How to Raise Capital | Strategies & Steps

The effectiveness of your strategy to raise capital determines if your fund will be a rising star or a sad memory. The more time and effort invested in the business plan, the more consistent you will be in capital acquisition. This article will identify some popular sources of startup and investor capital and why a hedge fund is the perfect vehicle for raising capital.

Starting a hedge fund can be a very strategic choice for capital raising. Compared to other investments, hedge funds have more regulatory leeway, allowing fund managers to employ alternative investment strategies that investors seek to diversify their portfolios. To be attractive to sophisticated investors, a hedge fund must prove that all legal requirements are in order, that the fund manager has a well-thought-out investment model, and will communicate honestly and transparently with the investors. 

Regular investor communication is paramount to investor confidence. People expect there to be market corrections. They appreciate being kept in the loop to understand how you plan to react. A positive spin-off from operating the fund honestly and transparently is the goodwill of the investors who recommend your fund to other sophisticated investors. Hey, word-of-mouth is the best marketing of all.

Fund Capital Raising

New fund managers are often drawn like a Moth to a flame by the potential of making money without realizing the commitment of time and effort needed to secure funding successfully. During the fundraising process, it's not uncommon for managers to invest much of their personal time and creative resources into identifying, presenting, and raising capital. Fundraising involves costs and obligations that you should weigh carefully to ensure you have adequate startup capital. If you fail to plan - you plan to fail.

Venture Capital:

VC companies offer funding to promising startups in return for ownership stakes in the business entity. VC firms typically engage in post-initial seed funding stages. They offer support, strategic guidance, and networking opportunities to assist startups in achieving rapid growth. 

Angel Investors 

Wealthy individuals who put money into startups and fledgling businesses in return for a share of ownership (equity). They usually back companies in their early stages with the highest risk and make informed decisions based on research and experience. Since they invest their money, they are a source of less financial support than VCs. Outreach campaigns using Angel List or LinkedIn can also be laser-targeted to the investor profiles you seek. There are online services that can quickly create a database of potential prospects from these types of online communities. 

Crowdfunding 

The popularity of equity crowdfunding has increased since the federal government implemented the Jumpstart Our Business Startups (JOBS) Act in April 2012. Equity crowdfunding involves offering shares in a company in exchange for financial support. There are three types of crowdfunding models. Reward-based (where backers receive products or perks), equity-based (where investors receive shares), and donation-based, given as gifts. 

In crowdfunding, the fund manager can establish minimum and maximum contribution amounts for investors. Crowdfunding efforts usually span several months and are best suited for startups looking to secure funding of $100k or more. 

Commercial Lending

When you have good credit scores, shopping for commercial lenders is an option. These lenders will be looking to confirm that your previous work experience has given you the chops to manage the fund. Remember that these loans can carry a hefty interest rate, and you can expect a collateral lien against your assets. Accelerating the payoff would be advisable. 

Note: When considering a personally guaranteed loan, there are strict regulatory and tax laws you want to avoid running afoul of. Consult with your legal and tax advisors to ensure full compliance with everything. Not doing so can cause you massive headaches at a later time.  

Bootstrapping

On the other hand, if total control and not being under a lender's or investor's thumb is your goal, then using your money is the best solution. But only if you have the seed money to cover the startup costs and an operational budget for a few months. Funding the startup yourself also makes points with sophisticated investors because they see that as a 100% all-in commitment from you.

Outreach campaigns using Angel List or LinkedIn can also be laser-targeted to the investor profiles you seek. There are online services that can quickly create a database of potential prospects from these types of online communities. 

Preparing to Raise Capital

When launching your fund, you must have a crystal clear vision of your fund's goals and how you will reach them. Until you have some performance data in the rearview mirror, potential investors must be comfortable that you have done everything possible to prepare for success.

Your Private Placement Memorandum (PPM) must clearly explain your investment model. Put yourself in the investor's shoes; what would you want to know, and what questions would you need answered? 

Here is a general list:

• Who are the management team members, and what is their background?

• What is the fund’s governance and structure? 

• What is the fund’s investment methodology? 

• What is the fund’s due diligence process for investments?

• What are the fund’s compliance and regulatory concerns? 

• How does the fund control and mitigate risk? 

• How does the fund handle liquidity?

• What are the fund’s reporting and transparency protocols? 

• What are the fund fees, terms, and conditions (management fees, performance fees)? 

A Real Estate Fund Example

Mark is preparing to launch a residential fix & flip real estate fund and needs to raise capital. Here are some questions he would want to address as he builds out his investment model overview.

• What is the maximum cap that can be paid per property?

• The expense limit for the repair and rehab?

• What rehab will be handled in-house, and what will contractors provide?

• What is the targeted profit and the bottom dollar if the property exceeds a set days-on-market?

• Would the fund offer owner financing (note), collect interest for a set period, and then exit by selling the note?

• If some properties meet a set criteria, would rental income make sense?

You get the idea, right?

Mark must also decide whether or not to give up equity in exchange for investment capital. 

• Will doing so attract more investment capital and do so faster?

• What would the equity be based upon, a founders group at a set percentage or based on the amount of invested capital?

