My partner, @IraWeiss, and I were fortunate to wrap up fundraising on our first fund, Hyde Park Venture Partners (HPVP), a few weeks ago. Closing a two year push has me reflecting on what I learned and what it means to my relationship with entrepreneurs and their own fundraising endeavors. The process made me greatly appreciate and empathize with every entrepreneur who walks through our door when they are most vulnerable.
A quick background: HPVP is a $25M early-stage venture fund raised from high net worth individuals and family offices. We have more than 60 amazing LPs and networked with upwards of 200 potential investors to get there. We are very lucky in that about half of our investors and capital come from Ira’s prior investor base – he made a bunch of money for them before. The other half come from increasingly distant reaches of our network. These investors were hard won.
SELLING YOURSELF IS HUMBLING BUT CRITICAL
Before HPVP, as with many of the first time entrepreneurs I meet, I worked hard, followed the rules and got the right brands on my resume to be "successful" in life … in other words I didn't take any real risk. HPVP is my first risky endeavor; I am a first time entrepreneur.
I started my professional life as an engineer. When I first showed up for work at GE or as a consultant at BCG, I didn’t have to sell myself much. I had followed the rules before, so most assumed I could do it again. But VC (and entrepreneurship) is a very risky and unscripted business. In fundraising, I found many potential investors assumed both that HPVP’s investment thesis was flawed and that I wasn’t the guy to do it. I am lucky in that Ira has a long investing history and a stellar track record to help allay these concerns, but that often wasn’t enough. Hearing and feeling prospects’ thinking was humbling.
We had to sell both ourselves and our ideas in a way we never had before. People are trained in schools and jobs to dissect an idea, find evidence and make a compelling argument, but self-awareness isn’t a class I recall. It is much harder to turn the glass on yourself and rationally surface and address objections that people might have about YOU. Yet it is critically important... and sometimes painful. I learned to do this better with practice.
In the end, people invest in people. HPVP will always think twice about passing on a business where the management team is highly self-aware and effective at selling themselves, even if the business is less than perfect. Likewise, I am sure that Ira and I have some investors who are skeptical of our investment thesis but believe in us enough to think we will figure it out. A good segue to what we learned about finding investor...
COLD RELATIONSHIPS DON’T CONVERT, SO WARM ‘EM UP EARLY
Ira and I tried a number of tactics to expand our prospect list, but in the end found exactly what we advise seed stage entrepreneurs all the time: pursue people in the following order and in all cases people who already know you or of you: (note: this is order will change for later stage companies)
- People you’ve made money for before
- Friends and family
- Angels already investing in the space/geography
- Introductions from any of the above
- Family offices
- Institutional investors
Despite bold efforts, I don’t think Ira and I converted a single cold investor lead and very few introduced investor leads. Almost every LP we have is someone we knew before or at least knew us well enough to answer an e-mail.
This may be a frustrating realization for first-time entrepreneurs with limited networks or for Ira and me as we think about the possibility of raising money in the future from institutional investors (who we do not now know). We will spend the next few years selling when we’re not selling – what you call good old fashioned networking. I learned from @JustinMassa that familiarity breeds comfort; Justin and I met so many times over nine months that I couldn’t not invest in @FoodGenius when he was ready to raise! So, if you’re thinking about ever fundraising, start laying the groundwork now. Become a known quantity before you are selling anything because fundraising is the worst time to build comfort and relationship. Get out there ahead of time and enjoy the conversations. I wouldn't trade the stories I heard or people I met while fundraising for anything, even though most didn't invest.
Ira and I are also proud to each have several family members and very close friends invested in HPVP. I used to look down on entrepreneurs who took the “easy” route and raised from family, writing it off to nepotism. In fact, family investment is a huge vote of confidence – no one knows you better. Our having the support of close friends and family tipped some of our prospects for this reason. It also makes for fun thanksgivings! Bring a pitch deck, who knows! Of course the downside is the fallout if things don't go well. Every entrepreneur has to weigh this for themselves as we did.
HAS YOUR INVESTOR EVER RAISED MONEY?
I wonder about investors who have never raised money themselves (whether as entrepreneurs or investors). Many entrepreneurs complain about VC associates; you hear “arrogant,” “doesn’t know anything”, “asked dumb questions.” Before raising HPVP with Ira, I was that VC associate. Well-schooled, well-logo’d, and smart but also riskless and without much empathy for entrepreneurs and risk taking. I had never REALLY put myself and my ideas out there for the world chew. Don’t get me wrong, I can still be arrogant and ask dumb questions… but I hope now a bit less than before.
I rarely believe in definitive rules, but this is at least something entrepreneurs should consider when courting investors. Always good to partner with someone who feels your pain.