Last time, we introduced the concepts of momentum and friction, in the context of raising a fund. In that piece, we directed our focus to momentum, and outlined a few ways that a fund manager can help generate scarcity and velocity, and thereby get their fund to a successful close, efficiently and effectively.
In a sense, momentum is a very direct characteristic: it relates, in the most part, to matters that are, more or less, under the manager's control, being generated, chiefly, through certain decisions that a manager makes (where to set the target and hard cap, when to hold first and interim closes, etc.).
Friction, on the other hand, is more indirect – it is best understood from the perspective of a prospective investor's investment process.
Effective friction management can be summarised as:
- Charting a route: communicating a clear process (and sticking to it)
- Clearing the path: keeping one step ahead of each prospective LP and clearing the obstacles that might appear in their path
In this article, we'll look at both these elements and provide some guidance on how to excel in each.
Charting a route
Every successful journey starts with a clear plan, and an attendant itinerary.
Without clear direction on what will happen, and when it will happen, how are LPs supposed to make time, at the right time, to engage with the various phases of your raise?
Your process letter should include everything an LP needs to know – and everything they need to plan for – in order to participate efficiently in the process.
Dates when access to the data room (and any supplemental data) will be made available should be clearly stated, as well as when it will be possible to spend time with the manager's team, on-site.
Asking at this stage for broad indications as to desired (and minimum acceptable) allocations is also smart. Over-subscription may be a "nice problem to have", but it is nevertheless a problem, and will need to be managed.
Fundraising is a dialogue and there may be some potential investors that struggle to meet a timetable, but LPs actually appreciate clear guidance and timelines, as it helps them plan their own work flows and resource allocation. Your confidence with regards to reaching your targets (and the importance to you of the investor in question) will dictate whether or not you are willing to make exceptions. Be aware, however, that derailing the entire timetable to satisfy a single LP (or for any other reason) can be fatal: once you have communicated your plan, you must stick to it.
Clearing the path
Preparation is important. This extends not just to getting your documents ready (more on this, later) ahead of the project beginning, but also with regards to anticipating the queries that may arise from prospective LPs. A pre-fundraising perception study can be helpful here. Knowing the likely questions beforehand, and being able to prepare the perfect answer confers a clear advantage.
LP due diligence takes time, and this is unlikely to change. A prospective investor should never be waiting for access to a document, and this means that you should always have all documents in your dataroom, well ahead of time.
With regards to producing the documentation you need for the fundraise, make sure that you begin this process early enough. The importance of these documents and the number of stakeholders that will want input and/or approval rights means that they are rarely quick to produce. Our team can help with the heavy lifting, of course, but people within your organisation will need to sign off.
Another area that can add significant time to a fundraising process is referencing. Conscientious LPs will always want to conduct some reference calls themselves, but you can dramatically reduce the time this takes (and the burden it puts on you, your LPs and your referees), by engaging an independent firm to conduct and document some reference calls, in advance.
Of course, there are many other events that can become virtual potholes along the way, but by dealing with the known issues, well ahead of time, you will be able to focus your attention on the exceptional situations, and raise your fund successfully, in record time.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
