Key mistakes when raising capital
#1 Starting too late
The real estate investment manager said “I’ve got a great deal, top returns, safe investment - a no brainer”. I said “Really? That sounds awesome. When do you need the money?”. He replied “In 2-4 weeks, no later than that or the deal will be gone!”
Most likely you’ll all have heard about this situation before or you have been in it yourself. An “opportunity” comes along but you don’t have the capital to invest. How frustrating. I know how that feels as I have seen this happen so often. It’s an ongoing phenomena.
The good news is: There will be more opportunities for you in the future! As your investment activities progress, there will actually be many more opportunities to cross your path. So don’t get upset about the missed ones. The bad news is: If you’re amount of available investment capital doesn’t increase, you will also miss future deals. So you need to make capital raising an active discipline of your investment business.
Start planning and preparing your capital raising soon enough so you have capital available in 9-12 months. Why so long? Here are three out of many reasons:
You need to get ready for investment first. Working with other people’s money requires additional and different communication and decision processes than investing your own money. You need to be clear on those processes and they need to be documented and communicated. Investors expect (buy) clarity, certainty and confidence - nothing else.
It takes time to find (the right) investors. Investors are everywhere, but not the ones that you want to work with and those who want to work with you. Investors have terms & conditions (either conscious or unconscious) and so do you (at least you should have). Those T&Cs need to match.
It takes time for investors to orientate themselves towards you. Very few of them invest after the first meeting. And if they are professional investors you’re most likely not the only one talking to them. So you will have to invest time in verbal and written communication and interact on an ongoing basis to help them make their decision.
As this all tells you: Capital raising is more than asking for the money, it’s about building relationships. And that takes time and effort. 9-12 months before you see any investor capital, is a period I have discovered over the years. However it doesn’t always take exactly 9-12 months. As a rule you can say the more professional investors are, the longer it takes. If you talk to heavily regulated institutional investors such as pension funds, the cycle can easily extend to 15-18 months. On the other side talking to private, non-sophisticated investors might only require 3-6 months. As a rule I wouldn’t recommend to speculate on quick investor commitments. And not to be under too much pressure - start looking for investors first, than find the deal (I know this is difficult).
Having said all this, it’s not impossible to get investor commitments quicker. I managed to get a 5m € commitment from a German fund of funds manager over night after the presentation. But that was just possible because I had communicated with their analyst team over a 3 months period beforehand and I had state of the art due diligence material ready on day one, which in return took me many weeks to prepare.
If you’re prepared to do your homework and get ready for investors before approaching them, you’ll save a lot of time. Getting ready for investors will take you a couple of months. So start planning and preparing your campaign today - to be ready when you need the capital.