Approach Fundraising As A B2B Sales Process
For many emerging VC managers, fundraising from LPs seems like an obscure procedure that is difficult to comprehend and hard to do right. I think it becomes much clearer if you look at fundraising as a typical B2B sales process, viewing the fund that you try to pitch as the financial product that you want to sell.
This is how such a process can be designed, with many similarities to best practices in enterprise sales:
- Identify the right investors to build a long-term relationship with & get access to them (intros, outreach)
- Engage with them and make them aware of what you offer
- Educate them about the broader opportunity in your market while learning from their specific needs (investment horizon, liquidity profile, risk/return expectations, allocation targets, existing portfolio, etc.)
- Help them evaluate the different options to get exposure to the opportunity that you address (direct primary, direct secondary, SPVs, fund primary, fund secondary, fund-of-funds) & convince them of your approach
- Help them get internal Buy-In if they are not the single decision-maker & provide what they need to justify a potential investment in your fund.
- Agree on terms & close the initial investment
- Onboard the new investors, giving them more attention in the earlier stages of their investment
- Ensure their ongoing satisfaction through transparency and responsiveness in order to keep retention for future subsequent funds high (re-ups)
- Potential expansion of their allocation to your business (increase their commitment in the same fund via subsequent closings or other future funds or strategies such as opportunity vehicles)
- Get their advocacy so they spread the word about you, generating new leads for fundraising and/or potential investments you could make
Only a few managers actually take their time to sit down and think through these steps one by one before scrambling to talk to LPs. Strangely, there are B2B sales workshops for startups of all sizes and sectors but no one shares the secrets of LP fundraising. It would probably not hurt to eat into the margins of cap intro & advisory businesses.
Understand Your Target Audience
Fund managers often forget that the LPs they try to target get as many requests from potential investment opportunities as the amount of pitches VCs get from startups trying to raise. A bespoke go-to-market approach generally wins over brute force methods which is why managers with a thorough understanding and empathy with their target audience outcompete their peers in fundraising.
The context of a potential LP will tell you a lot about their likelihood to take a risk on an emerging micro-VC manager. For example, an entity with $10+ billion assets under management and a lean team will usually not bear the opportunity cost of time to do due diligence for a $5 million (0.05%) check in a $25 million seed fund. At the same time, if you speak to an entity with $100 million AUM, it could be that their allocation to alternatives (including real estate, PE buyout, commodities, crypto) will be so small that allocating to venture capital might not be feasible.
With this in mind, it is your priority to understand the different types of LPs and their respective needs and concerns. For emerging managers, high-net-worth-individuals (HNWIs), family offices, fund of funds, corporates and government programs are the most likely sources of capital.
Since emerging managers lack the track record required by large ticket investors, they usually focus on closing many smaller checks while slowly building relationships with more institutional LPs for future subsequent funds. However, be careful not to partner with too many small LPs without the necessary operational infrastructure and processes to handle them (onboarding, capital calls, reporting, LP approvals, etc.).
Defining and properly segmenting the right target audiences is the prerequisite to forming an effective marketing strategy.
Choose The Right Marketing Approach
The purpose of B2B marketing is to establish a relationship between potential customers and your offering. Marketing often distinguishes between push and pull methods.
Pull marketing works if you believe that your target LPs are already sophisticated enough to be specifically looking for what you have to offer. For that scenario, managers have to make sure they can be found by investing in their brand, high-quality content, social media followership and PR.
In other situations, push marketing might be a better choice if you believe your target LPs are not explicitly looking for your product but would still find it highly relevant. Keep in mind that e.g. family office principals mostly dislike being contacted directly whereas professional investment teams at wealth managers, fund of funds or endowments are always looking for new opportunities and probably do not mind a cold outreach if it is well-targeted.
Identifying the right stakeholders requires lead generation and lead enrichment in order to find the best way in and often comes with gathering information from databases, news sources and social media pages. From my experience, paying for general databases such as Preqin or Pitchbook is only of limited value since they lack the possibility to filter for allocators that are open to emerging managers.
