Recently, I had three conversations about trust. So forgive me, but that’s the soup du jour today, as their comments are still swimming in my mind.
I spent some time with the Head of Investor Relations at a high nine-figure AUM firm. And he said something that echoed much of the reality of fundraising these days. “Fundraising is all about trust. It’s not about the performance metrics. It’s about who believes in you.”
Then, immediately after, I caught up with an LP friend, who said, “Investor relations is a wasted job title in VC. They’re glorified note takers and relationship managers. I won’t invest in any fund where I haven’t met the GP.” Only to later share how much we both admired a certain Head of IR at a large multi-stage fund.
At first glance, the irony is blinding. The funny thing is that both are equally as true. GPs have a bank account where they can deposit trust. They withdraw trust every time they make an ask. Whether it’s for capital or special terms on the term sheet or for a certain ownerships target or for a guest speaker for an event they’re hosting. Before a GP starts a firm, they need to bank a lot of trust. They should give more than they take. And to run a firm, there are three types of primary customers you need to bank trust with:
- Founders,
- Co-investors,
- And LPs.
You also can’t take a loan on trust (in other words, outsource trust) before you’ve deposited enough trust in your own bank account. Or else, you’ll be in debt. If you’re in too much debt (i.e. have a negative balance), your reputation takes a hit. But when you’ve banked enough trust, you can have a separately managed trust account managed by others. An IR professional who manages the trust account with LPs. A community/platform person with co-investors and talent. And so on.
Having others manage these accounts too early in the firm lifecycle means taking debt and impacting reputation. So when my buddy who’s the LPs says he doesn’t like most IR folks, it’s because before the IR person was hired, the GP didn’t bank enough trust.
And the truth is trust is built not in grand gestures and one-off deals. It’s in the small interactions. How fast do you respond? Even when you’re busy, do you make time for people important to you? Do you remember what you talked about last time? Do you close the loop on advice you get from LPs—whether you use it or not? Do you remember their answer to ‘What did you do last weekend’ 15 weekends ago? Do you follow through with what you promise—even if it’s a restaurant recommendation you mentioned in the call?
In a conversation with a Fund I GP yesterday who successfully raised his 8-figure fund in 8 weeks (and yes, part of that duration was over the holidays), he said something I really liked: “Every LP is looking for returns. That’s a given. But every LP is also looking for returns plus X. Your job during the fundraising process is to find out what X is, and it may be less obvious than you think it is.” For some, X is undoing boredom. For others, it’s the front row seat to learn. Others still, it’s the prospect of social capital that will come with making an investment. And you can’t find any of these out, if you don’t spend the time to build trust with the other party.
Photo by Marek Piwnicki on Unsplash
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The views expressed on this blogpost are for informational purposes only. None of the views expressed herein constitute legal, investment, business, or tax advice. Any allusions or references to funds or companies are for illustrative purposes only, and should not be relied upon as investment recommendations. Consult a professional investment advisor prior to making any investment decisions.