Additional and Tangible Fundraising Considerations
In last week’s installment, Valmar provided fundraising considerations about investor landscape and active options within that landscape.To expand upon that, Valmar’s partners at Juniper Place, seasoned experts in raising alternative assets, have provided additional tangible considerations that may be useful to investment managers.
More Insight About the Landscape of Digital Asset Investors
Graphic #1: Hedge Fund Industry Growth is Driven by Institutional Adoption (Source: Juniper Place/HFR)
Graphic #2: Crypto Reaches Early Phase of Institutional Adoption (Source: Juniper Place/Blockchain News/Twitter)
To expound upon the two graphics above:
There appear to be strong parallels between the process of institutionalization of digital assets and what the hedge fund industry experienced from 2000 onwards. Today, the majority of assets under management (AUM) in traditional hedge funds come from institutional investors. In the past, AUM were largely driven by ultra-high-net-worth Individuals (UHNW) and family offices, not unlike digital assets today.
The institutionalization of the hedge fund industry drove explosive growth, initially via fund-of-funds, tasked with sourcing, evaluating, and constructing diversified portfolios with well-managed risk systems. Fund of funds led the charge for delivering asset class access and overall education to institutional investors.
Institutional quality infrastructure and a robust regulatory framework were critical factors for widespread institutional adoption.This statement is even more true with digital assets, which have suffered a reputational blow over the past year.
As a major takeaway, while the current fundraising environment is difficult, as the market builds itself into a new cycle, there is history and evidence to suggest that crypto is on the verge of unlocking institutional capital.
Two other graphics worth looking at relating to the current fundraising environment:
Graphic #3: Digital Asset Investors by Region (Source: Juniper Place)
Graphic #4: Digital Asset Investors by Type (Source: Juniper Place)
While the above graphs do not encompass every investor in the space, they broadly capture important present investment trends. A few additional points about the Investors by Region and Investors by Entity Type graphs:
Early-stage investors in digital assets were predominantly retail, UHNW, angel, family office, or VC investors.
Institutional adoption appeared imminent in Q3 of 2022 (prior to Terra Luna, FTX, and other crypto disasters) but subsequently slowed amid infrastructure, reputational, and regulatory challenges.
Early-stage institutional investors ARE active and desire a collaborative relationship that delivers education, diversification, and co-investment opportunities.
Major Do’s and Don'ts
While funds come in all shapes, sizes, and approaches, there are some common and important Do’s and Don’ts that can enhance the effectiveness of the capital raising process.
Do:
Build a team that combines traditional finance pedigree with crypto-native technical credibility and that seamlessly blends.
Craft a compelling narrative that weaves together vision, strategy, execution approach, risk management, potential for returns, service providers, and team; use portfolio examples as context.
Build robust, institutional-quality infrastructure and risk management capability, and be able to demonstrate it.
Educate and seek to be a trusted advisor; build trust slowly, serve as a credible resource, and demonstrate expertise on multiple levels.
Be persistent without being rude; investor sentiment can shift rapidly and some of those who say “no” today may say “yes” in the future; leverage technology to stay in contact and produce value-add content; provide regular updates.
Don’t:
Rely on speculative marketing; cold calling is ill-suited for digital assets; warm introductions go much further than cold ones and a targeted, rifle approach works better than a spray, shotgun approach.
Be overly critical of competing strategies/organizations; your audience may not share that view, and it is generally considered inappropriate.
Rely on performance alone; reputation, consistency, experience, and risk mitigation are as important as absolute performance.
Assume that institutional investors are either crypto novices or highly technically savvy; there is a wide dispersion of knowledge, and it is up to the manager to listen to the investor and to adjust the presentation to their technical understanding. This may require additional time for appropriate education before the investment can be made.
Ignore investor feedback; remain humble and flexible, pay close attention to investor concerns and priorities, and always maintain a high level of transparency.
Toolkit
To attract capital, investors will want to intimately understand the strategy, risk management, and other due diligence aspects, as we discussed in a prior post. A variety of tools are used by manages to tell their story at different stages of the investment process:
Factsheet - A one to two-page document highlighting firm and strategy along with track record, performance statistics, targets, and limits.
Investment Presentation - A slide deck expounding upon firm, strategy, opportunity, technology, execution, risk management, service providers, team, and terms.
Due Diligence Questionnaire (DDQ) - A questionnaire that provides critical information about firm, fund, business, strategies, risk management, and general operations.
Risk Management Handbook - A document detailing a manager’s approach to risk management, including considerations related to market, liquidity, counterparty, operational, custody and asset security, technology, information and cybersecurity, as well as regulatory and compliance risks.
Data Room - A well-constructed digital data room will provide investors with comprehensive information about the firm along with its financial, legal, and operational documentation/manuals/procedures. Much of this documentation may be referenced in the DDQ.
Consistent Content - Whether through a blog, a newsletter, or podcast, the regular production and distribution of content provides the manager with consistent opportunities to emphasize education and highlight key themes. It also creates multiple touchpoints for investors.
Conclusion
Despite the rockiness of the current fundraising environment, there is still investment flowing from UHNW individuals, angels, family offices, or VC investors, predominantly those based in Europe and North America (with the Middle East segment also showing growth). While many institutional investors may have temporarily stepped back, the early adopter curve is poised for rapid growth as infrastructure and regulatory pathways become clearer.
As managers actively raise capital from the aforementioned segments, they can begin to engage with institutions on an educational basis. The use of traditional approaches and communication tools commonly utilized in traditional finance will go a long way to helping managers raise capital in a structured and professional manner. The process is rarely perfect, but with focus, determination, and structure, success can be achieved.