• Would the equity investor agreement include an option for Mark to buy out their positions?

When the time is right, Mark needs to determine how to exit the fund and when. 

• Sell the fund to a larger competitor.

• Merge with another fund.

• Use an initial public offering (IPO). 

Craft a Compelling Pitch

• Identify the assets to be acquired and include appropriate diagrams and charts to illustrate a comprehensive investment strategy.

• Provide each team member’s bio outlining their role within the fund. 

• Demonstrate your grasp of both the current market and future changes. The advantages and obstacles present. Include realistic financial forecasts accounting for positive and negative markets. 

• Discuss the methods to reduce risk, such as diversification and leveraging techniques.

• Outline the steps to ensure adherence to federal and state rules and regulations. 

• A financial forecast provided by a CPA. A line item estimate of the expenses and expected profits. Include how the fund will use the capital for operating expenses and asset acquisition. 

• Confirm that the investors can participate as accredited or qualified purchasers and keep a file with supporting paperwork.

Once your pitch is completed, test it on a few people to confirm your information is clear and understandable. Implement reasonable suggestions, and now you are ready to go eyeball-to-eyeball with investors.

7 Tips to Navigating Investor Meetings

If you want your fund investor meeting to go smoothly and be successful in raising capital, here are some helpful tips: 

1. Do Your Research: 

Prepare yourself before the meeting by learning about the investor. Visit their social media profiles and business website. This will highlight their interests and what they do for a living and provide some conversation starters.

2. Relax Your Delivery: 

Hit your main points, but don’t worry about following a script. Some investors prefer a casual conversation to a formal presentation, so be ready to adapt!

3. Watch Your Time: 

Spend 20 minutes on your pitch and a 10-15 minute Q&A. That doesn't mean you're done. A tried and true saying about being a good listener is, “Walk where your prospect wants to walk.” If you see that they want to relate past experiences, then stride down that path with them. If you show interest in them, they will be more inclined to show interest in you.

4. Be Flexible: 

Investors will likely ask you questions during your presentation. Pause, reframe the question, “So what you want to know is’…and, then answer it.

5. Read the Room: 

Watch how the investor is responding. Are they engaged and asking questions to show they are following your presentation? Are they courteous and not allowing your meeting to be interrupted? Are they asking the right questions at the right time?

6. Speak Directly to Their Concerns: 

Expect questions about market conditions, how you will go about this or that, and how to handle risks. Don’t gloss over these challenges; meet them head-on with a brief and succinct answer.

7. Try a Test Close: 

When you reach a point where you are finished, and they have asked their questions, you might try a test close, “Now that I have covered everything, can you think of any reason why you wouldn't want to authorize the paperwork?

Practice, Practice, Practice: 

You must be able to tell your story relaxed and engagingly. A stress-free meeting is an awesome thing. It proves you are well-prepared with answers to the most common questions. 

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Confidence closes the deal!

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Becoming a Black Card member of  Fund Launch© will allow you to tap into experienced professionals who can assist you with distilling a crystal clear, effective pitch. 

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During the capital raise, many managers fall victim to tunnel vision. All they can see is the next prospect, the following presentation, and the next close. Not everyone is ready to pull the trigger when you first meet them. Do you always commit when hearing about something for the first time? Of course not. 

The proven way to deal with the old "we need to sleep on it"  objection is utilizing an automatic email sequence. A sequence is a series of emails that keep you on their radar and up to date with your fund's progress. Monitor all your communication channels and respond when they ask questions or voice concerns. There is a relationship process these people need time to move through, called know, like, and trust, before they are comfortable enough to move forward. 

Capital Raising is Changing

Although many investors might claim it is all about the ROI, that is not always true; the emotional ROI is sometimes just as significant. People make emotional decisions and then justify them with logic. Other funds are most likely reciting facts and statistics, so if you lead with an engaging story designed to capture interest and follow up with the numbers side, you're making it easier for the investor to decide.

Over the last few years, there has been a discernable attitude shift among many high-end investors. They often look through an investment to perceive the social good their capital can spin off. When an investor's interests mesh with the fund's purpose, this usually leads to a much longer relationship, resulting in more fund stability. To differentiate your fund, could you align yourself with socially conscious investors?

Some funds have a mission statement stipulating that they will not invest in companies that do not have a carbon footprint reduction and environmental impact policy. An element for the greater good would appeal to socially conscious investors concerned about the economy's sustainability and our planet's well-being. Search the topic, environmental and social governance (ESG.) This area has much investor momentum, and funds recognizing this can benefit.

Could you strengthen your fund's back story with a positive social or environmental benefit through contributions to select a nonprofit? Doing so may position your fund in a different light and garner the attention of prospects with similar values.

Want to learn more? 

Fund launch© are experts that can quickly get you up and running a successful hedge fund!  We have years of real-world experience and have developed a templated process that will save you buckets of money and shortcut you to reach that exciting day when you roll out your fund. 

That's why over 1000 fund managers have chosen Fund Launch© to hone their skills and get themselves to market fast. To learn more, please visit us at www.fundlaunch.com/training and book a private consulting call today!