At a recent Bloomberg event entitled, “Hedge Fund Start-Up Conference”, a panelist quipped that the best way to give a new fund some momentum was to get a deep pocketed investor to seed the fund with a large chunk of cash. Thanks for the tip! Accurate advice; However, it’s easier said than done. Nothing attracts a crowd like a crowd – Thus, it has been proven easier to raise money when you have money. But how do you get seed capital?
Attracting seed money is an exercise in Sales 101. An essential part of sales is what a former mentor of mine would call “giving the client that warm fuzzy feeling.” The investor, like any buyer, needs to feel comfortable with their purchase. In asset management this means approaching the seeder with a quality team.
As the Bloomberg conference recap stated: “The days of launching with two Bloomberg terminals and a credit card are categorically over. Having quality service providers and a strong – ideally institutional-grade – operational infrastructure in place are vital.” Investors (especially large seed type investors) want to see solid third-party partners working with your fund. But this does not mean you need break the bank to pay for marquee names, just reputable providers.
There is a cadre of solid, well-known law firms and audit firms that are considerably more cost effective than the top tier, brand names. The same is true for administrators and prime brokers. And just because these service providers are less expensive than the “elite,” they still provide great quality service and give your seeder that “warm fuzzy feeling” of security with their investment. I routinely refer my emerging manager clients to top tier, yet, cost effective service providers.
Moreover, there are several valuable cost saving measures available to get a new fund up and operational, at the level necessary, to attract seed capital with minimal cash outlays. For example, it’s often possible to run an on-shore fund only until sufficient off-shore demand builds up. This maneuver can keep legal and other costs to a minimum. If planned for in advance, altering the structure down the road – to add a master fund and offshore feeder- is easily accomplished. Additionally, the typical multiple entity fund structure (e.g., separate GP and investment manager), is used primarily for tax purposes. This becomes much more important when your fund has substantial assets and you finally become profitable. In the early days, however, these entities can be consolidated. Generally speaking, fewer entities equates to less expense.
Organizing a fund correctly and selecting effective service partners is critical to attracting seed investors. Let WithumSmith+Brown, show your fund how to raise seed capital without spending all your capital!