Here’s a fundraising tip: “you’ll be sorry you missed this” has never once worked as a tactic to get me – or most LPs for that matter – interested in a fund. Neither has telling me, “if you miss this fund you’ll never be able to get into future funds.”
Such bluster usually earns one-way ticket to my “managers” folder, a place that is alphabetically and existentially distinct from my “interesting managers” folder. After all, if you throw around the bombast with me, it makes me wonder: how do you treat entrepreneurs? I’m your shareholder; they’re your customers.
Most often I hear these types of things when a manager comes to me a scant few weeks before the close of their hot fund. In the heat of a capital raise, things are moving too quickly. Good investors know that time should be cheap and capital expensive. Reaching out a month before the final close makes it easy for them to put a fund in the “life is too short” bin.
So how to stay out of that dreaded purgatory? I’m always a fan of those managers that invest in getting to know their potential investors outside of the rushed formality of the fundraising process. But it’s not about the random jibber jabber of sporadic coffee meetings or overproduced slide decks that seem like warm-ups for the eventual pitch. The thing I value most is an honest look at the portfolio and a longitudinal view of the impact companies. What do I mean by longitudinal? I think it’s important to focus on a consistent group of companies over time, even as some of those companies stumble and fall. Like a Times Square huckster trying to lure tourists into a game of three card monty, some GPs are really good at deflecting attention from companies that haven’t grown as expected. “Check out companies A, B and C,” crows the GP, but at the next meeting it’s all about companies D, E, and F . . . "Where did A, B, and C go since the last meeting," I'm left to wonder. The shiny new pennies in a portfolio sure are nice, but it’s also important to understand why some of those nickels turned out to be wooden. That’s the level of in-depth dialogue and authenticity that we should expect from a partnership. That level of interactivity is tough to get under the oppressiveness of a deadline.
Of course, sometimes when I’ve told GPs that their timing is too aggressive for my diligence timetable, they’ve replied with snarky things like: “maybe LPs need to work at startup speed, too?” Indeed, the difference is that GPs invest in business ideas that can be evaluated in the context of a more easily understood set of variables while we invest in people, a far more intricate asset. Understanding the complexities of individual behavioral footprints and team dynamics is far more challenging. Not to mention that fund investments are illiquid; once you’re in a fund, it’s tough to get out. Individual portfolio companies are relatively more liquid and represent only a fraction of a GPs activity. After all, a typical fund lasts twice as long as the average American marriage making the old phrase, “marry in haste and repent at leisure” good advice for both investors and sweethearts.