Fundraising optimism is growing as we enter the second half of 2024. The environment continues to be competitive across the board, especially for emerging managers. According to Pitchbook, established funds have secured 77% of fund value YTD. Though conditions are still tougher than in previous years, LPs are slowly starting to deploy again. With this shift, postponed raises will likely begin to launch this fall. Running a strong fundraising process starts with versatile technology that covers the following bases:
Minimizes manual entry
Increases firm-wide transparency
Provides clear direction on what actions the team should be taking (i.e., adding to the top of the funnel, pitching and convincing LPs, or advancing LPs through the investment process)
In this article, we’ll cover three straightforward tips for enhancing any pipeline management system. Implementing these measures will help you determine whether your team needs to add more leads to the funnel, actively pitch to potential investors, or move LPs through the investment process more effectively.
As you navigate your fundraising process, it's important to recognize that convincing LPs and moving them through the investment process are intertwined, but distinct tasks. While convincing LPs involves gauging their enthusiasm, willingness, and ability to invest, moving them through the process focuses on advancing them through the stages (e.g., from an introductory call to signing the documents). These tasks often happen simultaneously, as an LP might express low investment probability yet still request further information, such as a data room. In such cases, you’re progressing them through the process, but their likelihood of investing may actually decrease.
Let’s dive in.
Enhancing Your Pipeline Management in Three Steps
Step 1: Aim for a Close Target that is 20% Above the Aggregated Minimum Check Size
In challenging environments, we recommend our clients total the minimum check sizes assigned to LPs, and aim for 20% over the targeted close amount. For instance, if the first close target is $50M, aiming for $60M is advisable. This strategy ensures that there's a sufficient buffer to account for the natural attrition in fundraising processes and helps maintain a robust pipeline by preemptively addressing potential shortfalls.
Step 2: Assign Probability Estimates Based on the Emotional Readiness of the Investors
Next, we recommend our clients measure the need for convincing and pitching LPs by assigning a probability of investment based on their emotional readiness. For example, after initial communications, an LP might demonstrate a high level of excitement (e.g., a feelings-based investment probability of 60%), and indicate that your fund is within their investment strategy sweet spot. This metric helps prioritize and tailor the engagement strategies for each investor, focusing efforts where there is higher emotional buy-in and investment alignment to potentially accelerate the commitment process.
Step 3: Allocate Stage-Based Probabilities to Each Opportunity
Finally, we recommend our clients assign probabilities to the statuses or stages in the investment process, as this can help identify potential bottlenecks. For instance, a firm discovered that opportunities were repeatedly stalling at the data room stage. Feedback from several LPs indicated they were entering the market too early and should wait for additional markups. This feedback led to hesitancy to share the data room with the performance metrics and was hindering their overall fundraising efforts. Recognizing this issue prompted us to reassess whether it was the optimal time to move forward.
By assigning stage-based probabilities, the team can identify where prospects are faltering in the pipeline and implement targeted interventions to advance them towards commitment. This method allows for a more nuanced understanding of the pipeline and helps pinpoint where additional resources or adjustments are needed to maintain momentum.
Leveraging technology and clear metrics is essential for effective fundraising. By distinguishing between emotional likelihood and procedural stages, funds can address bottlenecks and ensure smoother transitions from interest to commitment. As optimism returns and LPs start investing again, having the right tools and strategies will be key to successful fundraising in late 2024.
At Strut Consulting, our white glove Investor Relations service focuses on assisting VCs in refining their pitch, targeting LPs, creating data room materials, setting up LP onboarding processes, and ensuring our clients have the right tech stack for a successful raise. Ready to get started? Reach out to us here.