3 Biggest Mistakes Fund Managers Make: White Board

3 biggest mistakes new fund managers make and how you can avoid them when launching your own fund. I've helped over 1,000 fund managers in our Black Card community, and I currently run 2 8-figure funds. Okay, so number one I see is my idea is perfect. A lot of people come in, they believe their idea is perfect, and most people don't backtest their idea. They also don't iterate on their ideas well. They believe they've got everything figured out. And I'm speaking from experience here. The flip side, what I see good fund managers do that are launching a fund They work with investors. If you've seen our Fund Launch Formula, phase 3 is capital raising and working with investors, going back and forth and looping in your potential client to build a fund that investors are dying to have. And finally, number 3 on here, they don't think how it's going to fit into a portfolio. Meaning a lot of your clients that you're going to be pitching, these big family offices, they already have a portfolio of investments that they've allocated to. So let's just say simple math, this family office is a $100 million family office. They've already decided their allocation buckets. Maybe it's, you know, 32% is real estate. They've got some bonds over here, some equities. They've got private equity, some VC deployment. I'll put little numbers in here. And so you're coming to pitch them your nice real estate deal. And but you don't really think through or address how does this even fit into their portfolio? Because what's going to happen? You're talking to a family. They've already got real estate. They like real estate. They know how to do real estate. And maybe of the 32% here, you know, 10% managed by outside managers and the other 22% is managed by maybe themselves internally. You've got to understand when you're presenting Where are you trying to fit? Are you trying to tell them, hey, we want to manage, you know, that stuff that you're self-managing, it's super annoying, it's got tenants, tenants, we're going to help you manage that. Or is it, hey, you've already got these 2 fund managers over here, let's add a 3rd called us and we should be a piece of your real estate portfolio. You need to be in, you know, senior assisted living or RV parks and this will fit into the overall portfolio because it diversifies yourself within your real estate portfolio. Regardless of how you want to do it, it's worth the conversation. It's actually a good thing to ask at the beginning of the session. Hey, before we dive into our fund and we're talking about it, what's your kind of— what's your allocation look like for this institution or this family office towards real estate? Or just this person, how much crypto do you currently have in your portfolio? How much of you guys— how much do you want to have in your portfolio? It's a good starting point of a question to start when You're getting into this. So number one, my idea is perfect. They don't backtest, they don't iterate, and they don't figure out how it fits into a portfolio. All right, on to number two. I see a lot of problems with the pitch, and I have done these problems multiple times. So I'm speaking from experience here because I've messed this up like a hundred times, and I've just learned through trial and error when pitching investors. So three things here: number one, they don't address the macro situation; number two, there's no distinct edge, and they are not. The pretty girl at the dance. Guys, she's got glasses and a ponytail. Let me explain what I mean. So I had a friend call me up yesterday. We walked through a deal that he was looking at. This was a real estate deal. I'll put it over here. Real estate deal. It was multifamily and they had 200+ doors. They bought it distressed. They were going to do some value add to it. And he explained to me, yeah, you know, I'm looking to take out about $5 million on it. We've already owned the asset, but I need to move out $5 million. I'm looking for some help. You know, I'm having a hard time raising capital and I wanted to see if, you know, you or somebody you knew would come into this deal and pull it together. Now point stop. That was kind of the pitch on the phone call. Very good friend of mine, nice guy, I love him to death. But I thought through this and I went through a few things here. Now I've got the iPad out. Now if I scroll down to his edge, when he explained his edge to me, you know, here we have your asset class. So the macro situation of real estate, he didn't explain to me at all. I was sitting there like, Is it a good time to be in real estate? We have interest rates that are coming, you know, it's high, but it's low. Like, should I be in real estate? Should I not be in real estate? He didn't address this. So I didn't know, I had kind of a question