Finally – A Formula For Raising Capital
I want to thank John Kim from Kelso. He is the inspiration behind this piece.
Our industry is obsessed with formulas. Here is ours… as it relates to raising capital.
Lets break it down.
Pedigree – This is fairly self-explanatory. If you have been a successful PM at Two Sigma for twenty years, you are going to have an easier time raising money than someone walking out of business school.
Credible Tension – This variable is a little less obvious. Credible tension relates to the ingenuity and uniqueness in which you tell your story and design your materials. The more intrigue you create, the more interest you garner, and the greater value attributed to the capital raising process. There is an art to creating tension. You want to be different, but not too different. Focus on creating powerful language and pushing design beyond the traditions of the industry. Use new tools and different tactics to communicate. Create materials that are different, but vastly more professional than industry standards.
Relevancy – If your strategy is no longer relevant, it will be tough to raise money. Sometimes it is simply a matter of educating your audience on why your strategy remains relevant.
Competition – This is rather obvious - if you have a lot of competition, it will be hard to raise capital. (A general observation; very few people starting a HF or PE fund do a comprehensive analysis of the competition. If they did, they would never start.)
Performance – There is no magic here. The stronger your performance, the greater likelihood you have of raising money. And recognize this variable takes into account all of the metrics that help frame performance, volatility, Sharpe Ratio, etc.
Operating Tenure – It’s simple, a 30% return over a month time period is not nearly as impactful as a 30% annualized return over a 5 year time period.
Current AUM – If two funds were identical in every way, but one fund had an AUM of $5B, and the other $100M, the $5B fund will almost always raise money faster.
Index Performance – It doesn’t matter how well you are doing if the general index used to benchmark your strategy is doing just as well.
Consistency of Communication – This is probably the most overlooked variable within the formula. The return on building awareness is not linear. It is a lot harder to get the attention of an audience than people think. We are often asked how many times you need to connect with an audience to influence an outcome. Take the number you think and multiply that by 3… and then double it. And I am serious. Don’t go into a brand awareness campaign with an end date in mind. Start with the intention of never stopping.
If you don’t have that perspective, you will do just enough to fail.
Quality & Relevancy of Communication –If you don’t send quality content that is relevant, people will unsubscribe and tune you out. Content needs to be refreshingly interesting in some way. It should also tie back to your brand strategy, but that is an entirely different conversation.
There, now you don’t have to worry about it anymore.
By Kyle Dunn