How to get LP feedback on your fund, prior to active fundraising
Some of the first questions we ask a fund manager seeking investment from us are –
- How much capital commitment do you have and from whom?
- Where do you expect to get the rest of your capital?
Some of the less exciting responses we’ve heard are –
“I haven’t started fundraising yet because I want to really have my strategy figured out and I don’t want to burn my one chance to pitch investors.”
“I have capital committed of $x from some friends, family and work associates. I’m planning to raise the rest from DFIs but I haven’t talked with them yet.”
“I’ve spoken to IFC and another few regional DFIs and am waiting to hear back.”
“We don’t really have much traction with investors yet, but are hoping YOUR commitment will give us the traction we need.”
“I had a great conversation with X high level person and they told me they wanted me to follow up with them in the next few months.”
All of the above responses indicate that the manager has not yet talked with enough investors to get sufficient feedback. Until you talk to investors, you don’t know what they really expect and want. You are blind to the issues ahead.
“But, I don’t want to make a bad first impression with an investor.”
That’s right, you don’t. What you want to do is “preview” your fund thinking and get feedback from a representative group of potential LPs. Here is a framework you can use as you preview your fund with LPs –
- Get an introduction to the LP (much preferred than a cold call) and request for a 30-minute meeting (or a call) to get feedback on a new fund you are in the planning stages for.
- Emphasize “feedback” and that you are not yet fundraising.
When you get the real-time conversation, here’s the flow…
- “Thanks for taking 30-minutes to give me feedback today. I’m in the process of setting up a new fund. Today, I’m not fundraising. I’m here to share with you my current thinking and to get your feedback. I think we can get through this in 20-30 minutes.”
- Important to emphasize that you will be efficient with their time. If the meeting goes longer because they have a lot of questions, that’s their choice. I’d recommend blocking one hour on your schedule.
- In 10-15 minutes (shorter is always better), walk through an overview of the investment opportunity, how you are thinking of focusing on some specific strategies and why, the team you are assembling and how they are the right team to lead this fund, the types of investors that you think this might be a good fit for and why.
- You should be able to do this verbally or with some simple visual slides that you share on your tablet. You want it to feel personal, and not a presentation/pitch.
- You need to prepare this very well. It’s alright to leave open questions as that indicates that you are still planning.
- Let the other person get into the problem solving mode with you. You do this by saying things like “Here’s what I’m thinking…” or “Here’s what I’m observing…” and similar.
- Don’t initially share things like fund terms and performance targets. You want them to engage in the broader feedback. But do be prepared for the top questions you expect them to ask. Be vague about things like terms and returns … “I’m still thinking those through. Are there certain [terms/returns/xxx] that you’d think are important for the fund’s success?”
- “I’d like to hear your feedback.” Pause.
- As the person starts providing feedback, use your active listening skills. If they make a point that you’d like to understand better, say “Please tell me more about that.”
- Take notes. It shows that you are valuing their feedback.
- After your conversation comes to a natural (or time limit) ending, close with “Thank you for sharing your feedback with me. It is very helpful as we refine our strategy and prepare for fundraising.”
- You can try and summarize their feedback back to them to confirm, but this might not be necessary and you don’t want to miss the next items.
- “I have two final questions for you. #1 is Who else would you recommend that I get feedback from?” Once they have given a name or two, ask them “Would you be willing to introduce me to them so that I could have a similar feedback conversation with them?”
- It is important to emphasize that the introduction is not for fundraising, but for feedback as this will make it easier for them to make the intro and they will, hopefully, remember to note that it’s for feedback and not for fundraising in the intro.
- “#2 and final question: What might make this fund potentially an interesting investment for you?”
- If they get uncomfortable, then back off by saying something like “That’s fine, I haven’t given you much time to think about this. We can cover this later.”
- You also might get a “not for me” feedback which is also helpful to know.
This is what I call the “art of the fund preview” … it is a discovery process that will help you be smarter in developing your fund materials and targeting your LP prospects.
Go talk with at least 20-30 potential LPs who are in different situations – e.g. local HNIs, local institutional investors, family offices, foundations, DFIs, fund of funds, etc. You will learn an incredible amount from this “feedback tour”.
Now analyze the feedback that you’ve received and turn this into an “LP strategy” document which will prepare you better to answer the questions posed at the beginning.
While an investor like us wants to see some LP commitments, we also want to see that you’ve done your LP research homework and you at least understand and can articulate what the feedback has been and how you might have a path to getting your fund raised.
Oh, and by the way, did I say that you were just getting feedback and not fundraising… well, actually what you were doing in the “preview” was fundraising as EVERY conversation you have with an investor is a fundraising conversation. It’s just a different part of the fundraising process.