A few fundraising considerations
Introduction
There is no other way to say it, especially in a bear market, fundraising is a challenging endeavor. The process can be humbling, intimidating, frustrating, and often unsuccessful. In a world overflowing with cash, one may assume that acquiring some capital is the least of their worries. Reality, however, proves to be quite the opposite. Over 4 million businesses are launched in the US alone every year! With this relentless surge of new ventures, funds, and start-ups emerging on the scene, the race to secure funding has become increasingly intense. Additionally, omnipresent industry events, investor databases (such as Preqin, Pitchbook, or Juniper Place Investor Intelligence Portal), and the advent of modern scraping tools and lead generation methods, have made it increasingly hard for investors to hide. Thus, the challenge lies not only in assembling the right team, product, and strategy, but also in capturing the attention and trust of potential investors amidst the deluge of pitches, decks, emails, and LinkedIn messages that inundate them daily.
Raising capital is not for the faint of heart, is a kinetic and evolutionary process, and should be driven by some overarching strategy. Failure is a regular part of the fundraising journey, and lessons from investors must not be taken personally and must be implemented regularly. Each investor meeting is both an opportunity to raise capital and to refine messaging and pitch. As raising capital is a critical aspect of the hedge fund business, the Valmar Team has spent a significant chunk of our lives crafting strategy, creating supporting collateral (such as pitch decks and data rooms), and chasing investors, with plenty of successes and failures. This post will explore few basic fundraising insights that our team has accumulated over the past two decades.
Investor Landscape
With respect to traditional hedge funds, the investor landscape encompasses a variety of institutional investor categories. There are pension funds, endowments, insurance companies, sovereign wealth funds, fund of funds, and family offices - each with their own distinct objectives and preferences. Pension funds typically focus on securing long-term investments to support retirement obligations. Endowments seek investments that generate income and capital appreciation to sustain educational institutions. Insurance companies need to align their investments with risk profiles and long-term liabilities, prioritizing income generation and capital preservation. Sovereign wealth funds, established by national governments, aim to diversify holdings across asset classes and geographies for long-term growth and wealth preservation. Fund of funds allocate capital to diversified portfolios of hedge funds. Lastly, family offices are frequently on the lookout for opportunities to preserve and grow the family wealth through investments in private funds and hedge funds.
In recent years, institutional investors have been increasingly recognizing the potential of crypto hedge funds. According to the Institutional Investor's Digital Assets Outlook Survey conducted in October 2022, these investors anticipated crypto to be one of the top markets for generating alpha in 2023. Among those showing interest in crypto, 41% expressed a preference for crypto hedge fund strategies as a means of gaining exposure. Yet, currently, most of these investors still favor gaining crypto exposure through venture funds or holding crypto assets directly.
Consequently, when it comes to crypto hedge funds, the pool of potential investors remains relatively narrow. The distinct features and uncertainties of the crypto market (such as regulatory, security, and counterparty risk concerns), combined with the emerging nature of many crypto hedge funds, make these vehicles primarily suitable for investors with a more entrepreneurial mindset and a willingness to embrace the associated risks, rewards, and volatility. This select group of investors typically includes high-net-worth individuals, family offices, and fund of funds.
Fundraising Options
As a crypto fund manager, it is important to be aware of the limited set of investors that one should target and spend time on, and it is crucial to customize your approach specifically for this audience to increase your chances of securing the capital your funds need. Fundraising isn't just about making calls, sending emails, and creating PowerPoint presentations. It is an intricate dance that requires a mix of strategy, charm, listening skills, responsiveness, and relationship-building. The world of cryptocurrencies introduces an additional layer of complexity, characterized by uncertain regulations, institutional investors' cautious attitude and mandates, and a developing ecosystem that often lacks maturity. However, even within this domain, we do come across familiar faces from the world of traditional finance.
