Bridger Pennington explains why emerging fund managers fail: trying to do everything alone instead of building a team, prioritizing their own economics over investors', and setting unrealistic timelines. He draws on coaching experience with managers who have raised substantial capital to offer practical advice on structure, incentives, and fundraising strategy.
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Hey guys, in this video we're gonna talk about the 3 main reasons why my clients don't succeed. Over the past 18 months at IFS, you know, Bridger and myself have been coaching a lot of emerging fund managers who have raised over $2.1 billion. But, you know, a lot of times when we get started coaching these clients, you know, people always ask, why don't people succeed at starting a fund? And today we're gonna talk about those 3 main reasons. All right, let's get into it. So first and foremost, the number one reason why people don't succeed at this business, starting funds, is because they try and do it by themselves. The only fund that you could potentially do by yourself and just outsource a lot of other, you know, third-party providers is maybe a hedge fund where you're trading a lot. You can keep that really lean, but still, like, if you really want to reach scalability with a fund, you need a good team. Um, we talk about it a lot in the course, but you need capital raisers, you need a fund manager, and you need an expert investor. And now if you don't have a lot of experience yourself, we talk about this in other videos, but you know, leverage other people's expertise. That's when you need to start thinking about, well, maybe I do need a board of advisors or I need an investment committee that can help me throughout this. Regardless, if you think you can tackle it on and you don't want to pay anybody, then you know, you're probably not going to— it's probably not going to work out. You do have 2 main levers at your disposal, cash, equity. If you have deep pockets, great. You know, hire on all these, you know, supporting partners and to help you get this thing off the ground. If if you don't want to do that, you got to be willing to be more generous in the early stages and give those give those partners equity and incentivize them to succeed. Second reason: people are more concerned about their own bottom line than their investors' bottom line. So basically, you're more concerned about making money than you are about making your investors' money. When you're starting a fund, you can play with the terms a lot, and there's kind of this break-even point that you need to think about. So you got to think about your target AUM, how much money you're going to make. from fees and carried interest? And what's that going to pay you? Because what happens most of the time is people come in, they want to start a fund, they haven't really thought about the numbers. They're like, yeah, I want to raise $5 or $10 million, relatively small fund, that's great. But then they start running the numbers and at 8% pref, and if you waive the management fee and an 80/20 split, you're like, wait a second, I'm not going to make that much money. So then they start, well, maybe we do a 50/50 split. And you start changing all these terms to make it make sense for you. Just because you weren't able to raise a ton of money. Big no-no. If you're able to perform well and you have a good investment strategy, the money will come. I recently just filmed a video on Cathie Wood. Her AUM spiked from $5 billion to $50 billion because in one year she had 152% return. Okay? The same goes for funds. So don't, don't skimp your investors. You know, be very generous in the early stages and you'll be all right. The third reason is, you know, setting proper expectations. Starting a fund is just like starting a business. Okay? You need to approach it the exact same way. You need to start by selling. You need to plan, you know, have a business plan. You need to, you know, estimate your income and your expenses. Um, just from an operational overview, you need to be prudent about these things and approach it just as if you were starting some tech company and you know what that's going to look like and what your runway is and, uh, things of that nature. And in reality, the timeline of things, This is a very lucrative game. People can make astronomical amounts of money running funds. However, it does not come immediately. It is not a get-rich-quick game. Um, starting a fund takes time, and obviously the more money that you have under management, then the more it makes sense, the more your investors make, and the more you make. Like, KPI is AUM for you. Just bringing on more money because that allows, you know, the portion of your carry and your, and if you're any fees that you're charging, that improves your paycheck. So, and then just the timeline, right? The 2 biggest bottlenecks in starting funds is usually your legal, A, which can take 60 to 90 days. So some people come in and they're like, hey, I want to start a fund. And I'm like, when do you want to get going? 30 days from now. Not going to happen. Um, unless you already have your legal filed, like that's, You know, 60 to 90 days is probably appropriate. And then there's obviously setting up all your preferred providers, any sort of brokerages you're using, asset managers, legal compliance, all these preferred partners, which we talked about, you know, you need to think through all of that. And then the second biggest bottleneck is just your capital raising period. Some people can go, you know, raise— one of our clients raised $700 million in, you know, a matter of 8 months, and other people it takes them 8 months to raise $2 million. So, you know, that capital raising period you do need to be strategic about and think about, you know, what you're going to be able to achieve, you know, taking an inventory of your network and, you know, how you're going to grow that and how you're going to get to where you want. But as Bridger's dad loves to say, don't ask, you know, people overestimate what they can do in a year. And they underestimate what they can do in a lifetime. This is not— if you want to, you know, be running a massive fund in 1 year, it's likely, you know, not going to happen. You can if you have the right team, but these things take time. It certainly takes time to put together. So those are the 3 main reasons why my students fail. Be sure to hit that like and subscribe button if you want more content like this. Thanks guys. Have a good one.
