Many community leaders believe one of the best ways to create real growth (wealth, jobs and opportunities) is to invest capital (debt or equity) in high-growth startup and scale-up businesses. This makes sense, since these are the firms that have created nearly all net new jobs in the U.S. over the last 30 years.
While creating this kind of investment fund may sound simple enough, not all new funds have the same goals and objectives - particularly when it comes to accelerating economic growth in a neighborhood, city, region or state. In order for a fund to be successful in realizing its specific goals and objectives, leaders must begin with a well-developed and informed plan.
Here are five helpful questions to ask if you or your community are thinking of launching a new investment fund.
1. What are the primary goals of the new investment fund?
- Today, crowdfunding platforms and entrepreneurial accelerators of all types are popping up all over the U.S., each one with varying goals and objectives related to their investment activities. In a climate with an increasing number of funding options for entrepreneurs, it is incredibly important for new investment funds to have clarity around the fundamental goals of their investments. Taking the time to clearly articulate an "investment thesis" is an important first step all new funds need to take.
- Some investment funds are focused on generating the highest possible financial returns; others are designed to help entrepreneurs in specific communities or defined industries like IT. Some funds are focused on inner-city entrepreneurs that can have a direct impact on creating jobs in their neighborhood; others - particularly funds that include partnerships between public and philanthropic sectors - have additional "double or triple-bottom line" goals and look for returns related to brain gain, economic inclusion, culture change or other community priorities.
- Before your new fund gets too far down the road, ask yourself some basic questions: Are you trying to create a fund that is optimized to deliver maximum financial returns to investors? Will the fund have other priorities, like job creation, or overarching cultural or social impact goals? If the fund has more than one primary goal, how will you balance priorities in the event of a conflict?
2. Can your community support a new fund?
- It's no secret that entrepreneurs in many parts of the country are starved for capital. Still, it's important to wrap your head around existing deal flow as well as potential funding sources to understand how this new fund might fit in amongst other funds in your community.
Having a detailed understanding of the unique role this new fund will play in your community, from both a deal flow and a limited partner perspective, is critically important to its ultimate success.
3. Who will manage your fund?
- An investment fund is only as good as the people who manage it; that's why it is important to do your research and be deliberate and realistic about the true scale of your operation.
- Can you raise a fund large enough to support full-time professional managers, or will you need to rely on part-time staff? Funds designed for social impact may even be able to find volunteers to manage investment activities. Whatever your situation, it's important to know the answer to this question and develop a fund-management plan before you begin raising money, not after.
4. How will you assess your potential investments?
- Following "your gut" is not an investment strategy. After you raise the cash to start a new investment fund, you may find yourself besieged by capital-starved entrepreneurs. Finding a data-driven way to evaluate these opportunities is essential.
- All investments come with risk. Managing that risk well and developing a methodology for screening out opportunities that are not ready for prime time can be the difference between a successful fund and a team that is not going to have a chance to raise a second follow-on fund.
5. What about post-investment assistance?
- One huge misnomer in the investment business, particularly when less experienced individuals are involved in creating a new investment fund, is that your work is done when the investment has been made. Experienced fund managers know that top-tier funds deliver their greatest benefits to entrepreneurs by providing assistance after an investment is closed.
- Here at JumpStart Inc., we provide a range of services to the companies we invest in. Combining our financial capital with in-house assistance services like our mentoring program, networking events, marketing expertise and talent recruitment/acquisition services allows us to nurture and protect our investments while simultaneously helping to build a healthier entrepreneurial ecosystem.
- This model has worked well enough to allow us to begin helping other groups in other communities pursue similar goals.
Well planned, well managed investment funds don't deliver results overnight, but with a solid strategy and a little patience, they can deliver the results you are looking for.
Having a definitive answer to each of these five questions before you start raising cash will go a long way toward helping your fund get started on the right foot.
Do you have more questions about creating a fund strategy that is right for your community?