Capital raising has many pitfalls. To avoid some mistakes that others have made in the past, here are our top three, most costly capital raising mistakes:
Capital Raising Mistake #1: Having a 2-4 month capital raising goal.
It is important in the capital raising game to set concrete goals and timeframes for meeting those capital raising goals. Otherwise, you may drift along without any real sense of whether or not your efforts are paying off and if you are on track to meet your ultimate goal of closing the fund. Moreover, setting a goal of just 2-4 months is unrealistic and the wrong mindset to go out of the gates with.
You need to plan, build relationships, educate potential clients, and design high quality marketing strategies and materials for the long term. Make plans for 12-24 months and beyond, and make sure that you are maintaining those relationships even after your current campaign ends so that you can be ready to start the next one. While it is important to set goals for a reasonable timeframe, I prefer to view capital raising as a constant cultivation and nurturing of relationships. In a relationship, either business or personal, you typically do not impose an expiration date on that relationship. Why would you do so when raising capital?
Capital Raising Mistake #2: Counting on building a track record and then simply hoping to outsource all marketing to a great third party marketing firm or placement agent down the road.
This puts all of your eggs into the one third-party-marketing-basket. Third party marketers have hundreds of potential clients approach them each year. It is risky to assume that one will not only take you on as a client but actually raise a sustainable level of capital for you.
The second hidden danger of this strategy is that you maintain an infant-level of capital raising experience and knowledge until you start actively raising capital. You need to start moving up the capital raising learn curve immediately. Even if you rely primarily on third party marketers, investors require near-constant affirmation that they have invested their money with the right manager. This demand of regular attention is often at odds with the other demand that investors have, which include full-time attention to managing their capital. This can often frustrate a busy fund management team who prefer to simply focus on investing assuming investors will be satisfied as long as the returns are strong.
Instead of simply ignoring the problem in favor of focusing wholly on investing, the management team can instill greater confidence in their investors and cut down on the investors’ questions, concerns, and requests for updates by proactively communicating and interacting with investors on the GP’s schedule. I have known many managers who are brilliant traders and money managers but put little effort into developing as communicators and marketers. This makes the capital raising process more difficult when introductions are made and may even hurt current client relationships. By improving your own marketing and communication skills, you can more easily assuage investor fears and doubts, instill confidence in new and existing clients, and reduce the amount of time spent answering questions that you could address proactively.
Capital Raising Mistake #3: Under-estimating the value of a first name basis relationship with your top investor prospects.
Some professionals, especially those with technical backgrounds, think that marketing is a numbers game: you simply contact thousands of investors and you’re bound to come up with a few interested LP’s. This is only partially true. At times, you might have to reach out to many to develop relationships with a few investors, but relationships are at the core of everything that gets done. Most private equity firms we’ve worked with have found that by maintaining a strong, active relationship with a core group of limited partners. This way, the capital raising process is much easier when it comes to your next round as it doesn’t feel like a call for money. It is an investment opportunity from a close contact with an existing relationship. You can then use a database of new investors to supplement your existing network and start fresh relationships with less pressure to close immediately.
I’ve found that it’s best to upload my database of investors into a CRM system that allows me to keep real-time notes on my investor contacts and set reminders to stay in contact-that way I know I’m always keeping up with my best relationships and can better strengthen that relationship going forward. Investors like to place capital with people they know and trust, the more investor friends you have the better.
By following this approach and avoiding the mistakes highlighted here, capital raising becomes a much more effective process and hopefully more lucrative for all involved.