While getting the first meeting with an LP might be fairly easy – many LPs take up to a hundred meetings a year or more – most will only make a handful of investments. So how do you get from meeting to close?
At this year’s RAISE Conference, we heard that differentiation and track record are just the ante to get in the game. Here’s what else we heard will up your chances of getting to “yes.”
1. Build the right relationships early.
Many LPs at the conference noted that their #1 source of deals is other GPs and LPs. Coming in through a referral can make a big difference in building trust.
“GP referrals are a very high-quality source of leads for us,” said Brian Borton, Vice President of StepStone Group. “One of the first screens we look for in GPs we’re backing is: has our network already vetted this person?”
It also helps to start building these relationships early. Nicole Belytschko, Managing Director of CM Capital Advisors, notes that they often like to “follow a manager over a cycle” to get to know them better.
“We like to see how they invest, see how they handle opportunities and pitfalls,” said Belytschko. “This really informs our process and allows us to get to know the manager and their inner workings.”
2. Show your strategy in action.
The more you can show LPs what they can expect from you, the better – this helps to lower their risk.
“We’re in the business of predicting the future, and we’re going to enter into a ten, fifteen, twenty-year relationship with you,” said Borton. “We want to de-risk that as much as we can.”
For this reason, Borton and others recommend starting to make investments early and warehousing deals, to give LPs an indication of how the fund will do.
“I would highly encourage first-time emerging managers to start writing checks. Do a smaller first closing on your GP commitment, or from some friends and family, and just go on and do deals,” added Borton. “Then come to me and share what you’re doing. This kind of visibility is definitely an advantage.”
Belytschko also encourages new investors to “put points on the board” early to “show you can invest.”
“It doesn’t have to be realizations,” added Belytschko. “Show how you make decisions.”
And, if you haven’t done deals with your partner before, do a few deals together, noted Harpeth Fund Advisors Managing Director Angela Stanley.
“If you’re a first-time team that’s never invested together, it’s harder for us to get excited,” said Stanley.
3. Have a long-term vision and growth strategy.
Stanley urges GPs to “think of yourself as an institution before you’re fully institutionalized,” and sit down with your partners to put together a game plan for growth.
“It’s amazing how many GPs come to us and they haven’t planned a future path for the firm or their vision,” shared Stanley.
Investing in operations also shows you’re in it for the long haul. Borton shared that his firm is doing more operational due diligence now than in the past.
“I think it’s really important to build the infrastructure and organizational capabilities over time. It’s OK to outsource everything for the first single GP fund, but we want to see a trajectory towards institutionalization of that platform, see how you’re going to grow and scale it,” said Borton.
4. Make it easy to evaluate you.
LPs are busy – so the easier you can make it for them to review your materials, the better.
For example, a few LP panelists questioned whether password-protected data rooms and intralinks were always necessary. As one noted, “I can’t remember the password – just use DropBox!” Sending a simple PDF instead of using DocSend is also generally appreciated, so LPs can forward your documents internally, or save them and review them on the plane.
The same goes for the PPM. While not everyone agrees on the value of a PPM, and only about half of microcaps have them, those who opt for one may have an advantage, said Christopher Vogt, Director of Equity Strategies at Margaret A. Cargill Philanthropies.
“I like PPMs for two primary reasons,” said Vogt. “The first is efficiency. PPMs often have a lot of the core information we’re going to use in our investment memorandum. Having this information (auditor, law firm, other service providers) at your fingertips saves us time. We don’t have to call you to track these things down so it’s better use of your time as well. The second is that it shows LPs that you have thought about your strategy and process and are willing to memorialize what you do and why.”
5. Be realistic. Be truthful. Don’t oversell.
One thing LPs said would torpedo a meeting? Not being realistic about your prospects.
“It drives me nuts when a GP comes to us and says, ‘There are no competitors, we don’t compete against anyone.’ It’s unlikely that is true in this market,” added Stanley. “Get to know your peers, understand where you fit, and show how you’re differentiated.”
“One of my pet peeves are people who say, ‘I haven’t had any losses.’ This just isn’t realistic,” she added. “In fact, the best managers not only have losses, but they also have a part of the portfolio where they sell companies for 1 or 2 or 3x – where they’ve taken would be zeros and turned them around. Don’t lose sight of the middle stuff.”
And finally, show transparency.
“If you have a write off in your history, just raise it. If I have to figure it out on my own, you probably won’t get a second meeting from me,” said Margo Doyle, Chief Investment Officer at S-Cubed Capital. “We all have mistakes. Failures are actually part of what make us better.”
When talking to first-time fund managers, Precursor Ventures’ Charles Hudson often shares this piece of advice:
“If you’re new to fundraising, chances are you’ll run out of one of four things during the process: Hope, patience, financial runway, or LP leads. You can survive one or two of those, but usually not more than three.”
