Fundraising Tactics: How to Build Rapport Before Asking for an Investment
Over the last 20 years we have helped large and small asset managers solve marketing and distribution challenges, learning many lessons along the way. In this edition of Oversubscribed: Insights from a Fund Marketer, we explore the importance of channel-specific fundraising strategies for first-time funds.
Establish rapport, credibility, and trust before asking for an investment. In that order.
In any environment, raising fund dedicated capital can be a difficult undertaking. For emerging or spin-out managers with first or second-time vehicles, it can be exasperating. Success requires a manager to stand out, making their initial marketing and communication efforts as important, if not more, than the investment performance of the strategy.
While there are many hurdles asset managers face when launching a new firm, nothing will trump the challenge of raising fund dedicated capital for a first-time fund. Well-planned fundraising, marketing, and communications demonstrate a manager’s professionalism, critical in earning investor trust. On the flipside, in-persons, delayed follow-ups, poorly articulated diligence responses, and unorganized data rooms not only serve as momentum killers but can also leave a lasting impression. The investment community is a small one… treat every investor engagement as an opportunity to create a new brand ambassador.
Introduction: Start with who, how, and why and leave the What for last
Securing an allocation for your first-time or spin-out fund requires an understanding of human nature. Simply put, investors won’t buy what you do until they understand why you do it.
Managers that lead with small talk designed to showcase who they are, how they think, and why it matters are able to establish credibility and earn the trust of the investor. Asking for an investment before credibility and trust have been solidified is a recipe for a quick no. In fact, we often see managers damage long-standing relationships by opening conversations with a sales pitch… simply put, skipping the who, how, and why and leading with transactional conversations centered around what they do and what they want. Simply put, starting with “what,” is a common and colossal mistake. Managers leading with pitch decks and transactional conversations fail to connect meaningfully with the person across the table. This approach typically results in zero invested, with little opportunity for a future relationship.
Best-selling author Simon Sinek states it best in his book, Start with Why: How Great Leaders Inspire: “People don’t buy what you do, they buy why you do it.” Before anything else, investors want to know WHO you are (establish rapport and trust), WHY you think what you think (create commonality), and HOW those beliefs impact your investment convictions (build credibility). This is because, until you build enough rapport to establish trust and credibility, there is absolutely no reason to talk about what you do. Sadly, most managers want to lead with their pitch deck and espouse detail on what it is that they do.
They Must Like You First
While it usually comes off like it was pulled straight out of a sales training manual, it’s always funny when a manager insists on asking for the order even though a relationship has not been established.
So, let’s start with the obvious. All parties are quite aware of why the meeting is taking place, so asking for the order too early only further clarifies a lack of understanding of the process. Investors will let a manager know if they want “in.”
Nobody wants to be sold
We encourage managers to take the time to learn about the person across the table and begin forming a foundation centered around who they are and what is important to them, while avoiding transactional conversations centered around fund performance. Enter the first meeting with the sole intention of establishing shared values and philosophy, allowing you to set the stage for a relationship that will carry on for years. When a manager takes the time to establish trust with investors, the result will be far better than achieving the AUM goal; they will create a long-term relationship that will continue to harvest mutual benefits.
The more time we spend serving relationship-driven channels, the more we learn about the benefit of having an LP base of long-term, sustainable relationships. These involve developing a value-based relationship with the investor. Investors communicate amongst themselves and often see and review hundreds of investment opportunities. So, when a portfolio manager offers more than a ride through their pitch deck, they have the chance to build relationships with a strong network of investors. Staying away from the details of the fund in the initial meetings demonstrates that the manager’s interest lies not in the funds they can allocate, but in the long-term goals they can achieve together.
At the end of the day, we are all in the people business and we must build trust. A $10 billion fund manager once explained that the variance between the good and bad performers (not including outliers) in their sector was never greater than 200 bps. Because of this, the manager recognized early on that the real differentiator is the quality of the firm’s relationships with LPs. Their peers struggled to raise subsequent funds, even with superior performance, while they continued to hit their target raise amounts in shorter and shorter timeframes.
Whether you’re a first-time fund manager or not, don’t underestimate the value of your conversations. Our advice is twofold: 1) LPs don’t care what you know until they know that you care, and 2) Nothing else matters until trust and credibility are established. While there are many ways to construct an LP base, founding a strong one is only possible after building rapport. Investing the time and energy in showing the LP community you care can be the difference between good and great in an industry where it is hard to differentiate.
- It’s a small world. Investors talk to each other and compare notes. While those that choose to allocate will speak highly of you and the fund, don’t forget that those who decline the opportunity will also form an opinion and are even more likely to share that view with others;
- Think ahead. As a successful fund manager, it won’t be long before Fund II is launched. Relationships established during your first fundraising effort, whether they invested or not, are the perfect starting point for Fund II conversations. Managers need to manage relationships with the idea that those investors who passed on Fund I are the most likely source of new investors for Fund II;
- Be patient and considerate. Building an LP base of respected and valued investors may take more time but will prove to be of much more value to the long-term fundraising prospects of the firm.