangements or preferential economics for different LPs in a side letter. Nothing is stopping you from including these clauses in the main LPA but eventually, it’s really all about how generic you want this to be.
Fund structures and LPAs — being legally drafted — are pretty much predicated on market precedents, which is ultimately driven by demand, i.e. the investor pool. If a structure has been tried and tested in the market, an LP is more likely to use it. This partly explains also why the popular 2–20 fee arrangement has not really changed significantly in the last three decades.
Ultimately, it boils down to managing risk and uncertainty. Most investors (LPs) will try to be more conservative and stand by something which is easier to justify — for a good reason because huge amounts of institutional capital are at stake here.
Is there a need to be regulated / licensed? Broadly speaking, any regulator, fund formation lawyer or sponsor will always advise you to be licensed, for a good reason: to provide more credibility, as well as to protect the interests of the most important stakeholders (the LPs) in your fund, which again in turn, drives credibility.
If you are receiving money from ‘mom and pop’ investors, the answer to being regulated is always yes. In most mature fund jurisdictions, the general rule is: As long as you take monies from any institution (including accredited investors), you need to be regulated / licensed.
What if I just raise capital from people I know? In the eyes of the external parties, getting a fund properly licensed puts the fund manager in good publicity, and is also synonymous with endorsement by the local regulatory authorities. Investors are generally get more comfort that if a fund is licensed, the basic regulatory checks have been done.
In theory, you could even operate a “fund” without being licensed or regulated if you have an extensive proprietary network of individuals who are ready to commit capital with you. The key risk or consideration here is whether or not these investors can seek adequate recourse in the event you screw up.
In reality, most funds are set up for the purposes of taking in institutional money for long periods of time. Therefore, regulation and licensing not only allows for proper governance but paves the way for raising more third party capital in the future.
One of the biggest financial hurdles with getting licensed is of course the upfront expenses (potentially up to $1 million paid-up capital required). Most first-time fund managers may not be willing to part with such a huge amount of capital especially if there is no certainty in raising the fund.
[This is the third article in a 4-part series on fundraising] Read the final chapter on the fundraising process here.
This is true for many investment banks. And people pay for complexity.
But it's an odd world:
Founders chasing publicity on social media, focusing on “story-telling” instead of "product-selling".
Companies (especially funds) announcing (and celebrating) an investment or acquisition in a business, almost sounding like: “Look, we bought these guys” or “Hey I pulled that off, can you?”
Entrepreneurs focusing too much on beautifying powerpoint slide decks and looking for investors instead of devoting more resources towards building a real product and looking for customers.
Some people spend too much time going around begging angel investors and VC funds for money to build their business. I once told a friend: raising capital is equivalent to "cash flow from financing". Why don't you focus more on delivering "cash flow from operations?".
The same applies to private fund raising: If you have to wait to bring in OPM (other people's money) before kickstarting your fund, maybe you really shouldn't be in the PE/VC business.
The end result is the same: solving for that funding gap.
You are much better off spending your time and resources looking for customers (who are by the way, non-dilutive to shareholding) rather than "road-showing" month after month to investors.
I think many of us nowadays over-relate to what we read in social media. We constantly see how different forms of a Jeff Bezos and Elon Musk manifest themselves as visionaries of businesses: People who make sweeping, yet inspiring remarks about their entrepreneurial ambitions, and making the headlines through that process. A few days later, a large venture capital or private equity firm, a middle eastern sovereign fund, or some other titan of an investor with deep pockets take a minority stake in the company.
And weirdly (for a lot of people), a part of the brain puts one and one together concluding: "Go big, or go home", "If I passionately try hard enough, someone will acquire us some day", or "some big company will buy us out". It's easy to get caught up with the hype and optimism. After all, there are many precedents of successful tech founders who started from humble beginnings.
While it is true that if you don't die trying, you won't make it, too many folks forget that the most important part of doing any business is reeling in customers, not telling stories to investors (but what do I know, right?)
I also know a handful of folks who place too much emphasis on pursuing egotistic corporate titles, lamenting on why they aren't promoted or not given nice-sounding C-suite positions. Those who crave the adulation of social media and in the process, overcompensate themselves have no chivalry.
They are all doing it backwards. Real business is in working the P&L, not in fluffy words and lofty titles.
There is no point in calling yourself Chairman, CEO, CFO, CIO, (or any permutation of a CxO), Head of Business Development or Head of Investments if you have a lousy report card to show for. It's useless to garner a thousand followers if you can’t successfully monetise your product.
You can call yourself anything you want really, but at the end of day if your designation doesn't get the job done and bring home the bacon, then what is the point?