Hudson’s point – one echoed by many of the fund managers at this year’s RAISE Conference – is that raising a venture fund is a grueling process. Even though LPs may take a hundred meetings or more over the course of a year, most will only make a handful of investments. For my first fund – New Cycle Capital – we talked to 120 investors to get 13 to say “yes” and raise $26 million.
In addition, many limited partners are forthright that they take meetings to learn, even if the odds of investing are miniscule. In fact, one large family office said at RAISE that they take many meetings, but add just one new fund a year. This means emerging fund managers will need to do hundreds of pitch meetings over a 12-18-month period to make a fund happen.
How do you get these meetings? And how do you make sure you’re being efficient with your time? Here are some of the tips our RAISE panelists shared for finding and getting in front of the right LPs.
1. Start to build relationships early.
Many LPs want to cultivate relationships with fund managers over time, before they invest – so get in front of them as early as possible.
“One of the things we like to do is follow a manager over a cycle. It helps us to see how they invest and how they handle opportunities and pitfalls,” said Nicole Belytschko, Managing Director at CM Capital Advisors. “This really informs our process and allows us to get to know the manager and their inner workings.”
Starting relationships early is particularly important with the gatekeepers like Cambridge Associates, who have additional internal processes and conduct deep due diligence.
“We encourage groups to get in front of us before they’re ready to start fundraising,” said Zach Gaucher, Senior Research Associate at Cambridge Associates. “Coming to us and saying, ‘I’m halfway closed, I’m two months before things are wrapped up’ doesn’t give LPs time to establish a relationship and go through a diligence process.”
2. Ask for intros and insights.
We heard from many LPs that they’re eager to take meetings with people introduced to them by a trusted friend or colleague, so don’t be afraid to ask for these intros.
You can also tap into your VC network to get a better sense of which LPs might be a good fit. I’ve found that other fund managers generally know what their own LPs are looking for and will want to make introductions if there’s a good fit.
3. Get some deals going early with AngelList.
If you’re just getting started, AngelList can be a solid source of funds to get a few deals done early, noted Brendan Wallace, co-founder of Fifth Wall Ventures.
“I used AngelList to incubate our fund,” Wallace said. “I made a website for the fund even before we had capital, then raised money on AngelList to do about $25 million worth of deals. This allowed us to test our investment thesis and build a track record.”
4. Analyze PitchBook or Preqin data to focus your list.
“Our second fund was more of a grind than our first one, because we were going for much more institutional investment and we increased the fund size by 50 percent. We had to take a lot more shots on goal,” Joaquin said.
To facilitate this process, Obvious “bought some very expensive PitchBook data,” ran a set of filters to see which LPs invested in their fund size and new managers, then put a weighting on the funds they thought had a similar story or track record to theirs. The result was “a much more focused target list to work from,” added Joaquin.
(I’ve also found that Preqin can be useful to see which funds an institutional investor has traditionally invested in – you can also use Crunchbase to research which funds have similar investment strategies.)
5. Seek out strategic investors.
For sector-specific funds, there can be a strategic advantage to soliciting investment from the leaders in the industry.
Wallace realized that if he could get the biggest incumbents in the real estate industry to become LPs in his real estate-focused fund, it could give him a strategic edge in subsequent fundraising.
“We raised the first half of our fund from the biggest real estate incumbents like Lowes and CBRE – basically a big real estate name from each of the strategic sectors of the industry. They saw this as a way to get ahead of new technologies and possibly identify competitive threats earlier,” said Wallace. “After that, it was easier to get meetings with endowments and pensions.”
According to limited partners, strategic investors also address a key issue facing new venture capital firms: lack of differentiation. Notable strategic investors demonstrate that a firm is likely to get unique deal flow and can provide strong due diligence on potential investors. Think hard about which investors will make your story better, and get them lined up first.
6. Tap into your founders.
If you’ve got some deals under your belt already, consider asking your founders to invest.
“It’s really great if you get founders you’ve backed before to back you – even if it’s a small check,” said Eva Ho, General Partner at Fika Ventures. “We had almost twenty founders from our past funds put in a check varying from $25,000-$100,000.”
Ho noted that this strategy also made her fund more appealing to other prospective LPs, sharing that, “It definitely made people sit a few minutes longer during our pitch.”
7. Don’t lose hope – or patience.
Finally, Ho notes that you should be prepared to “grind it out.”
“I think we pitched close to 500 people over seven months,” she added. “There’s no other way to do it.”
At the 2nd annual RAISE Conference this May, we heard from a wide range of fund entrepreneurs and limited partners about strategies that lead to success when raising capital as an emerging manager and managing that capital on an ongoing basis.
