Finding the Right Investors: 5 Questions for Emerging Managers
When it comes to venture capital, many people think of investors as simply writing checks to fund startups. However, this image only tells one part of the story. Venture firms are not just funders; they’re also fundraisers. As an emerging manager, finding the right investors is crucial to securing funding and building a successful investment thesis.
In this article, we’ll explore five essential questions to ask when searching for the right investors. By considering these factors, you can increase your chances of attracting the right partners and building a strong foundation for your fund.
1. What is Your Investment Thesis?
Before approaching potential investors, it’s essential to define your investment thesis. This involves articulating your investment strategy, target sectors, and geographic focus. A clear investment thesis will help you identify the right investors who share your vision and can provide the necessary support.
When evaluating potential investors, consider their track record in your targeted sectors or regions. Do they have experience investing in similar companies? Have they successfully exited investments in the past? By assessing an investor’s alignment with your investment thesis, you can determine whether they’re a good fit for your fund.
2. What Resources Can You Provide Beyond Capital?
As an emerging manager, you may lack access to certain resources or networks. However, the right investors can provide more than just capital; they can also offer expertise, connections, and support during the fundraising process. When evaluating potential investors, ask about their ability to provide additional resources beyond just funding.
Consider the following questions:
- Do you have a network of industry experts who can assist with deal sourcing or due diligence?
- Can you introduce me to key decision-makers in my target sectors?
- Will you provide guidance on fundraising and investor relations?
By assessing an investor’s willingness to provide these types of resources, you can gauge their level of commitment and potential value as a partner.
3. What is Your Investment Horizon?
Venture capital investments often have extended timelines before realization. Unlike retail traders, who receive daily feedback through stock prices, VC investors must wait for years or even decades to see returns on their investments. When evaluating potential investors, consider their understanding of the investment horizon in your target sectors.
For example, if you’re investing in healthcare companies, you’ll need to educate your investors about the lengthy regulatory process and clinical trials required before products can be commercialized. By ensuring that your investors understand these complexities, you can minimize misunderstandings and maximize alignment with your investment strategy.
4. Can You Help with Deal Sourcing and Due Diligence?
As an emerging manager, you may not have the resources or expertise to identify top investment opportunities or conduct thorough due diligence. The right investors can help bridge this gap by providing access to deal flow, industry connections, and evaluation expertise.
When evaluating potential investors, ask about their ability to:
- Introduce you to high-quality deal sources
- Provide guidance on due diligence and investment evaluation
- Offer introductions to key decision-makers in your target sectors
By leveraging the resources of experienced investors, you can strengthen your investment pipeline and improve overall fund performance.
5. What is Your Track Record with Emerging Managers?
As an emerging manager, it’s essential to find investors who have a track record of supporting new managers. Look for investors who have invested in multiple funds or portfolio companies managed by emerging teams. This experience will help you gauge their ability to provide guidance and support throughout the investment lifecycle.
When evaluating potential investors, ask about their history with emerging managers. Consider factors such as:
- Have they successfully exited investments led by emerging managers?
- Do they have a dedicated team for supporting new fund managers?
- Can they introduce you to other emerging managers who can provide valuable insights and networking opportunities?
By identifying investors with a proven track record in supporting emerging managers, you can increase the chances of securing funding and building a successful investment thesis.
Conclusion
Finding the right investors is crucial for emerging managers. By asking the five questions outlined above, you can identify potential partners who share your investment thesis, provide valuable resources beyond capital, understand the investment horizon in your target sectors, assist with deal sourcing and due diligence, and have a track record of supporting new fund managers.
Remember that no pitch to an LP guarantees an investment. However, by carefully evaluating potential investors using these criteria, you can increase your chances of attracting the right partners and building a strong foundation for your fund.
