This post is part of our Emerging Manager's Guide to Fundraising. Download the full guide for more best practices to launch and scale your fund.
Emerging managers need to be intentional about creating their investor network.
Institutional investors have vastly different objectives (and means) compared to family offices. Each group has different investment ethos, risk tolerances, strategies and goals and their needs may often be in conflict too. Setting yourself up for success in the fundraising process means taking the time to be thoughtful about how you construct your investor base and then diligence prospective investors and identify suitable targets accordingly. Not every investor will be a good fit—and that’s okay.
There is no clear winner when it comes to which investor category best suits emerging funds. Larger institutions may not want to spend time performing diligence on multiple managers, so may prefer to write fewer, larger checks; while individual investors are showing increasing appetite for alternative investments but may have different liquidity expectations and need to be managed strategically.
Institutional investors
Nonprofit organizations, pension funds, and universities invest their funds in order to ensure the long-term financial sustainability of their organizations. Endowment funds, like the Yale University Investments Office, typically allocate a larger share of their portfolios to VC and private equity than pension funds.
This group has typically been the hardest investor type to get on board with emerging funds. When they invest with a firm, they’re not investing for the returns of a single fund but to build a long-term relationship with a generational firm. They’re investing in your next five funds. When they have that mindset, they can only add a small number of new managers per year. If you’d like to be one of those firms, that means investing years into relationship building and eventually extensive due diligence.
The payoff is fantastic though: a long-term capital partner that writes very large checks. If they’re going to anchor your fund, you’ll likely have to extend more favorable economic terms. Some institutions such as the Teacher Retirement System of Texas and the NY State Common Retirement Fund have dedicated emerging manager programs.
High-net-worth individuals
Like family offices, high-net-worth individuals (HNWIs) such as well-known angel investors Marc Andreeson and Chris Sacca, have been a traditionally active supporter of first-time funds, especially now that the SEC is opening up routes for non-accredited investors to get some skin in the game. Besides being wealthy individuals, there are few similarities across investors.
Individual investors have become increasingly attractive to fund managers seeking sustained growth as competition for investor dollars increases. The reverse is also true: wealthy individuals (not to mention their advisers) are increasingly drawn to alternative investments as they look for new diversification options and better returns than they can get in the traditional markets for public equity and debt. Retail is the fastest growing channel.
However, they are used to consumer-grade digital investing experiences like Charles Schwab and Robinhood, so fund managers need to think about onboarding and communication strategically in order to minimize friction and maintain investor loyalty.
Both HNWIs and family offices tend to have specific interests in the sectors where they allocate capital. For example, if a HNWI made their money from building a media company, they may be more likely to invest in that sector. Related, they may be helpful industry connections for your portfolio companies. Most HNWI are not professional investors, which means you won’t be subject to the same rigors from most other investor types. They’re historically underallocated to alternatives, but recent trends suggest that’s changing fast.
Sovereign wealth funds
Many countries maintain their own investment funds to help finance infrastructure, social benefits, and other public goods for their citizens. Sovereign wealth funds such as Norges Bank Investment Management (Norway), Mubadala (Abu Dhabi), Temasek (Singapore), and others make direct investments in startups and take limited partner interests in venture capital funds, preferably those that contribute to econominc expansion in their area.
Still, sharing a cap table with sovereign wealth can be risky, and the risks tend to be political. If the country behind the money irritates a good portion of the world, it could make things awkward at the next funding round when their money is either no longer accessible or toxic.
Funds of funds
As the name implies, FoFs are pooled investment funds which specialize in allocating capital to other capital allocators. FoFs are typically ready and willing investors, making them another popular option for first-time fund managers. They will often write checks faster than other investors—however, funds of funds are unique in that they too are raising their own funds, which can make timing an issue.
FoFs such as Archean Capital and HarbourVest are prominent investors in new funds, with programs dedicated to identifying promising new fund managers.
Having investment from FoF with an an association to a SWF or institutional investor, and established track record and reputation, can enhance an emerging fund’s credibility and reputation, making it more attractive to other potential investors. However, FoFs typically manage a portfolio of VC investments and have relationships with multiple funds, so potential conflicts of interest when it comes to deal flow, co-investments, and allocation of resources need to be clarified before committing. Many FoF have a direct portfolio too. Expect that co-investment opportunities may need to feature heavily in your strategy.
Corporations
Many large corporations, such as Lockheed Martin and Johnson & Johnson have an innovation or acquisition strategy that involves investing directly into companies or funds. While the financial performance of their investments is important, it’s often secondary to other strategic purposes.
The company is aiming to enhance its competitive advantage by identifying new markets, synergies, business models, or best uses for new technologies. Investing into funds or directly into other companies helps them gain exposure to emerging trends but also positions them to be partners that can accelerate the investment’s growth or potentially acquirers for the portfolio companies. So it comes as no surprise, but you must be aligned with the firm on your markets, strategy, or thesis to have them participate in your fund. Even if you are aligned, expect moderate or worse levels of diligence as large corporations typically have more stringent processes to follow.
Family offices
Family offices have historically been an important investor category for emerging managers, representing one of the most active and willing investors in new funds. Over 90% of family offices in a recent survey reported that they allocate to venture funds, and 84% of those reported investing in emerging funds.
Firms such as Iconiq Capital, which invests on behalf of a number of high-powered Silicon Valley execs, have particular interest in emerging managers.
In general, they have different incentives from larger, institutional investors. But when you’ve met one family office, you’ve met one family office. No two are alike and generally, the larger the family office, the more sophisticated the investment decision-making is. Take time to understand the individual motivations of that group.
Family offices’ diligence processes can vary dramatically but tend to be less onerous than other professional investors. Unless you’re dealing with the largest family offices, it’s less likely to have a formal investment committee or mandate, resulting in more flexible decision-making that can be favorable to emerging managers. The key thing family offices care about is growing and preserving the wealth of the family or individuals behind it.
But successions, management changes, and fluctuations in capital requirements can prompt unexpected changes in previously secure capital. It’s also an incredibly opaque investor class, making it challenging to identify those investors let alone secure their capital. And once you do identify them, you need to figure out if they allocate capital to alternative investments.
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