Attempting the Impossible
Are you building a business or practicing your craft?
This was me about one year ago:
In late 2019, I was talking to a smart and accomplished investor who I had known for several years. He was managing capital within a large group and was offered the chance to spin out and set up his own firm. As part of the deal, he received a significant amount of locked-up capital to manage and was able to take his team of analysts and track record with him. I had tremendous respect for him and his team. They were sharp, hard-working, diligent, dedicated.
He was looking for someone to help him “build the business,” which meant helping with the marketing effort, hiring, and sourcing deals on occasion. It seemed like the chance of a lifetime. To be part of something new, something that was going to grow and prosper. But there was a catch: it was mainly a sales job. Which is neither my passion nor my strength. I enjoy bonding with people one on one. I am a good listener, mainly because I really care. I am interested in what people think, why they do what they do, how they go about their lives. But in a group of strangers I will clam up. I watch myself get awkward and self-conscious. I become acutely aware of my stilted, off-beat attempts at banter.
I was not enthusiastic about the prospect of selling to strangers. But I believed in the people and what they were trying to build. And I was hoping for an opportunity to leverage my writing skills and experience with fintwit. I signed on.
We got started in January 2020 and I immediately got a taste of what it is like to sell a product that the customer perceives as a commodity. Our strategy was concentrated value, mainly in public market equities, sometimes in credit. Of course, we thought our work was unique and valuable. But to prospective investors it looked neither new nor unique.
I had worked at two family offices and an institutional consulting firm. (Institutional consulting means you perform due diligence on funds for institutional investors. In my case, I underwrote credit funds for large institutions such as pensions, insurance companies, sovereign wealth funds, and endowments.) I knew this was going to be difficult. I still underestimated the challenge.
I also realized that I respected my hard-working and detail-oriented friend as an investor. But I could not deal with him as a boss. Then COVID hit. It became clear that marketing would take a backseat for a while. A couple of months later I was let go. At first, I felt very frustrated. I was bitter and resentful. I had given up a secure and well-paid role to join the firm. It felt like a group of friends had cut me loose at the first sign of trouble.
In the back of my mind however, I knew that I had not been a good fit for the role in the first place. Heck, I did not even like the work. Today I realize that it was the painful but necessary catalyst for me to break free of my old career. I still don’t like how it happened. But I have come to terms with it and can see the positive that came out of it.
I was reminded of this when a prominent fund manager advised against getting started as an emerging manager.
April 19, 2021: I will no longer share the tweet going forward. My post got much wider attention than I anticipated and my friend’s quote ignited some controversy. I have a lot of respect for him and it was not my intent to make him the face of the debate over emerging managers. Suffice it to say that I could instantly relate to his message of how brutally difficult the journey can be.
Over the years I have seen friends start their own funds. I tried to be helpful where I could. Mostly, I learned that my friend was right. It is insanely difficult unless you come from a prestigious shop and have initial backing.
I would like to offer some advice on two issues: understanding the allocator’s perspective and gaining clarity about what it is you are trying to build: a business or a practice.
This may sound like very specific advice. But I think it applies to all of us who are attempting to build something new, something difficult. It is about putting ourselves into the shoes of our customers or audience. And about introspection and building self-awareness. What are we really trying to do? And how do we square it with what the world is willing to pay for?
Getting an institutional investor for your emerging fund is hard. Here’s why.
There are some obvious reasons for why it’s difficult to get institutional capital for a fledgling fund. The track record is likely short, the infrastructure rudimentary. Small funds face a size mismatch: the LP needs to write a big check but does not want to be the largest, or only institutional, investor.
But there are more subtle reasons for why it’s difficult to get that institutional LP on board:
Allocators have their guard up.
With a few exceptions, allocating capital to funds is not a glamorous business and faces consistent budget pressure. Some even do away with it altogether. This may be hard to imagine from the outside, but teams allocating tens of billions of dollars can be under-resourced relative to what they want to achieve (and will often feel underpaid relative to the people they allocate to.) In many cases they spend significant amounts of time on dealing with the internal bureaucracy. Meanwhile, they face a deluge of incoming pitches. Their job constraints require that they guard what precious time they have to meet managers. I wrote about how Andreessen Horowitz uses “the test” of getting a warm introduction to filter out startups. If you can’t get an introduction, the implication is that your chances of success are too slim to bother. This is a tough heuristic but highlights the time constraints for a sought-after investor. Your ability to build a network, tell a story, and get an introduction are part of your edge. Without it, your voice will be part of the noise that the allocator tries to tune out in order to get anything done.
You’re selling a commodity.
You may think your stock picking and portfolio management abilities are something special – and maybe they are – but to allocators they taste a lot like chicken. Think about your pitch and how you explain your process. Maybe you’re looking for a margin of safety. Or the best companies. Or the ones ready to capture a massive TAM. You’ll explain the depth of your research. How you leave no stone unturned. Imagine listening to that same pitch five times. Or ten times. How about thirty times? It’s hard to compete if blend in, if you walk, talk, and sound like all the others. A cardinal rule of storytelling is to “show, don’t tell.” Letting a character explain the plot through extensive dialogue is entering the danger zone. Likewise, you can’t rely on describing your process. You have to find a way to stand out, to be interesting. You think Bridgewater publishes their Daily Observations for fun? Find a way to show, not tell.