mark on that. Strategies. The strategy they had was they were going to do some value add to it. Okay. Well, you and everybody else, why should I invest in your deal versus the 20 or 30 other firms on Wall Street that are big that have already done this for 30 years? Why would I go with you with the same strategy on an asset class that might be okay? Well, let's look at the team. Well, the team was— it's okay. It was fair. Nothing bad. Nothing great either. And really the big pitch that he gave me was this. I've been looking at this for years. This is one of the best deals I have seen in the last few years. This thing is awesome. So off his credibility, which he's been in real estate for, I don't know, let's call it 5, 6 years, something like that, maybe more. Okay. So it's one of the best deals that you have seen. Okay, and your team, and you know, I've got to now trust your team. Strategy's pretty me-too strategy. It's nothing that special. And he didn't address the macro situation of why now? Additionally, the structure, I think they were doing something like an 8%, you know, cash-on-cash return, and they wanted to do like a 70/30 split, which is fine to below average, kind of neutral to below average. An 80/20 would be more, you know, standard. So I'm looking at this deal, you're looking at with me, right? No compelling reason of why now. Kind of a me too strategy. Team is okay, and the structure is kind of okay. Now this deal could do well, but why should Bridger put money into your deal when I know 20 or 30 other real estate funds that can explain this edge stronger than yours? Now looking from the outside in, it's obvious. You're like, well, yeah, you should beef that up. But it's kind of like we get this in our own heads sometimes. We're kind of stuck in. A plastic bag on our head. You know, everyone on the outside is like, dude, just pull the plastic bag off. But we are sitting there wrestling with this plastic bag on our head. I'm a beast. Go to sleep. Go to sleep. Now, if I was to re-pitch this for this person, I would do it something like this. Hey, I've got a very interesting deal in the multifamily real estate space. It's 200 units. Now, right now, real estate's in a very interesting and compelling spot. We've got these new laws coming out, interest rates are going to move. We believe we can buy at a huge discount. Which we already have done on this deal. And over the next 3 to 5 years, real estate's going to explode in Southern Louisiana because of X, Y, and Z. We have all these macro data points of why Southern Louisiana is a great place to invest. I'm just making this up as I go. Nextly, our strategy. We're doing value-add, but we found of the 200 units, 97 of them, if we just do this 1 or 2 things on each unit, we can justify a 20% premium in rents. As rents catch up, we believe this will be Fully occupied in 6 to 8 months, which furthermore gives us a better cap rate. We have a team with 30+ years of experience that have done deals just like this in southern Louisiana. I mean, this is the best team in the country for this small little niche market we're in. Furthermore, we have a fair structure at, you know, 80% and an 80/20 split. Did you notice the slight tweaks of pitching that deal? It went from a me too strategy to maybe there's more of a compelling edge there. Now that's not a perfect pitch. That was just Off the cuff in 20 seconds. But you can tell there's a little bit more of a compelling pitch there. So if I go back to my big whiteboard here, a lot of people when they pitch, they just assume everyone understands the real estate market or they understand the crypto market or the private equity market. They don't address the macro. Number 2, there's no distinct edge. Why you versus other people? And then finally, I want to share a story about this. Be the pretty girl at the dance. Back to the example. The guy called me and maybe he's just, we're friends, so he was telling me the truth, but I've seen some people pitch like this, myself included. We go up and go, hey, you know, I'm raising a fund. We've, you know, we're floating this around to a few people and, you know, can you help us round us out to, you know, we need $3 more million by the end of the month to kind of get us figured out. And we've, you know, we've kind of struggled raising so far and we're looking for some supporters and some help to get some money in to really, because we think it's a great deal and it's going to do really well. So let me tell you a little story about this pretty girl at the dance. So Fund Launch Partners started raising last year in 2024. Now, if you were raising in 2024, it was— we actually found some data on this— it was the hardest capital raising period in the last 30 years by the data. Isn't that crazy? I was at Greenwich Economic Forum with all these bigwigs from