Successful marketing campaigns require budgets. From an economic perspective, closed-ended venture funds have the advantage over open-ended hedge funds that capital is locked in for ten years. Conservatively assuming that the only source of income is management fees, this means a VC fund manager receives $200,000 in fees from a $1 million investment over the lifetime of the fund (LTV). That allows for significant marketing and sales spend to acquire that customer (CAC). With rising allocations to the venture asset class and higher competition among managers, I expect marketing spend in the industry to increase significantly in the upcoming years.
In terms of marketing channels, some such as SEA, display, video, TV and radio will obviously not work for this target group. Instead, what works is carving out a niche in one or more of the less transactional channels:
- SEO / Organic Search
- PR & Content
- Word-of-mouth / Referral
Considering the importance of relationships in LP fundraising, events are still an underutilized channel. I guess that is due to the lack of high-quality bespoke events that explicitly target emerging managers and LPs that are looking to allocate. Raise in the US and AllocateGP in Europe are two conferences trying to fill this gap. Beyond that, I came across a few demo day type formats already but it remains to be seen if any of those can build up as much momentum in LP circles as YC has done for GPs.
Generally, I believe emerging managers should try to experiment more with multiple of the channels above to reach their target audience. Luckily, a strong online presence does not only attract potential LPs but also co-investors and entrepreneurs looking for funding.
Define Your Sales Funnel And Set Appropriate Targets
Once marketing succeeds, it is up to sales. Strong sales means running a strong sales process which relies on a well-defined funnel. Fund managers should break down the customer journey into granular touchpoints to create a satisfactory customer experience from the LPs’ perspectives. Thereby, every interaction with a prospect is an opportunity to learn.
As salespeople know, it is essential to qualify your leads early on. Emerging managers should ask qualifying questions to establish GP-LP fit in the first two conversations with potential clients such as:
- How much capital do you manage and how high is your allocation to PE & VC?
- How many venture managers have you backed?
- Have you allocated to micro venture funds in the last 24 months and are you expecting to allocate within the next 12 months?
- Have you allocated to emerging venture fund managers in the last 24 months and are you expecting to allocate within the next 12 months?
As with most funnels, the priority should be to move leads either down the funnel or out of the funnel efficiently. One of the worst things that can happen to you in fundraising is spending too much of your time and energy with the wrong types of prospects.
In order to guide potential LPs through the pipeline, ask yourself at each stage what are the questions that they will have for you and what are the incremental answers they will look for to help them and their teams make a decision. You will leave a great impression if there are materials you can proactively produce and share with them and if your data room is well organized.
Similar to fundraising from startups, LP fundraising tends to be more successful if the process is well managed from the side that is raising. I have even heard of GPs that are actively tracking the number of leads identified, initial calls set up, DD meetings and new commitments per week throughout the 12-18 months of fundraising.
When setting your objectives, keep in mind both the short-term goal of growing AUM and the long-term goal of maintaining a productive relationship and a stable capital source for future funds.
Get Positioning Right And Nail The Pitch
Positioning is important to both establish contact and to make the most out of it once you have awareness. You need to be able to clearly communicate the who, what and why and leave an impression that is differentiated from the market. Sophisticated LPs will try to evaluate whether you could be a potential fit to their existing portfolios, whether the market opportunity you pitch is truly attractive and whether you have an edge in capturing that opportunity.
As marketers and sales professionals know, the value proposition you pitch is dynamic and needs to be adapted to the audience and context. Emerging managers can consider using different materials for different types of LP segments and the successful ones constantly iterate their pitch to increase their chances of addressing the LP’s sweet spot. In a future post, I will discuss how GPs can deliver a great elevator pitch to LPs and what elements need to be communicated.
To summarize this post, I believe emerging fund managers can increase their chances of succeeding in fundraising by transferring best practices from B2B sales processes. It requires a thorough understanding of your customer, choosing the right marketing approach, managing an efficient sales funnel and getting positioning right.
I would be curious to learn more about creative marketing approaches and hope that over time, the community of emerging managers will also contribute to more transparency regarding sales efficiency. Please reach out if you would like to share any qualitative or quantitative insights into what has worked for you.