Career-wise, you are a tough risk-reward.
Emerging managers face an incentive problem, also known as career risk. You have to separate the organization from the individual. That person won’t see much upside from betting on you. They won’t receive a huge bonus if you do well. But if you blow up, they will have to answer some tough questions. You think you have the solution to the organization’s problem: attractive risk-adjusted returns. But you’re really asking an individual for a leap of faith. Your track record is short, your team incomplete, your infrastructure lacking. You have to put yourself in their shoes. You are asking them to go out on a limb for you. Your chances stand and fall with whether they feel they can trust you.
It’s not impossible. Just really, really difficult. Institutions with emerging manager programs like MITIMCo (which even has this nifty website with resources) are rare.
A business or a practice
Why then do so many still attempt to pull it off? Why go out fishing where other boats get lost every season? Yes, there is the potential of earning generational wealth. But I don’t think it’s an entirely rational decision. I think some people feel they have to do it. They see it as part of their hero’s journey. They lie awake at night and can’t think about anything else.
Which brings me to a quote that boiled it all down for me: the difference between doing it to create wealth and doing it for yourself. It’s by Anthony Deden:
"The distinction between an investment practice and investment business. A business gives to the customer what they want. The manager creates a product to fill a need. A practice, like a medical or law practice, is there to give a client what they need."
I would draw the distinction a little differently, tilt it from ‘want vs. need’ to the person providing the service. The business solves the customer’s problem and maximizes wealth creation for the owner. The practice serves the customer in a way that reflects the uniqueness of the practitioner, their process and personality. The business’s natural drive is to grow and generate cash. For the practice, it is to allow the owners to practice their craft in service of the client.
Let me give you an example. This is a business: Blackstone Announces $4.5 Billion Final Close of Blackstone Growth (BXG) Fund, Largest First-time Growth Equity Vehicle in History
It gives the client what they want: deploy a big check with a brand name manager they know and trust. Whose salesforce checks in on them regularly. Who can tick every box on the due diligence checklist. And if the product doesn’t deliver? Well, who could have known? It minimizes career risk with the “can’t get fired for choosing IBM” effect.
It is a business that offers a product for allocators who satisfice. And it maximizes wealth creation for Blackstone shareholders and employees.
My old boss wanted to run his fund in the way he thought best: concentrated, with flexibility to invest in equity, credit, and private assets. No short selling. It was an expression of his style and personality. It neither maximized his wealth creation nor was it designed to fit exactly what customers wanted – though he would have argued that it was exactly what they needed. He was looking to practice his craft.
It amazes me that many investors skillfully analyze companies, yet they refuse to apply the same scrutiny to their own businesses. I think it is because they mentally place themselves in the second box. They think of themselves as artisans creating a unique product.
Questions to ask a business:
What is your competitive advantage?
What is your sales strategy?
Why do your customers choose you over the competitor?
How will you continue to grow? What other products or markets are you looking at?
How are you building a winning culture?
How do you find great employees or partners to help build your business?
Questions to ask an artisan:
Why do you do it?
What inspires you?
Tell me about your process.
Who taught you the craft? Are there different schools of thought?
What materials and tools do you use? Why?
How do you find customers when your Google Maps profile is incomplete, and your street has no foot traffic?
Do not confuse these two! Be clear about what you are building and why. Be clear about your definition of success. If you are building a practice, don’t expect the results of a business.
Be clear about your motivation and your goals. Why are you climbing Mount Everest? What is your definition of success? Are you trying to build a business or expressing your craft? What compromises are you willing to make? What do you really want – and how dependent are you on others to get there?
Seek advice. And listen. Find those who have walked the path before you. Many are on twitter and are sharing advice already. Be valuable to them – share ideas or make introductions. And listen carefully when they share their experience. Not all of it will apply to you. But don’t pretend that you’re smarter, tougher, and better connected than the people who have spent years in the trenches. You ignore the wisdom of this crowd at your own risk.
Understand your customer. Understand the distinction between the goals of the organization and the incentives governing the individual you are dealing with. Make friends in the allocator community, without any expectation of future allocation. Don’t pitch them. Listen to what they are dealing with. Empathize. Figure out the process of how allocations really get made. You should understand the different types of investors and their internal constituents and processes if you intend on selling to them.
Figure out your strategy. Not your investment strategy. Your business strategy. What is your edge? Study persuasion. How can you pre-sell? How can you get endorsements and referrals? Your network is an edge, possibly your most important one. Think carefully about what will really determine the success of your business.
Manage your expectations. You are competing for portfolio allocation and attention. To be sure, there is some natural churn. Funds close down. New CIO’s kick out all their predecessor’s picks and ‘refresh’ the portfolio. But mostly you are looking at a limited pie that has been sliced and claimed already. Your survival may depend on displacing someone else. You wanna work here, close! Mentally prepare yourself for a lot of rejection. Build support mechanisms to pick you back up when it happens.
Maximize your shots on goal. First and foremost, you have to be a survivor. Running a money-losing business is like buying call options. You risk running out time before you catch the big move. Think carefully about your expenses. Don’t count on unpredictable factors such as near-term performance or that one big check to bail you out. Learn how to be resourceful. Try to make time your friend. Extend the runway. “To finish first, you have to first finish.”
Whatever you decide to do, I wish you the best of luck!