Wall Street. We met a guy there. He on average raises anywhere from $500 million to about $2 billion a year. As a broker dealer and as a placement agent, okay? He told us 2024 was the was harder than '08, harder than '09, hard about the same as 2001. Okay? That's how tough 2024 was. Okay? For capital raising. Same thing was true with Fun Launch Partners. Fun Launch Partners we launched. We had raised ah man let's let's call it I don't know three to four million something like that. Don't quote me on that but it's somewhere in that ballpark. Okay, so we're looking at this, we're like, crap, this is not good. So we bring in a few partners to kind of help us raise. We're trying to raise $30 to $50 million for this fund, and we're like not even close. And we're going, he's like, all right, we're gonna change our capital structure. So we started bringing different partners. We thought we had a good edge. We're going back and forth. Partner we bring in, I'm gonna call him Q, partner Q, okay? Partner Q worked at a firm. His last fund that he had just raised, they were trying to raise $750 million. They ended up oversubscribing this fund. They raised $1.2 billion and they did it in about 45 days, which is phenomenal, right? I mean, that's crazy. Oversubscribed. So how did he do this? And he taught us this strategy of how to be the pretty girl at the dance. So what he told us was no one wants to invest in a fund or thing that no one else likes, right? So when you pitch and you're like, hey, can you fill us out? We're trying to raise here. We're trying to, you know, can you please help us? It gives you very, very low status. What you want to do is convey that everyone's asking you out. You're the pretty girl. Everyone's wanting to put money in. Everyone's wanting to date you. So what he did is taught us this little lesson. He said, what I'm going to have you guys do is use LOIs. Okay? He goes, we're raising $30 million, right? We say, yep, we're raising $30 million. He goes, all right, I want you guys to start collecting LOIs. So you would talk to an investor, ask them at the end, hey, we're looking for a non-binding, The one-page document, non-binding LOI that just expresses you're interested. How much are you interested in allocating to the fund? And then we can follow up data room and stuff. I just want to see if you're serious or not. Additionally, it gives you something to follow up on instead of just asking, hey, how'd the deck look? It's like, hey, have you reviewed the LOI? It's something to follow up on with these investors. So what we started to do was collect LOIs from investors. And what would happen is an investor would say, hey, yeah, I'm, you know what, I'm interested in $1 million. Or I'm interested in $500,000. Okay? And his point was this. You want to— and the language you'll use around these LOIs, the reason you're collecting them is, hey, we're doing a closing on, you know, March 28th. M28th, we're doing a big closing. We believe we're going to be oversubscribed on our $30 million. So what we're doing is we're collecting LOIs to see how much we could allocate towards you. So they send a million-dollar request. You could say, hey, yes, we actually are going to reserve a million-dollar spot for you for that $30 million. But he goes, better yet, what you need to do, you don't accept their money. You say, hey, you know, we had you at a million. We can only accept $800,000 because we got to leave room. We have other people coming in. We can— we're trying— we're capping this thing at $30 million. And you were going to do $500K. Great. But we can only take $410,000. From you, he goes. Furthermore, what this does now? Don't lie to anybody. Really, you know, make sure and make sure you have enough interest stuff. But what it does is it trains your potential investors like oh shoot, they're turning away my money, right? They are saying you know what? We don't even need your extra two hundred k. That's how much in that's we're the pretty girl at the dance. Everyone's putting money in. I I can only allocate you eight hundred grand. Sorry. And they go, wow, you really put up a million. Well, let me see what I can do. And then all of a sudden, hopefully you have your close date and you oversubscribed. You know, if we're closing at $30 million, we want to be oversubscribed to maybe $35 million, right? And we tell everybody we're oversubscribed because he goes, what happens is this. You got to play the long game. You play the long-term game. What you're doing here is you say, when fund 2 comes out, Guess what? All these investors are trained to know, oh shoot, like, you know, Pennington, when he launches a fund, he's serious. They actually fill up. They oversubscribe their funds. And so when Fund 2 comes out, we go, hey, we're looking for LOIs for Fund 2, just like last time. Remember, it