Placement agents and third-party marketers play pivotal roles as the matchmakers connecting fund managers with potential investors. Managers lacking the necessary contacts or skills, or are simply too busy running their business, can leverage these agents’ knowledge, extensive network, and expertise to enhance their fundraising efforts. That said, not all agents and third-party marketers are worth the effort and the cost. In fact, many will promise the moon, but few in our experience actually deliver. When choosing whom to hire, it is important to be cautious, conduct rigorous diligence, and make informed ROI decisions. Look for professionals with a strong pedigree and track record, along with a fair and transparent payment structure that aligns their incentives with your long-term success. While it's tempting to opt for an inexpensive provider, the key lies in finding balance. Retainers alone can lack incentives, and relying solely on success-based payments may lead to a lack of focus. Often, a combination of retainers and performance-based compensation (which ranges, in our experience, from 1% to 5% of the capital secured), strike the perfect chord, ensuring they remain attentive to your needs while staying motivated to deliver outstanding results.
Other interesting groups within the fundraising ecosystem are Cap Intro teams. These are typically found within counterparties such as prime brokers and serve the purpose of facilitating capital introductions for fund managers that are current or potential clients of the broker. To be honest, our experience with these teams has been a bit of a mixed bag. The main challenge lies in the structures under which they operate, which do not provide much motivation for taking extra steps and lead them to prioritize existing clients over new opportunities. This tends to translate into a lack of proactive engagement and limited support when it comes to helping fund managers tap into a wider pool of investors. As one might expect, the more institutional businesses in crypto (such as Copper, Hidden Road, sFOX and a few others) manage the better Cap Intro programs, though those institutions will be selective of quality and pedigree.
While the influence of third-party marketers or cap intro teams may not currently wield significant impact, it is important to recognize the obstacles they face within the realm of digital asset fundraising. The limited pool of investors interested in the crypto space, combined with the relatively smaller scale of the asset class and their crypto fund clients, pose significant constraints on the incentive drivers. Consequently, the number and quality of these players in the space is severely constrained, though we hope and expect capital introduction programs to continue to develop in amount and quality.
Due to the above considerations, it is challenging for a crypto hedge fund to rely on these specific channels. With limited help coming from of third-party marketers or cap intro teams, fund managers are then required to take matters into their own hands. Creativity, thick skin, and going the extra mile are essential for success, as are tapping into personal networks, stepping out of comfort zones, and directly approaching potential investors. Personal connections form a solid foundation that brings trust and familiarity, greatly enhancing one’s fundraising efforts. Crafting compelling narratives is another crucial aspect of capturing investor interest. It is about telling a captivating story that is in line with investors mandates but also resonates on an emotional level. A well-crafted narrative packaged with marketing materials that effectively convey your fund's message can set your fund apart from the competition, leaving a lasting impression on potential investors. Highlighting the unique value proposition of your fund is key. Investors want a clear and compelling case for why they should invest their capital. This involves showcasing potential returns, effective risk management strategies, and factors that differentiate your fund as an attractive investment opportunity. By providing comprehensive and transparent information backed by solid research and analysis, you instill confidence and enable investors to envision the potential upside of aligning with your fund.
In its next post, Valmar will explore narrative building and common fundraising tools to deliver that narrative in greater depth.
Conclusion
Fundraising for a crypto hedge fund can be a daunting task. The pool of potential investors is small, and the asset class is still relatively new and volatile. However, there are several strategies that can help increase your chances of success.
First, it is important to focus on the set of investors that are active in the space -high-net-worth individuals, family offices, fund of funds, and few others - and tailor your fundraising efforts specifically for them.
Second, you may leverage the help of credible placement agents, cap intro teams, and third-party marketers, but do not rely on them, as they are not going to do the heavy lifting for you.
Finally, be prepared to put in the hard work. Fundraising is a long and challenging process. Results are never guaranteed, especially in this market environment. However, with persistency, creativity, a unique value proposition, a strong narrative, and [lots of] luck, success is attainable. This is not personal. This is business.