There is a large pile of literature for entrepreneurs on how to raise funds, the things to do and the mistakes to avoid. A lack of funding is the main cause of failures, and mastering the dos and don’ts is paramount in this area. Yet, almost nothing exists for fund managers.
If you want to raise your own funds few resources exist, and it is even more difficult when you want to raise an “impact” fund. Therefore, I have listed below my main observations from interacting with dozens of impact fund managers for the past seven years.
Your fund idea has to make a commercial sense This is the most obvious point. There is “investing” in impact investing, so you need to show the market potential for the businesses you will be supporting. Are there any new champions emerging? Are there some successful exits that you can mention? What are the value drivers? How is the local competition of comparable funds and lenders? Will you be able to source well i.e obtaining good entrepreneurs while agreeing on an optimal term sheet? My personal preference is for those who acknowledge that the social impact space often require trade-offs regarding the expected IRR, but the jury is still out on this topic (look at the comment section of this excellent article)
Finding your niche and your differentiator is key. You need to stand out from the hundreds of fund managers competing with you. What do you do differently? What will you add to the investor/LP? Why must she add you to her portfolio? Do you have a unique investment and impact thesis? Actually, this is when it sometimes becomes a bit annoying. In pursuit of funds, managers often tend to oversell their “niche” or their “impact”. The business models they plan to support become “systemic changes” with far-reaching positive effects – claims that are rarely based on rigorous studies. A single tiny revenue generating idea becomes linked to the most vital “sustainable development goal”. Unfortunately, few managers are humble enough to acknowledge the complexity of the broken systems in which they operate when raising funds …and perhaps it is the most effective way to follow when you are eager to close your funding round. I personally prefer partnering with those who are frank about their limits. Additionally, you must explain why you are the most qualified to respond to this opportunity. Obviously, you cannot backtest a strategy, as you might be able to do with a fund of listed stocks.
The survival of the most patient. You need to go through the valley of death. As a new fund manager, you have to plan for a minimum of two years before closing. This is a painful and delicate process. You start with your own assessment, but constantly need to pivot and quickly align with new market dynamics (or “new jargon” some might say), as well as inputs and feedback you receive from your potential LP. You must juggle between your strategic planning, business development, and pipeline building, in the center of a huge “chicken and egg” circle: your pipeline depends on your fundraising and your fundraising depends on your pipeline.
Although I hope these two cents were worth your time, a good next step would be seeking the support of incubators.