{"id":17485,"date":"2010-07-07T22:19:54","date_gmt":"2010-07-07T22:19:54","guid":{"rendered":"https:\/\/www.lavca.org\/confessions-of-a-vc-who-raised-money-during-financial-armageddon\/"},"modified":"2010-07-07T22:19:54","modified_gmt":"2010-07-07T22:19:54","slug":"confessions-of-a-vc-who-raised-money-during-financial-armageddon","status":"publish","type":"post","link":"https:\/\/www.lavca.org\/confessions-of-a-vc-who-raised-money-during-financial-armageddon\/","title":{"rendered":"Confessions Of A VC Who Raised Money During Financial Armageddon"},"content":{"rendered":"

By Alan J. Patricof, Founder & Managing Director – Greycroft, LLC
\nThis post originally appeared on Business Insider.<\/em><\/p>\n

(Business Insider<\/a>) July 7, 2010 – It took a lot of time to communicate the strategy and get the message across.<\/p>\n

We had 515 contacts, of this, roughly 250 passed for various reasons and 100 were non-responsive. We had 154 visits, 97 due diligence requests, 33 second visits, and 12 reference requests, to ultimately produce 9 institutional investors.<\/p>\n

That\u2019s less than a 2% yield of all contacts and 6% of first meetings.<\/p>\n

After expending a significant amount of time and effort explaining our approach, which met with a mostly positive reception, we still faced all of the usual comments: we love your team, we like your concept, your record is great especially your distributions (the reality is the big funds have not made distributions in some time, or have they made limited distributions), BUT<\/p>\n

1 \u2013 We are stuck with the denominator effect where our main marketable investments (stocks and bonds) have gone down so much our alternative investments (venture capital, private equity) have become too large a percentage of our overall portfolio<\/p>\n

2 \u2013 We are over-committed to alternative investments and we have to wait to see how much they will actually draw down from our outstanding commitments<\/p>\n

3 \u2013 This is a great time to buy distressed assets (i.e., prior investments by other folks that have since plummeted in value)<\/p>\n

4 \u2013 This is a great time to buy existing VC funds and private equity funds at a discount<\/p>\n

5 \u2013 This is a great time to buy top quartile funds that wouldn\u2019t take our money before (these guys have no egos)<\/p>\n

6 \u2013 We need to make big commitments to big funds to move the needle<\/p>\n

7 \u2013 We\u2019re out of money and out raising our own Fund of Funds<\/p>\n

8 \u2013 I like your idea but I can\u2019t get to it until the 4th quarter or next year.<\/p>\n

We probably have detailed lists of a dozen or two funds that fall into each of these classifications.<\/p>\n

Fortunately, we would not be writing this story today if we didn\u2019t have a happy ending. During the process, however, we learned a lot about various institutions and how they treat supplicants like us. Some of the highlights that immediately come to mind: courtesy on call backs in a time frame they set but don\u2019t observe, due diligence processes which promise a month or two and take almost a year, people who invite you to full committee presentations and only one person shows up after you take two days and travel over 1,000 miles to get there in a rainstorm. And these are just a few of the examples.<\/p>\n

Fortunately, we hired an outside assistant to help us in this process (not a placement agent). Since we were a small fund, it would have been overwhelming to us and our small administrative staff to set up the meetings and follow ups, fill out questionnaires (which for the most part fall into a dark hole), and respond to the myriad of questions which occur during the due diligence process. Although not a placement agent charged with raising the money, this person was an important and critical member of the team and was a key factor in helping us to keep track of where we had been and where we were going – \u201cIf it\u2019s Tuesday, it must be Belgium.\u201d She also kept up our spirits.<\/p>\n

Our original fund was raised solely from high net worth investors. For Fund II, we decided that we wanted an institutional investor base to solidify the foundation of the fund going forward. Since we knew it would take institutions longer, we focused first on institutions, before going back to our existing investors, and seeing where the market led us. Two groups in particular went through extensive due diligence including: independent credit checks on each of us, negotiating the LP agreement, requesting a seat on our advisory board, and finally getting us through their investment committees. After all of that, they confessed that they were out of funds and were in the market raising their own fund of funds; this after countless meetings at their offices, calls to every one of our CEO\u2019s, co-investors and personal references. Needless to say this was a great disappointment, but in both cases they offered, based on all their work, to serve as references. We wished them luck in their own fund raising and suggested that perhaps they would invest with us in Fund III. No bridges were burned.<\/p>\n

And then, at last, after four months of marketing, success…<\/p>\n

You\u2019ll Be Our Lead Investor?<\/strong><\/p>\n

Finally, around June or July 2009, we found our keystone investor who, when they committed, said they would stick with us until the end even if it took until 2010 (which it did!) They are and have been a stalwart supporter. While tough in negotiating terms, they have always been reasonable and without them \u2013 and their willingness to serve as a reference at all times \u2013 we could not have made it to the finish line. We will remember their steadfastness!<\/p>\n

They were followed by one other institution shortly thereafter who also allowed us to use their name as a reference and, at that point, with the confidence that we had the foundation of a strong institutional base, we decided it was time to approach our initial individual investors for consideration to re-invest in GC II. We sent only a letter and did not make a single phone call to solicit anyone. We did not want them to feel pressured to re-up as they had been so supportive in forming Fund I and we didn\u2019t want to put them on the spot. Fortunately (and not unexpectedly), this process was much faster. In less than 10 days, we had almost a 75% renewal rate and those that didn\u2019t respond were never approached a second time. We also took in a few new individuals who we felt would be helpful to our investment strategy.<\/p>\n

In late December 2009 we received another few institutional commitments and called for a first closing on February 1st as we had reached our minimum target. At this point we had commitments for over $100 million. I might add that all of the institutional investors that actually made commitments to us did so within a time line and process that was articulated clearly by them, less than 2-3 months from start-to-finish. They met their own objectives which for us was most refreshing.<\/p>\n

Once we decided to call for a first close, we wanted to notify the 7 other firms who were at various stages of the due diligence process. Since each of these firms were of varying size participation levels, they needed to know that we had room for 2 or possibly 3 more groups and that we had made a firm commitment to our lead that we had a hard stop of $130 million (only because we wanted to say we were oversubscribed). We knew that the only way to move the stragglers along, some of whom we had been talking to for a month and some longer, was to push the button as we truly would not be able to accommodate everyone if we were so lucky as to receive commitments from all of them. We were careful not to be arrogant or overconfident and had already provided for a second closing within four months of the first if we needed more time. We were determined not to be in a permanent fundraising mode in order that we can get back to investing full time. We also finalized our GP and management agreement as we approached the date of the first close.<\/p>\n

On February 5th, a few days past our deadline, we had reached our first and only closing (with a few organizations who had come in late submitting their paperwork a bit later).<\/p>\n

Lessons Learned<\/strong><\/p>\n

So what lessons can be learned from this journey of the past year?<\/p>\n

1 \u2013 Never assume you know who will get over the finish line and make a commitment they will fulfill. At the end of the day the most unlikely group may come through for you and the most likely investor will disappoint.<\/p>\n

2 \u2013 Never assume you are done and that you have identified your group of investors. You have to keep pursuing new prospects up until the day you close as inevitably someone will get a hiccup and back away. Leave no stone unturned.<\/p>\n

3 \u2013 Never give up on an institution who says no. Keep providing them with up-to-date data and items of progress to keep them involved as you never know what will persuade them or perhaps why they said no in the first place.<\/p>\n

4 \u2013 Always, but always, ask the following questions before you leave the first meeting:<\/p>\n