The Importance of Fundraising for Alternative Financial Products
The main goal of fundraising is to ensure the necessary resources for the operation and achievement of the goals of an organization, project, or, in the case of this article, an alternative financial product.
I have been professionally engaged in this activity for about 20 years, and in recent years, my group has specialized in fundraising and third-party distribution of alternative financial products. Every day, we work with alternative investment firms, young hedge funds, and fund managers specializing in various exotic asset classes. Many of these firms have excellent investment strategies and achieve strong returns, managing to remain relatively uncorrelated with traditional financial markets and deliver performance and alpha to their investors even in complex market conditions.
The Missing Piece: A Structured Fundraising Approach
However, precisely because of their high specialization, they often overlook one of the most important aspects of the financial business: the need for a well-structured fundraising department equipped with a defined budget and clear objectives. Additionally, they need specialists in sales, financial marketing, and investor relations.
Especially in medium and small-sized financial companies where the focus is primarily on investment strategy or trading ideas, most of the team’s time and effort is dedicated to market analysis, defining strategic and tactical components, and executing trades.
The Result: Unlocking Potential Through Strategic Fundraising
The result? Excellent investment strategies capable of achieving outstanding performance, often lacking sufficient track records and adequate capital under management to be considered attractive investment opportunities for accredited and institutional investors—those who can truly scale a financial product quickly.
Accredited and institutional investors, in most cases, are reluctant to be the first to invest in a new and/or alternative financial product unless they specialize in “first loss capital.” This is because, thanks to their status, they receive daily investment proposals from various counterparts, allowing them to choose where to allocate their capital. They are unlikely to invest in a new strategy or a recently launched product, even if it initially appears promising.
This is the most important assumption that an alternative financial company, a young hedge fund, or an alternative financial manager must always keep in mind with intellectual honesty and professional humility: you are probably neither the only ones nor the best in the market!
Building a Successful Alternative Investment Company: Beyond the Strategy
This does not mean that scaling or achieving the desired and deserved success is impossible, but it will require the right approach and a correct strategic perspective.
So, how does a medium-small alternative investment company plan to grow and scale? In these cases, it is necessary first to understand that the gap in size and NAV (Net Asset Value) must be filled with a well-organized strategic positioning, a structured fundraising strategy, and clear and essential communication and investor relations activities. In short, it is crucial to invest time and money in these functions, just as it is invested in financial research, strategy structuring, and execution.
The Fundraiser Trap: Why Success Fees Don’t Work
Too often, we see alternative financial companies and fund managers in the market looking for fundraisers, expecting these professionals to commit all their time, experience, and especially their reputation without investing money, only offering success fees, and without providing the necessary tools and operational freedoms that would increase the chances of success for the fundraiser and consequently for the product.
The result? Experienced fundraisers politely decline the job offer, while those in greater need of clients promise incredible results that are likely to be difficult to achieve, risking from the outset compromising the reputation or the ability to build a correct strategic positioning for the alternative product, inevitably undermining its future success.
How to break free from this impasse then?
Every alternative financial company, hedge fund, and alternative asset manager must always remember that every financial product consists of 3 + 1 elements. Most of these can be governed by the proposers and fund managers, while the “+1” represents market momentum. The latter, if inconsistent or incorrect compared to the characteristics and objectives of the investment, can cause the failure of even the best strategies or the most promising deals.
On the other hand, the governable elements are represented by:
- The investment strategy or trading idea.
- The chosen investment vehicle, which should be easily accessible or marketable to a pre-identified target of investors.
- A correct and structured fundraising and investor relations strategy.
For each of these elements, an operational path must be planned, and a budget must be defined, just like any other business activity. The first ones who must believe in the project and invest capital, whether their own or derived from family and friends, are the managers and proposers of the investment. Only afterward, by balancing these 3 + 1 elements, can one approach the market of accredited and professional investors and find the volumes necessary to scale up the product and consequently the alternative financial company that manages and proposes it.
The Long Road: Organic Growth vs. Strategic Acceleration
Therefore, it is futile to frantically search for fundraisers on a success fee basis, capital introducers, or intermediaries if a go-to-market strategy, an acceleration program, and a budget for sales, financial marketing, and investor relations have not been properly planned. If these elements are missing, it is much better to give up scaling, raise a small amount of capital from family and friends, and if the strategy really works, use the miracle of compounded capitalization to grow NAV by reinvesting earnings. But rest assured, this will be a long journey, full of obstacles, and it will be almost impossible to become attractive to accredited and institutional investors.
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