The Five Ps of Raising Money: General Best Practices
Written by Frank Packard
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This article has two parts.
Part I describes some of the essential parts of raising capital for any undertaking. Part II focuses on best practices for alternative investment managers – such as private equity, venture capital, etc. Whether you are raising money for a startup company or a fund, successful pitches revolve around how you answer five important questions:
- Who are the People?
- What is their Philosophy?
- What is their Pedigree?
- What is their Platform?
- What type of Performance do they expect?
People
People are the heart of any enterprise. Any investor is going to want to meet the leaders of a business or a fund to hear their vision and to get to know them in real life. A common mistake is to rely entirely on staff or outside placement agents to make a pitch to an investor.
Sure, it makes good sense to work with agents to pre-qualify prospective investors. At the same time, first impressions count, and CEOs and founders need to show the face of the company to each investor early in the capital raising process.
Philosophy
What do you stand for? Why are you passionate about this investment strategy? Do you have a larger view of yourself, your company, and the world where this investment idea fits?
Pedigree
What did you do before launching this business activity? Where did you work? What roles and responsibilities did you have? Where were you successful in the past? How is this connected or relevant to the new undertaking? Which are the most impactful parts of your business career that have made you into the woman or man you are today?
Platform
Which law firms have prepared your documentation? Which service providers are hosting the virtual data room, managing accounting, handling fund administration and reporting? First impressions count. The care with which you assemble the platform for your business, in the eyes of Japanese investors, will indicate what type of investment manager you will be and will how much you care about your investors.
Are you licensed for your investment business, and are you working with licensed parties? Some transactions will require licenses for securities brokerage, investment advisory or asset management, depending on several factors, including who pays you and how.
Broadly speaking, if you are going to be compensated by the Issuer (the entity that is receiving money), then you are in the securities brokerage business. If you are going to be compensated by the Investor (the entity that is bringing money to the deal), then you are either in the investment advisory or asset management business. [NOTA BENE: This article is not offering regulatory or legal advice; you should check with qualified legal advisor as to which licenses you and other members of the platform might need to conduct your business activities.]
In my experience, it is a bad idea to try to collect money from both sides. Occasionally, I have seen this practice, and in certain circumstances it can comply with regulations to receive fees this way. However, it can cause trouble, such as confusion about who is the client and which party the agent or consultant is really working for.
Performance
Years ago. a former boss gave me one of the best descriptions I have ever heard for fund management. He said, “There are three parts. First, you describe to investors in detail what you are going to do with the money you receive from them. Second, you stick rigorously to doing only what you have promised to do (in other words, avoid any investment style drift). Third, you give the investors back more money than they gave you. The rest is commentary.”
From my experience in raising money for over 20 years, not only in Japan, but also in other developed countries, I have my own bitter joke. It applies to all investors, all over the world, and at all times: The problem with collecting money from investors is that they want their money back.
Too many fund managers are forgetting this core point. Investors will expect a coherent and persuasive plan for you not only to make money from your activities, but also to have a plan for returning money to your investors.
Conclusion
Different cultures have different priorities. In my experience the 5Ps work in best in Japan in the order written above. However, if I to conduct these activities with potential investors in America, then I would present these topics in the reverse order. Here’s why. Americans can often focus mostly on performance. Japanese can often the other 4Ps. In Japan, many people believe that with the right people, pedigree philosophy and platform, then you are likely to achieve your predicted investment performance.
