Surprisingly, securing an allocation for your first-time or spin-out fund may not be the most important outcome when speaking with a potential investor. During the fundraising process, we often witness managers damaging their long-standing relationships by opening with why said investor should allocate to their fund. Simply put, they start with the “what,” rather than the “who” and the “why.” This go-to-market strategy, while common, is a colossal mistake. Managers leading with their pitch decks fail to connect meaningfully with the person across the table. This approach typically results in zero invested, with little opportunity for a future relationship.
Start with Why
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. 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. Family office allocators will let a manager know if they want to invest.
Establish Shared Values
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, rather than on if they like the strategy and are ready to allocate capital. 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 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 to an investor that a manager’s interest lies not in the funds they can allocate, but the long-term goals they can achieve together.
Our Take on LP Relationships:
- 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;
- 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;
- 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.
At the end of the day, we are all in the people business. 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.
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.