February 27, 2024
Raising an Alternative Capital Fund Series - 1 of 4
Lessons learned developing a thesis for alternative capital. What matters and what doesn't.
Happy Tuesday, friends. Based on the kinds of questions I get most often from readers and podcast listeners, I'm kicking off my 4-part series about raising an alternative capital fund.
Today we start with a breakdown of a few lessons I learned along the way that might be worth remembering while you develop your thesis. To read how to develop a thesis, check out this newsletter. I've distilled what I've learned into a few ideas:
1. No one will believe that your thesis is right. That's right. Unless you've been doing it for a while and have a track record to prove that you're right, or unless you are talking to someone with intimate knowledge of the funding ecosystem, most people will smile and nod. The kind ones might ask you questions in an effort to help you come off your silly windmill-tilting quest to save entrepreneurs from the evils of conventional startup funding, but most will just not believe you at all. Push through it.
2. Market-testing your thesis is important, but beware - the audience is critical. When you develop your thesis and you test it on people, choose them carefully. If they're not buying your fund product or your capital product, or they do not possess intimate knowledge of the funding ecosystem, their opinion doesn't matter. Lawyers, accountants, friends, ecosystem builders, and others all have an opinion but they’re not buying your product. In fact, I'll take an extreme position on this one: don't even ask them what they think. They'll lead you down paths that don't matter in the end.
3. Build a test portfolio. Don’t be surprised when you hit the market and people are not quick to believe that you can successfully build a portfolio using a thesis and structure you’ve never implemented. Building a test portfolio to demonstrate that you can - and that you are right about what you are pitching - is a critical step and one that gives you credibility.
4. Conviction matters - commit to ONE thing. Threading the needle to please investors or combining too many concepts will kill your opportunity. I've seen several funds with competent teams try to launch using a thesis that combined the concepts of a potential for venture returns with early-payback risk offsets that struggled to make progress in the market. No matter how clever the instrument or the portfolio construction approach, I just don't think it's reasonable to claim to be able to deliver venture-scale returns while eliminating the risk of zeroes in the portfolio.
5. Keep it simple! Entrepreneurs don’t care how clever you are, and in fact your cleverness may be your enemy. Sorry, folks, but the more complex and clever your structure, the less likely it is that you’ll deploy capital at scale…and the more likely it is that you’re creating unnecessary complexity in managing and tracking your portfolio. I get it — you love the structure you’re cooking up that entrepreneurs should love too. But if they won’t understand it, you won’t sell it. So reduce cleverness and complexity and err toward simplicity.
6. Decide early between boutique or scalable. These are different business models and different extensions of you and your overarching goal. If you want to scale, be simple. If you want to be bespoke and clever in every deal, go for it. But understand your trade offs.
7. Burn the boats. If you don’t go all-in, you won’t succeed. It’s that simple. Everyone I’ve seen try to launch an alternative capital fund while doing something else failed. It takes all of your focus, and all of your energy. This is entrepreneurship folks, and it doesn’t work if you’re not all-in.
I hope those lessons were helpful. Reply to let me know what you think. Next up: How LPs really think about investing in funds with nonstandard approach, and how to align your strategy with theirs...and how to know when you're barking up the wrong tree.
Love,
Keith