Insights from our research and experience of working with fund managers in emerging markets

9 out of 10 people who want to be fund managers won’t raise a fund. The odds are against you.

We like to compare fund management to being a decathelete – you have to be very good at ten (actually many more) really complicated and hard things if you want to finish at the top of the sport. Here’s our list of ten key success factors for first-time fund managers  and established teams creating a new fund, that will get you thinking –

1. Learning agility, grit and integrity

• If you aren’t continuing to learn and improve, you aren’t going to succeed in a fast changing and dynamic world.
• Do you have the sheer will power to work at a hard, nasty problem until you’ve solved it, despite the world conspiring against it being solved? That’s called having “grit.”
• Integrity is defined as what you do when nobody is looking. Do you do the “right thing” without hesitation? Do you hold others accountable to the same?

2. Deal structuring, negotiations and entrepreneur connection

• It is critical that you understand how to properly structure deals which give you the appropriate investor protections while being fair to the entrepreneur in the many potential outcome scenarios.
• You have to be very good at adopting a principled negotiating style with entrepreneurs to a create a positive win-win outcome. One-sided deals rarely deliver.
• Finally, you have to be able to build inter-personal rapport with the entrepreneur (and their team) as you are going to need to navigate issues and conflict in the future; it will consume untold amounts of your time if you don’t have this foundation.

3. Principals who have worked together, know how to challenge each other, and still get along for a decade or more

• One of the biggest (not unfounded) fears of LPs is that the GP principals will not stick together for the duration of the fund – usually with severe negative financial results.
• LPs like funds with at least 2 principals because this provides thought partners, coverage when one is out, and a broader range of skills/experience.
• LPs like it when principals have experience working together for some time and therefore know how to help one another and deal productively with conflict resolution.
• It’s better still if principals are co-equal partners in key decision making and they each are willing to challenge the thinking of the other one(s) as it results in better decisions.
• A final plus is given to teams that have navigated adverse situations and delivered results for investors and other stakeholders.

4. Entrepreneurial mindset with a frugal approach

• You need to operate your firm as an entrepreneurial venture — like the ones you invest in.
• This means being scrappy, cost-conscious, pragmatic and adaptive.
• And you need to hire a team who wants to be part of the journey and participate in the value that you are creating over time (sharing long-term rewards with you).

5. Setting up an efficient and effective processes & support system

• Standardizing your processes, documents, systems, etc. is critical for both efficiency as well as quality of your work.
• Figure out ways to leverage outside resources to help support your portfolio companies whether that’s through advisors, mentors, board members or pre-screened service providers.
• Keep everything digital to make it easy to find, backup and re-use.
• Create a culture of continuous improvement – make something better every month and adjust/improve as needed to enable you to scale.

6. Developing sufficient investable pipeline

• One of the top complaints of LPs is that GPs present a great pipeline story during fundraising but then they can’t turn this into sufficient investments that can absorb the capital the GP is wanting to deploy.
• So while it is fine to have a big pipeline, you need to quickly focus in on an investable pipeline of deals that have sufficient risk/reward economics backing entrepreneurs who are ready for capital, are generally self-reliant, and can execute effectively.
• This is REALLY hard to do well.

7. Recruiting and engaging the right advisors

• Smart people know what they don’t know and gather people around them that can help them (and their portfolio companies) in those areas.
• It is so easy to fall in love with investments during the evaluation process and it’s so hard to see creative positive ways forward in a hard situation.
• That’s where good advisors come in — they ask you good questions and they bring creative ideas and advice when needed most.

8. Hiring the right team and setting the right performance culture

• Don’t hire people solely on their CV … hire them for a fit for your culture which is designed around everyone contributing towards the goals you have set.
• Find people who are doers and learners — who put the investors, firm, and mission above themselves.
• Set compensation to reflect long term value creation and participation … if someone just wants short-term cash comp, they aren’t a good fit.

9. Focus on the exits before you invest

• Everyone talks about pipelines and investing, but they so rarely talk about exiting.
• If you don’t make deals with a strong theory of enterprise advancement (including follow-on fundraising) and ultimate exit, you are unlikely to return profits to investors or carry to you and your team.
• Good investors pass on deals that look good – even when run by good entrepreneurs – if they can’t develop a believable plan for monetizing the deal.

10. You need a fundraising strategy, not just a pipeline

• Fundraising for a first-time (and even second-time) fund is harder than for a startup company, by a long shot.
• You need more than a list of prospects – you need a strategy on who or what you are going after and how you will get them closed, over a long period of time.
• And once you have that strategy, you need to apply it to build your pipeline which should be 2-3 times your goal, on a confidence-adjusted basis.

Excel in these 10 areas and you have a good chance.
Fail at any one and you’re doomed.