Late Night Thoughts on Raising Capital, Part I (while listening to Massive Attack)

I have heard from so many people, particularly in the impact investing community, that capital introduction professionals are just leeches. They serve no valid role in the financial services ecosystem. To make my point before the argument, I disagree. Quite strenuously, actually. But not universally.

OK. It is pretty late. Scratch that. It is really late. I’ve been up for hours reviewing term sheets, PPM’s and pitch decks for a series of small, direct investments for a potential client. Super interesting stuff: clear impact focus; compelling and inspiring entrepreneurs; plenty of innovation and business model risk scattered around. Just the sort of concepts to spark curiosity… maybe even full-on interest, if I’m in the right mood.

And you know what? As tired as I am, this – this late night document review and Google deep-dive is… well, fascinating. It is exciting. I feel energized. It is why I love impact investing so much: the promise of a world-changing solution buried somewhere in all these spreadsheets and pitch decks. So I pour another cup of rooibos tea laced with Big Horn bourbon, rely on my 20+ years of investing experience, and work late into the night to try to develop enough market nous to squeeze some credibility and insight into what would otherwise be little more than an informed guess.

And this realization bottom-hooked a totally random quote from my memory river: “Price is only an issue in the absence of value.”

A lengthy tangent:

I can picture the man who dispensed this bit of wisdom; a grizzled old veteran of Smith Barney lore, be-suited, braced and cufflinked as brokers of that generation inevitably were. And me? A rookie. Pure tyro. My first year in the hurly-burly, eat-what-you-kill, pre-tech crash, pre-discount broker world of the early ‘90’s stock market. Pearls before swine, without a doubt.

But that phrase resonated with me for some reason, and I recall wondering just how much value I was adding to my client’s portfolio; slowly learning the ropes of the financial services world, pouring through Value Line to understand a company’s financials, trusting Morningstar to guide me to the best mutual funds. Blissfully naïve. And adding precious little value. Eventually, of course, I realized that my primary responsibility was to protect the clients I served from the avarice of my employer. But that is the subject of another blog… (as well as the subject of this priceless video. Gotta love Danny DeVito).

The point being that even in my advisor-as-embryo state, I recognized something of import immediately. And I quickly set about trying to figure out how to add enough value to my service that price would become less relevant. Basically taking the tact that if price was only an issue in the absence of value, I would commit myself to delivering value. An honorable objective that happens to be so blindingly obvious as to be nearly invisible.

Which brings me via a somewhat elliptical path to the subject at hand: raising capital and the people who do it for a profession.

I have heard from so many people, particularly in the impact investing community, that capital introduction professionals are just leeches. They serve no valid role in the financial services ecosystem. To make my point before the argument, I disagree. Quite strenuously, actually. But not universally.

To illustrate my (likely controversial) perspective, ponder this:

Who would you want to engage in the pavement pounding required to raise the capital for that fund or company you recently discovered and with which you have fallen in love? Fund manager? Entrepreneur? CEO? Perhaps a dedicated internal sales team, bumping the cost structure and thus increasing management fees… which nobody seems to want to pay in the first place. Framed this way, does this make sense?

But I get why. Really. I do. Most investors view with skepticism (sometimes bordering on outright hostility) capital introduction professionals… because so few of them add value to the transaction. After all, if the only deal element a bizdev pro brings to the table is his/her fraternity/or sorority phone book, there isn’t any added value. So the price should be questioned. It represents economic friction. Besides, all of us in this growing discipline do a lot of field building and introducing, and very few of us expect to be paid for our efforts.

I’m going to go one step further and suggest that this may actually represent a market opportunity. Given the paired challenges of diligence and raising capital, one would be forgiven for thinking that a business that supported the former while solving the latter might be in high demand. A trusted, scalable, impact investing capital raising platform to which we could turn in times of need.

On a related note, I had a three-way email exchange with my colleague Jennifer Leonard and a business development professional whom I hold in high regard, and who was explaining/justifying his job: Lane Auten. Lane has been at this game for a long time and has done a solid job for his employers. I asked him what he was up to. His reply:

“I have been hired by Rethink to help them to reach their goals for Fund II. I am paid by them, not by the investors, just as an employee of Rethink (mix of salary and bonus based on targets achieved).

Professional placement agents work this way so that there is never a conflict of “I knew them first”. My goal is to help them reach their targets, and I am agnostic whether it is from current investor re-ups, people they meet, or new people I introduce. I spend most of my time creating an “institutional” foundation for them (materials, compliance, documentation, process, etc.) which sometimes is missing with young managers in the impact space. They would rather hire me than create the internal resources for fundraising, and they see the risk of having the partners’ focus diverted too much from their portfolio companies and investing/sourcing. I am aligned with their overall success.”

Talk about value-add. I’ll even go so far as to say this borders on field-building. Can you imagine a business based on outsourced diligence support and capital raising for emerging impact managers and entrepreneurs? A cost-effective solution for the impact eco-system, capable of professionalizing the discipline and accelerating investment decisions and cash flows? Pinch me – I’m dreaming.

So I’d like to doff my cap to those precious few high-caliber capital raising professionals who daily suffer the slings and arrows of outrageous fortune, all in service of one idea: that intuitional-scale capital must be directed at the problem-solving, world-changing entrepreneurs who form the nucleus of impact investing. And the sooner the better, as far as I’m concerned.

(On the issue of sooner the better, did anyone notice that California’s year-over-year water reduction broke the tape at… -2.8% in February? Seriously? That is simply pathetic. California is in the grip of a drought approaching biblical proportions. The Sierra snowpack is a 5% of normal. 5%! Think about that for a moment. Take a deep breath. Then panic. Yet the enlightened citizens of that most progressive of states can only manage to reduce their water use by… -2.8%? Depressing. And all too human.)

May those whose responsibility it is to catalyze impact capital and get it flowing like the Columbia River after a record year snowpack in the Canadian Rockies experience success beyond their wildest expectations.

For if they win, we all win.