Over the next few months, we’ll be rolling out a series of articles featuring many of the unique insights that came out of the conference. I invite you to subscribe to receive an update when the articles are published.
In the meantime, here are a few of my favorite quotes from the event:
On why you can never have too many LP leads:
“If you’re new to fundraising, chances are you’ll run out of one of four things during the process: Hope, patience, financial runway, or LP leads. You can survive one or two of those, but usually not more than three.” – Charles Hudson, Managing Partner, Precursor Ventures
On tapping your network for intros:
“I found that often, if you ask, everyone always has one or two referrals. I think you’d be surprised if you just ask.” – Eva Ho, General Partner, Fika Ventures
On getting your story straight:
“The most important part for emerging managers is the upfront work – making sure the story is as tight as possible. You don’t get a second chance to make a first impression.” – Angela Stanley, Managing Director, Harpeth Fund Advisors
“I want to understand how in your theme as a GP, you’re actually bringing something different. Does your team have a unique network for sourcing? Does your team and network add value to entrepreneurs such that they’re going to select you to be part of their syndicate? And then, what is it about you as a team that can add value after your investment? I spend a lot of time thinking about these three pieces.” – Margo Doyle, Chief Investment Officer, S-Cubed Capital
On tips for the LP pitch meeting:
“One thing I always love to see is the team slide further up in the deck. We want to know who’s driving behind the wheel. It’s also important that everyone from the team who’s in the meeting participates. If you’re going to bring people in, they should all be talking.” – Eric Woo, Principal, Top Tier Capital Partners
On the benefits of diversity:
“I think it’s broadly beneficial for the whole industry and asset class to embrace and support more diversity – whether along gender, ethnicity, race or other lines. Research shows that diversity of thought, perspective, and background ultimately drives better investment decisions. It’s certainly something that we like to see.” – Brian Borton, Vice President, StepStone Group
On outsourcing operations:
“It’s easy for people to say ‘Oh, I’ll just outsource the whole back office.’ The reality is, even if you’re outsourcing something, you need somebody who understands what these people are doing to actively manage it. You can’t outsource everything.” – Trae Vassallo, Managing Director, Defy Partners
On the importance of honesty:
“Disclose bad news as soon as possible. LPs want to know that the company you invested in isn’t doing well. If it pops up on Bloomberg and our Chief Investment Officer sees it and asks me about it, I’m not going to be very happy if I haven’t heard from you and don’t know what’s going on.” – Christopher Vogt, Director, Equity Strategies, Margaret A. Cargill Philanthropies
* Quotes used with permission from our speakers.
We’re making our final preparations for the 2nd annual RAISE Conference, and I’m truly excited about the content and the network we’re bringing together again in this unique collaborative forum.
The market continues to be ripe for fund entrepreneurship. Technology is allowing companies to scale more quickly, more cheaply, and in a wider range of locations, changing the investment needs of startups and creating a wealth of opportunities for smaller, more focused funds. Furthermore, the success of trailblazing funds like Floodgate, First Round, Baseline and SoftechVC have left LPs looking for the next great new manager.
In fact, according to a detailed study by a former skeptic, Cambridge Associates, new and emerging firms accounted for 40-70% of the value creation in the top 100 venture investments over the past decade, with funds of less than $250 million accounting for an average of 20% of total gains.
Who is driving the next wave of emerging funds? In some cases, principals and partners at existing firms have spun out and started their own firms, creating smaller, specialized funds or focusing on particular market sub-sectors in which to carve out a niche. We’re also seeing prolific angels, operators of AngelList syndicates, experienced operators, and other entrepreneurs develop new types of fund concepts and approaches.
We’ll hear from a wide spectrum of fund entrepreneurs at this year’s RAISE Conference to learn about their strategies for success, and address the core foundational questions that all fund entrepreneurs face:
- How can I build a strong base of investors?
- What fundraising strategies are working right now?
- How can I accelerate the growth of my firm?
- How do I build a firm that lasts?
We’ve assembled an elite group of panelists and presenters to tackle these questions and bring us up-to-date on developments in the industry over the past year.
We’ve also expanded our “Springboard” track this year, which is a demo day for emerging managers. We’ll hear from 30 emerging managers who are currently in market to share 5-minute presentations on their team, their strategy, and their track record. For LPs, this day is an incredibly effective use of time to quickly see some of the most interesting new funds that are coming up.
We’re excited by the quality of the presenters; many of the funds already have one unicorn in their investment track record and quite a few impressive exits. We also have a number of exciting sector-specific funds on the agenda, including Artificial Intelligence, Urban Innovation, and Sustainability. We’re looking forward to hearing from them and learning what new trends are emerging.
Many more insights to come. See you in the Presidio!