This keeps happening so I thought I would write about it as follows…..
A real estate client comes to me. Their goal is to raise money for their real estate business. It could be a first-time fund – it could be a second-time fund – or even an established fund business trying to grow. Or it could also be a sponsor trying to attract an investor for a one-off deal – for a programmatic relationship – or even a platform investment.
Through my discussions with these parties, I have seen some patterns emerging and wanted to share below the common mistakes I am seeing and how I think you can avoid them. For ease of discussion, I am defining the party seeking capital as the “Capital Seeker.”
Trying to figure out what investors are seeking and delivering it: This is something I see quite a bit. The Capital Seeker says something like: “Bruce, what are investors looking for? If I know that I will target my investments to that!” This is a major mistake in my view. Just as Steve Jobs famously said that it is not the customer’s job to know what it wants – it is our (Apple’s) job to show the customer what it ‘should” want, it is the same thing here. Investors would much rather you come to them with your fine-tuned and intelligent investment proposition than to come in and say, “Well, what kind of investments do you want – and I will find them for you.” It is essentially an intellectual cop-out. Instead, I advocate that the Capital Seeker develop the intellectual capital necessary for a targeted investment strategy. If the Capital Seeker can’t do that, then the smart thing – and sorry how this sounds – the smart thing to do is fold his/her tent and do something else.
Leaving the market you are established in to go to another market where you have no competitive advantage: I see this a fair amount. The Capital Seeker is used to investing in Gotham City; however, Gotham City is too pricey or has something else wrong with it, so the Capital Seeker picks another city to invest in. This is sort of like Warren Buffett’s warning/adage that “if you can’t run your own business successfully, then start (or buy) another business you know nothing about.” Investors are very wise to this. They know that real estate is at heart a “local business,” and, accordingly, want to invest with a Capital Seeker who has deep knowledge of the local market. If you move to another – new – market, by definition you don’t know the game or the players and have a smaller chance of getting the inside track of that elusive “good deal.” Having said this, if you really think Gotham City is toast, then you (maybe?) really do have to move somewhere else or come up with another investment strategy; however, that is a lot more than just looking for one-off deals in another city and likely requires a deep commitment to the new location.
Bidding on deals through brokers: Investors simply hate it if the Capital Seeker’s strategy is to bid on ‘brokered deals.” They hate it. They feel like it is just an invitation to pay the highest price whereas the whole point of the capital they raised is to “outperform,” and bidding the highest price is a recipe to at best perform average. See my last Real Estate Philosopher article on this subject. Once again, I go back to the central theme of this article that the Capital Seeker has to have some thesis that suggests outperformance as a result of the investment strategy.
Being boring and forgettable: There are an awful lot of people in the real estate world and an incredible number of Capital Seekers. The investors are besieged consistently with Capital Seekers seeking investment capital. Sadly – very sadly – almost all Capital Seekers violate one of the first rules of marketing; namely, they are so fearful of possibly saying “the wrong thing” or “offending someone” or “missing out on a possible investor’ that they are afraid to STAND OUT. Instead of a powerful and provocative message that resonates, they go for watered down and boring because they think that is what investors will like. In one word:
Poppycock
No one wants to be bored to death. Have some cojones. Stand out. Take a position that most investors will not like, but some will love and go for it. Yes, I guess there are a few horrible things worse than being forgotten, but not many. You know the CEO of Nike – which has had its share of controversies (paraphrasing): “It doesn’t matter if a bunch of people hate your brand as long as enough people like it.”
Your goal is not to avoid anyone saying your investment plan is dumb, but to get a small number of investors to fall in love with it.
Not differentiating yourself: Yes, this is similar to the foregoing points, but not quite the same thing so I add it in here. The point is that if you are the seventh Capital Seeker presenting your plan to buy a certain type of product to the investor, you are likely to be ignored or forgotten or, if not, have close to zero bargaining power for the investor’s capital.
Not having a good name for your company or product: Don’t underestimate this. I have written an article about the importance of a name before. Part of being remembered is your name. Also, a great name is free advertising and tells the story of your plan both internally (to your team) and externally (to your investors). C&M Investors might be “cute” because your daughter is named Chloe and your son is named Martin but is a huge waste of an opportunity to name your company in a way that will help you dramatically.
Getting discouraged because you are ahead of your time: This happens a lot and it is a bummer. You have a great investment idea but no one will bite. Despite everything I have written – above – it seems like investors just want to be like lemmings and won’t consider your idea. This pushes you to give up, but then, likely, three years later, you are kicking yourself when someone who didn’t give up used your exact theory and is minting money with investors chasing her. I guess all I can say here is don’t give up. Be like The Man in the Arena (Teddy Roosevelt favorite quote), “It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood”, or be like Churchill and “never ever ever give up…..” Most of the time the investors will come around in the end and if you are the one who has kept pounding your differentiated and unforgettable investment theme they will end up chasing you to invest. As Dr. Seuss said “ninety-eight and three quarters’ percent guaranteed.”
To conclude, the keys to raising capital successfully are:
- Figure out your own investment strategy
- Invest the necessary intellectual capital
- Don’t base that strategy on chasing brokered deals
- Differentiate yourself
- Don’t be boring or forgettable
- Along these lines, have an unforgettable name
- Don’t get discouraged if you are ahead of your time
Bruce Stachenfeld a/k/a The Real Estate Philosopher
PS: With apologies for sounding like a humbug – if you are a Capital Seeker, I do advocate that you read my book If You Want to Get Rich, Build a Power Niche. In my book, I give you all my thoughts on exactly how to build a differentiated business model.