- To successfully raise capital, emerging funds must demonstrate both high conviction and that the opportunity being offered is scarce.
- Contacts can be as valuable as cash when starting an investment fund because they open new doors and expand networks with limited partners and institutional investors.
- First-time fund managers need to prove to investors that they bring unique expertise and value that isn’t available elsewhere.
How do you convince investors to entrust their capital with a fund that is just getting started? Investors may be reluctant to participate, given that the fund has no track record of its own. To counter that, managers need to employ a deliberate approach and thoughtful strategies to launch their investment fund successfully.
Robert Green, the President and CEO of the National Association of Investment Companies, shares some of his experience of doing just that. He explains the importance of informing potential investors about the fund’s strengths and winning approach, demonstrating its leaders’ knowledge and capabilities, and distinguishing your fund from other investment opportunities.
The first step is education - not finding capital
Raising money is important, but laying the groundwork for that ask is more important still. Green describes the value of patience and education in the early part of the fundraising cycle:
Transcript: The first half of your fundraising cycle is always education. Your first you know, we'll do it on percentage basis because it's relative. But the first 50% of your meetings are all about teaching people who you are, what you do, where you came from, what you're about, and what you hope to do against a market that either is or is not favorably disposed to help you, right.
And so, if you're raising a fund, and it ultimately takes you two years to do that. Most managers will tell you we didn't raise any money the first year. It was an entire negative outflow. Right? We spent money. We spent time, we spent effort. We spent intellectual capital, and we educated a lot of people.
The right introduction provides initial trust
First impressions count. Here, Green discusses how an introduction from the right person can open doors:
Transcript: You're asking people for a 10-year lockup on a blind pool basis, right? There is very little in the world that we ask you to trust more than 10-year blind pool. So who sent you is very important.
We need to be able to effectively utilize our networks in the way that other groups in America have utilized their networks. Right? Whether it's your service providers, whether it's your trade association, whether it's your elected officials. Whether it's your, you know, people that you've worked within your company there have got to be people of substance and credibility that introduce you so that you carry the level of importance and significance that allows me to get to what I told you. The standard was high conviction. You can't get to high conviction in a reasonable time period, if you're being introduced by your elementary school teacher, you know what I mean. No knock on a school teacher. They set us all up for success. But they can't give you a ticket to this game, right? It's got to be somebody connected to it that gets you there.
It’s not only who you know but what you know
As important as relationships are, investors are ultimately paying for your expertise, not your personality. Here’s Green on the importance of demonstrating your unique capabilities:
Transcript: You've got to be able to demonstrate what your toolkit is. Remember, this is not passive investing right? You aren't simply investing money and letting it ride. People are increasingly investing in deep expertise, right? The generalist funds, the funds that will invest in anything as long as it's a good deal and meet certain underwriting standards. There are still funds that do that. But what most institutional investors are demanding for the high fees that alternatives come with. They're demanding specialization. They're demanding unique capabilities, differentiated capabilities.
Conclusion
In summary, launching a successful fund requires a strategic blend of education, trusted introductions and showcasing your unique expertise to build investor confidence from the ground up. By prioritizing these elements, emerging fund managers can differentiate themselves in a competitive landscape and secure the capital needed to drive innovation.
At SVB, we’re dedicated to helping first-time founding partners succeed. Learn more about how we partner with emerging managers.