oversubscribed. Like, how much do you want to allocate towards you? People get their LOIs in fast and start moving quickly because you've trained them to view you as the pretty girl at the dance with a high— Status allocation. So if I come to Fund Launch Partners, Q helped us. We now went from about $3 to $4 million. We raised roughly $20 million in about 2 and a half months. And we're looking to close out at $30 million here in the next month because of that one strategy I just taught you to be the pretty girl in the room. So if I go back to number 2, the biggest problem I see with the pitch, they don't address the macro. There's no distinct edge and they're not the pretty girl at the dance. Now, number 3, the 3rd biggest mistake I see is people jump to legal too early. So I'll jump to my iPad here. When we talk about the Fund Launch Formula, we more discovered this after interviewing hundreds of fund managers. We found there was a distinct process that people use to launch funds. Most people think when they want to launch a fund, step 1, I'm going to go hire a lawyer. That's what, you know, if you go read a blog post, a blog post would tell you go spend $50 grand And just hire a lawyer, and the lawyer will help you figure out the rest of this. And I was going, it's one of the biggest mistakes I see people do. Not because lawyers are bad. I think it's a fine way to do it, but because there's two common outcomes. Number one, you pay the lawyer, and then they start asking you questions like, "Hey, do you want to do a Reg D 506 or 506, or a 3 or a 3 or 3 fund?" You go, "Well." I don't really know what that means. They go, oh, no worries. We'll charge you $800 an hour and we will teach you what these mean. And then, okay, are you guys going to be an IA, an RIA, or ERA? Where do you want to fall? Oh, you don't know that? Oh, let's— I'm going to bill you again $800 an hour to learn this. You know, do we want to set up a Reg A or Reg CF? You know, what type of fund are you doing? What kind of waterfall are you going to have? What kind of carried interest or pref or catch-up or management fee are you going to have? Are you going to do international feeder fund structures? Are you going to do Cayman Islands? Islander, Luxembourg funds, what do you want to do? And you go, I don't know. And they go, great, yeah, we'd love to teach you. And they talk slow and they bill you $800,000, you know, $800 an hour. I had one buddy, no joke, he spent over $500,000 on his very first fund because of what I just told you. He didn't know what he didn't know. Lawyers explained stuff to him. Furthermore, a lot of firms— back to the problem number one— was people don't iterate. He came through and he went kind of opposite. He started to raise capital and he was working on the frame and the deal and stuff, and the investors had a lot of questions and suggestions to change his fund. He said those are good suggestions. So every time he said, you know what, yeah, we should re— we should change our management fee or our pref or a little bit on our deal structure, how we're going to do our deals. And what happened was the lawyers say, yeah, we'll happily change that for you in the docs. He spent literally over half a million dollars on his first fund legal When he could have spent $50,000 or maybe even less. But you know, when I launch a fund, my last fund, we go the opposite way. We work on the deal first. We then go to frame. We then go to capital. We iterate with investors. We build a fund that investors are dying to have. And then and only then we go to legal. My last fund is, you know, this same lawyer would charge $30,000, $40,000, $50,000. It was $10,000 to $15,000 for my fund. I walked in, I said, hey, I want XYZ. With a drink and a side of fries. Lawyers bill by the hour, right? I know exactly what I want. I save my lawyers an extreme amount of time. They go, wow, that's, yeah, that's great. We'll put that together. And I say, great, put it together for me. Done. This is kind of the crux of what we do. Anybody can build legal docs. Anybody can go out and hire a lawyer to build, buy a platter off the shelf, a casing or a housing of a fund. It's not, it's pretty common. Like anybody can do that. The big crux can't, what's on the platter? Is it a stinky fish or is it a beautiful Gordon Ramsay meal? What is on the platter? We want to build funds investors want. If you follow this process, you will build a fund that investors want. So what we do with Fund Launch, so we do help people in Black Card day in and day out. If you're interested in joining Black Card, you can come book a call at fundlaunch.com/demo and learn more about how we actually have an incubator with over 1,000 fund managers that we're actively looking at helping launch their funds. Hopefully that was useful. We'll see you next episode. Bye-bye.