Traditional Capital Raising is Old School
Traditional capital raising is an old school process. This means that succeeding in raising funds has typically depended on two criteria—a strong track record of success and/or a dense network of connections. Real world connections, whether professional or personal, help create the right meetings, draw the right attention, and get funds committed.
While the capital raising environment is in a transformative state (see below) it’s not all “out with the old.” A history of success and a well-developed network will always remain important.
Digital Networks are Transformative
What is changing is the definition of one’s network. Professional networks are becoming digital, and this transition is shaping the future of capital raising. Chances are you have used LinkedIn in a professional capacity right? Sourcing deals, developing relationships, and setting up meetings all already depend on tapping digital networks. We are at the point where any investor or capital raiser not using the internet is either still using a flip phone or is willfully avoiding a powerful tool.
The utility of digital networks will only continue to grow as their use becomes more widespread. After all, it was not too long ago that finding a significant other via an online dating site was looked down on. Now, if you are single and not using the internet to meet someone you are significantly lowering your chances of finding a great match (and significantly increasing the cost of doing so). (link to Carl’s article on “online dating”). Capital raising is following that exact same trend, except the social stigma (and perhaps the relative importance) of raising money online is lower than it was with finding a partner!
Investors Are Hungry for Access to Alternatives
The digital ecology of capital raising is especially important when thinking about alternatives because access in this asset class has traditionally depended on rather closed networks.
From the investor perspective, one of the key conversation topics that comes up regularly in our talks with all the major investment houses and asset managers is the groundswell of demand for alternative investments and new product offerings from their base. The head of alternative investing at one of the largest asset managers in the world, for example, recently told us about the enormous challenges and opportunities in transitioning their UHNW investors from a 3% allocation to alternatives all the way to a 30% allocation. Direct private investing is becoming its own sub-asset class with robust demand requiring its own technology solutions.
Meeting that demand entails expanding access and providing diversification opportunities for investors that have been less traditionally involved in the private capital markets. There are challenges here of course, especially relating to aggregating individual demand, but these challenges only further strengthen the need for vibrant well-functioning digital networks within alternative investing. More investors, more intelligently grouped investors, and greater access and transparency are all possible.
Crowdfunding, P2P loan networks, angel investor groups, and start-up communities have been the earliest adopters of online fundraising. Recognizing the success of these models and the strength of underlying demand, larger and more traditionally closed institutional investment opportunities, including larger private companies and elite PE and hedge funds, are following suit (albeit more slowly).
Digitization of Private Capital Is a Robust Trend
The trend towards digital networks will only become more unavoidable as we undergo a profound generational shift of wealth. Millennial inheritors and their successors grow up wired into communities and view the digital ecology as a natural extension of their social and business worlds. It is a nascent trend, but as these younger investors accumulate or inherit wealth, the paradigm of investing will continue to shift even further in order to accommodate them. Firms that do not position themselves ahead of this trend will lose an opportunity to establish profitable long-term relationships.
Because private capital markets have typically depended on tapping into personal networks, they are actually perfect for a transition into digital. It is my belief that private investing will be at the forefront of the movement towards a larger digital ecology. Digitally sourced, diligenced, and executed deals will soon be the norm.