Process for fundraising

What to expect when raising a search fund

Oct 25, 2022

In Building a plan to launch and Building your PPM published in recent months, I provided a summary of the foundational pieces that can help prospective searchers raise their search funds with more confidence. This week, I will share my experience fundraising for White Cedar to help you better understand what to expect going into the critical process. I recognize that my experience is only one perspective, and fundraising will likely look much different for you depending on your background, timing, existing networks, thesis, fund structure, and other factors. The post will not focus on how long these steps should take because they vary; instead, I will cover what I believe to be common features of the fundraising process: preparation, initial notice, meetings, investor decisions, communication, and closing.

Leading up to fundraising

As discussed previously, the months leading up to fundraising need to be spent wisely by meeting with searchers and investors while you finalize your PPM. Do not try to compress this exploratory and preparation stage too much, as it could send a negative signal to investors during the fundraising process or cause you to regret the decision later on once you hit some serious adversity.

A major milestone during this stage is to lock down a date on when you will begin the formal fundraising process. A concrete date will add a sense of urgency to your goal and prevent you from further kicking the can down the road. Communicating this general timeline with investors adds that much more accountability to it. I tried to stick by this, and the added pressure here definitely helped me progress things. As I wrapped up my first draft of the PPM, I decided on a final date to formally notify investors that I was ready and stood by it.

As you continue to receive feedback from your corner on your PPM, the deadline helps add some closure to making edits. Because there is so much that goes into the document, and your thinking does evolve with time as you work through certain things more (i.e., industries of interest for me), you will always want to make changes to your PPM. However, at some point, you need to stop and move forward. However, I argue that it is a better use of your time to nail your story, understand the gaps in your PPM, and mentally prepare for this important process rather than rethink every sentence, especially at the last minute.

Formal notice

I look back on the day I sent out to investors as a big milestone in heading down the search path. Once I had a ‘final’ version of my PPM, I emailed potential lead investors I had gotten to know in recent months a copy of it and asked to schedule a time to discuss it. For me, the goal was to prioritize those groups that could be lead investors (i.e., 15-20% of my cap table) before filling in the gaps with smaller groups or individuals. I never sent an email with my PPM to an investor with whom I had not had at least one conversation, and I would not recommend doing that either. Some recommend that you test out sending your PPM to investors that you’re not as enthusiastic about to get a feel for the process, but I am not a fan of that approach. What if they decide that they want to invest, and you have no other offers on the table?

For more practical guidance on the matter, here’s a version of the initial email I sent to investors:

Hi [first name],

I hope this email finds you well. I am excited to share my PPM with you and the rest of the [investor name] team. Please see attached for a final copy.

Here are a few highlights on my search:

The search fund name is White Cedar Company
Raising $XXX,XXX for 24-month search; # units of $XX,XXX
Looking for ~#-# different investor groups in total
Industry-agnostic search; however, the initial industries of interest are [insert industries here]
The full launch date is [month year]; [short sentence on how I planned to utilize my time before my launch date]

Would you please take a look and let me know when you'd like to connect to discuss further?

I look forward to hearing back. Let me know if you have any questions.

Best,

David

My common response after the initial email was that the investor would take a look and follow up in the next few days to schedule a call. From there, the process kicked off!

Meeting with investors

As investors begin to review your PPM, you will need to schedule times to meet with different team members. There are a few things to expect here. First, investors will likely want to know how far along you’ve progressed in fundraising. No need to worry here – be honest and share your game plan with them. Second, depending on the firm or investor, you will likely begin meeting with the more junior folks first and progress up to those most senior of the firm. Third, don’t expect to get a commitment on day one – it will take some time. Even after a series of positive conversations with investors, you may not get an immediate response on a decision until others commit to your cap table. With these expectations in mind, it is critical that you maintain a consistent level of professionalism, optimism, and honesty throughout the process.

Commit or not to commit?

Now you might be asking, if investors don’t want to commit to your search fund until they see others do so, what do you do? Well, it’s the classic chicken and egg problem. Right or not, many investors prefer to see a rounded cap table before committing, and that can be very frustrating as you go through the process. You’d expect there to be more independence from investors in the decision-making process, but I did not experience that. At the end of the day, showing that consistency throughout the conversations will pay dividends in the form of commitments. Finding the first one to three investors to commit to your search fund will be the most difficult, but even then, don’t expect things to be an easy ride. During this process, you are just looking for verbal commitments (or via email), nothing more.

My perspective is to focus on the task at hand while never losing sight of your larger goal. Don’t fret too much over not immediately getting commitments. Control what you can control, and that is by putting your best foot forward in the next investor conversation you have. Over time, you will have some investors ghost you, beat around the bush, and decline you. That is all okay and part of the process. What is important from those difficult conversations is that you ask for feedback when necessary and are receptive to learning from those calls to benefit future ones.

Regular updates

Persisting through the chicken-and-egg fundraising problem will eventually lead to a place where investors will be more likely to make a decision regarding their commitment to your search fund. It is crucial that you as a searcher continue to follow up with each prospective investor with updates on your progress and new commitments. As a best practice, aim to be highly transparent while signalling to investors that your non-committed conversations are going well (unless they clearly aren’t). Provide email updates frequently on how your cap table is materializing, any adjustments to your search strategy given feedback from investors, and noteworthy conversations with prospective investors that are worth mentioning.

While my fundraising took place during the pandemic, I did not have the opportunity to meet with some of my investors face-to-face, although I did have the chance to meet some of them on campus at Booth. I could not recommend enough to get face time with prospective investors whenever possible over meeting via Zoom. Maybe I am a bit traditional in this sense, but nothing beats those face-to-face interactions.

A couple of points to emphasize: do not continue meeting with investors that you don’t eventually want to commit to your search fund. If you believe they are not a good fit for whatever reason, kindly pass on that investor. In addition, there is no reason whatsoever that one should misrepresent their fundraising process (i.e., lie about commitments, conversations, etc.) to get ahead, even if the intention is to instill confidence in prospective investors.

Closing

Things tend to ramp up and close quickly. For me, it felt like only a week from when I was frustrated about being stuck on one commitment to closing my fund – and that seems to be common for many searchers. But as commitments tend to accelerate towards the finish line, you need to be extra mindful about sharing updates with investors on how the cap table is shaking out. Overcommunication during this stage is okay, in my opinion, and it will prevent anyone from surprises in the closing hours, something you want to avoid.

After everyone confirms receipt of your final committed cap table, it is then time to work with your attorney. They will help you send the necessary legal documents to your lead investors for review, approve them, and then send finalized documents out to the rest of the group. My attorney had worked with search funds (and my investors) in the past and was helpful in guiding me along with the necessary paperwork to close out the process. Expect to include your PPM, finalized cap table, formation documents, side letter, and subscription agreement in one of the final updates to investors. Once the necessary documents get signed off and returned to the attorney, you can move towards launch by setting up a bank account and building the foundation of your search to ensure a strong start. More on that to come in future posts.

Thank you for reading this week’s post. If you know someone who is looking to raise a search fund in this year’s cycle, please share using the button below: