March 12, 2024
Advice To New Capital Entrepreneurs
Happy Tuesday, friends! I had an interesting experience recently. I had lunch with an entrepreneur who was one of the first people I talked to about RBF before launching Novel. Back when we first met in May of 2017 he was a startup CEO. He ran a SaaS business and expected to hit $600K of ARR by the end of that year. Fast forward to today, and he has successfully exited that business and is working on a new fund concept. The tables were turned. This time, he wanted to pick my brain on what he plans to launch. I love symmetry. Today I want to share with you what I talked through with him in hopes that it aligns with the challenges you may be facing as well.
Before that though, a little history. The first time we talked - back in 2017 - I was 9 months away from a first close on any capital at all, so couldn’t do anything for him. I was one month into my journey into the world of alternative capital and RBF. Still, he was kind enough to let me pick his brain about how RBF might work for his business.
This was one of the meetings that motivated me to get going on what would become Novel. I thought selling money would be simple -- who wouldn't want aligned, non-dilutive capital?! It was so clear how easy this was going to be! He agreed with the thesis I was testing; he was dilution-conscious and was very diligent in thinking about how much capital he actually needed. If he raised money from a VC, he only wanted $1M, but if he raised RBF, he wanted $250K. I liked the way he thought about it in different terms. It made sense to me.
Of course, I had no idea how difficult the path of a capital entrepreneur would turn out to be. You've heard me say this before: selling money is hard. And raising the money to sell is hard (thus the reason for the newsletter series on how to raise LP capital, the first installment of which you can read here).
Back to the present. I sat down to lunch, and we got caught up on what happened along the journey to him selling his company. It worked out well for him, and now he's working on building a fund with a buy-and-hold strategy. It reminded me of a combination of Permanent Capital and Tiny. So, he's working on an alternative capital project, and he's a capital entrepreneur! He wanted to pick my brain on how to build an alternative capital vehicle. I loved his idea, and I was flattered he thought of me, so this was a fun conversation.
During the conversation, I was struck by a couple things I've come to take for granted that were new to him – things he was finding pretty challenging. Here are the key topics that I thought were important, and that resonated with him:
This is a sales job on both sides of the market -- including fundraising. This successful and sales-focused CEO (he was involved in all the big deals until they exited) was surprised when I described to him how I think about raising capital from investors. Build an investor profile --> build a list --> qualify the list --> run a sales process on the list. It's absolutely the same as enterprise or software sales, but until a person raises money systematically, they don't realize that. Once I shared the broad strokes of my process, his eyes lit up and he said, "This is exactly the same as software sales!" He's right, and I forget how fundamentally important a lesson that has been along the way.
Getting individual investors (HNWs) to understand where your fund fits in their portfolio is hard. When you get out to raise your first vehicle, you will likely raise from HNWs. When you do, you will be threading a needle between two things: (1) what they know about alternative investments, which they will use to categorize you; and (2) their belief that they can regularly hit home runs on their own and therefore don't want to tie up capital. When we went out to raise Novel's Fund I, we were regularly compared to the latest VC fund that an investor evaluated, and it took us a long time to figure out how to walk investors through the differences, and why we were a different (and better) option. On the topic of individual investors' belief that they can regularly hit home runs, e.g., "I like to keep powder dry for 10x opportunities", you can only say, "Are you getting 10x?" If they are, good for them! But they're not, so it will likely make them stop and think.
Your thesis must be differentiated and consistent and you must have a credible claim that you are uniquely qualified to execute it. You have to have a story to tell that's different from what investors normally hear, but that story must be believable given your background. You do not have to be perfect, you just have to convince investors that you are just good enough to pick the right amount of good deals that support your unique thesis to deliver your target returns.
It was really gratifying to share some lessons learned with this CEO-turned-capital-entrepreneur. It’s funny how things change along the way, how the lessons one learns become so important to share with others who are on this same journey.
That's it for now, friends. Feel free to reply to me with your thoughts! I'll formally resume the Raising LP Capital series in the next newsletter on March 26!