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April 07, 2009

The New Normal in Fund Raising

Using an analogy with the pharmaceuticals trials process, "Super LP" Chris Douvos has some new advice for GPs raising a fund in the current environment.
...I've got a confession to make: I'm worried that I've been giving people the wrong blanket advice by telling cats who have some money raised -- but perhaps not as much as they'd like -- to wrap up fundraising, get back to investing, and live to fight another day. After all, fund size is a function of time. If you raise half the amount of capital you'd like, deploy it at the same pace in about half the time. Then come back when the sand has been lubricated out of the gears of the financial system. Sure, there's a bit of a fee stream impact, but the brain drain associated with dealing with institutional investors right now is just way too high.

But then I had this epiphany: it's not just that there's sand in the gears, it's also that many investors are changing their entire evaluation paradigm. Between the dreaded Denominator Effect, investor fatigue, and a new impulse to "Keep it Simple" while eschewing complex "modern" portfolio management, I think that the new normal will be "show me," not "tell me a story." During the recent market madness, the cost of illiquidity was so high that people will remember the sting for a long time.

...But I'm a bit bummed that my reasonong was flawed all along: I'd assumed that the market would generally be more receptive a few years hence when cats came back for their next fundraise. But I now think it's going to take a lot more than readiness; it'll take good progress in the clinical trials. Those groups that are tempted to say, "the readiness is all," and come back without making much progress in their portfolio might recall that Hamlet used those exact words and was dead a couple of pages later.
Arun Natarajan is the Founder & CEO of Venture Intelligence, the leading provider of information and networking services to the private equity and venture capital ecosystem in India. View free samples of Venture Intelligence newsletters and reports. Email the author at arun@ventureintelligence.in