Through the Grind - Fundraising Lessons from Fund II

Fund announcements are dangerous things. No-one likes an overdone lap of honor, and we know far too many people who have gone (and are still going through) their own tough fundraises to pretend that this was easy. This was hard, but let’s be honest, this was first-world-problems hard. Nobody was asking us to flee from flooding, or rising sea levels, but it was work-level challenging, at times extremely so. There has been a lot of commentary about how difficult the fundraising market is, but I haven’t seen much that reflects on how people have managed to get through it. I thought it might be additive to set out some of the principles we used, in the hope that it helps some managers and founders in the future. Of course, this is just what worked for us, and many senior Investor Relations professionals may think I sound insane. That’s just fine.

There are no rules

Our final close was our 17th for Fund II. Our first close was for 14% of the Fund. At the final close we have 14 deals complete, of a 20 company portfolio. The main one is the number of closes - once LPs are ready and willing, get them in. Nobody wants an unfinished to-do hanging over them, and time kills deals. The first close / final close structure is increasingly unhelpful and unrealistic, and so is the idea that the first close has to be 40% of the fund. If your LPs are in and are willing, get them in.

Close early, make it real

The less blind the blind pool is, the easier it is for the marginal LP. Early closes to establish early positions has been indispensable for our three raises. The main thing is you have to be respectful of your early investors. Make sure later LPs that have the benefit of knowing the shape of the portfolio are actually going through their processes, and not hanging around the hoop unnecessarily. That’s what the late penalties are for! It also helps (obviously) if you can nail an early markup, but I must say it helps less than I thought it would. Our TVPI is miles into the top decile for the 2023 vintage (thanks HOPE, Cala, Flocean) and it wasn’t a huge talking point. 

Find and then look after your most supportive LPs

We were so lucky to have Xylem as our anchor, joined by WovenEarth to be our two most significant LPs in the Fund. Led insanely well by the inimitable Sivan Zamir and Jane Woodward, XIL and WovenEarth have been stunningly good partners. Unfortunately I have no advice on how to find them. It was just a function of time in the market, surface area of our network and dumb luck that I ended up in contact with these diamonds. Hopefully they’ll agree that they felt looked after and engaged as we moved through this process - gratitude is most effectively showed through showing up. 

Related to the surface area of the network, loads of LPs is a good thing. We’re at 144 and counting, and I think it’s a seriously important part of our impact. These are all entities and individuals with networks and means, and most of them started their journey into water with us. They are now at least conversant in what terrestrial water means, what is at stake, the precariousness of the system in the context of global heating - and that means they carry that knowledge into their direct investing, their philanthropy, their personal decisions and product choices, their advocacy. They also have their own networks, and can be recommendation engines if you do a good job - but first time LPs with you are usually comfortable with their own decision, and don’t want to put social capital to work through referrals. They would prefer to see how you do first, in my limited experience. Having loads of LPs just means you have to have excellent communications, because you have to have essentially zero incoming questions about what you’re up to. But that is NOT a tall order, it’s just discipline (more below on comms). 

Spaghetti, meet Wall

I have seen way too many Gantt charts for raises, ideal timelines, pre-raise windows, conversion periods, mechanisms for FOMO generation, the power of hard timelines and all this gumpf (technical term). In the words of Bill Clerico, one of my favorite GPs, “venture is not the hotness, and climate tech is really not the hotness”. When the market is as bad as this, the reality is that you build the best argument you can, you pull together the best first close you can, and then you embark on a relentless trudge into the face of a biting wind to build a coalition of the willing until it’s done. The ideal structure of the raise is well and truly out of the window. Go wide, maximise your surface area, speak to as many people as you can, because you just don’t know who will end up providing those crucial warm referrals. 

Generosity in the trenches

And warm referrals are crucial, and we would not be here without the generosity and supportiveness not only of our LPs, but especially of our fellow GPs. It’s a long list, but a huge shout out especially to Sonam Velani, Bill Clerico, Evi Steyer, Kirby Winfield, Joe Wilson, Brandon Welch and many others who went to bat for us. The use of your professional capital in support of another manager was a profound act of generosity, and a favor I look forward to returning AND paying forward. 

The Passthrough Entity’s Passthrough Entity

Use participation in round closes as an excuse to hold LP closes. There are not many levers you have as a GP, but you do have the QSBS lever. Timing deal participation with liquidity from closings is a nervy business, but if you can do it, not only are you growing the fund, you’re derisking the marginal LP check. This does take judgment, and building flexibility into round participation if you can helps immensely - tranching investments to give you breathing space on liquidity is a good idea, and our founders have been very accommodating. I would say it’s something you should only do with small checks, and don’t misjudge it. You have to have very high confidence that the capital will be in place within weeks at most. I would very much advise against misjudging it, especially in this market. You’ll also benefit from the capital efficiency of getting cash to work immediately with no drag to IRR and TVPI.

A high quality data room 

The reaction when someone gets into your data room should be “Woah….ok...”. The architecture of your argument should be clear, and radically in-depth. There is no such thing as too deep. Full PPM, ILPA DDQ, full DD Memos, portfolio construction models, endless Operational Due Diligence question responses. We had a lot of thanks for our use of video (even with what I have going on face-wise) - both in terms of pitches as well as portfolio updates, individual company deep dives etc. The information is useful for the LP of course, but it is proof positive that you do the work without shortcuts. It’s about as valuable a piece of signaling about your work ethic as there is.

Don’t use your deck

Your deck is a pre-read (and usually not pre-read!), and to illustrate points as and when needed - though make sure the illustration slides are not desk-based slides as the word density is too much to ever have on screen. This applies doubly so for founders. Moving through a deck ensures you want to talk about what you want to talk about - but it’s too easy for LPs to be both passive AND bored. The thread of the conversation should be dictated by them, and that means a quick intro to give them the arc of what you’re doing and why, and then go wherever they want to go. 

Deal with long decision cycles

There is no urgency in this market. None. Just be prepared for dogmatic following up, and the proactive provision of additional information as and when it comes. Our key tool for this is our monthly update - reasonably in-depth, hopefully a little bit entertaining, informative, but crucially it turns up in LPs inboxes metronomically. This allows LPs to get comfortable in their own time, while also watching you work. And it’s fully scalable - one goes to all, so while it may feel like a lot of effort (which it isn’t), across a wide base of prospective LPs it’s efficient. 

In terms of levers, you have deal closes, you have QSBS access, and you have a desire for the LP to have this off their plate. Otherwise you have responsiveness and relentlessness. Be prepared for the deal cycle to be long. Don’t kid yourself on LPs who have self-selected out, and just haven’t told you. If the silence is deafening (or even loud), move on. A falsely-large pipeline gives comfort, and if you should be scared, you’re just dampening your incentive structure to haul ass to strengthen it again. This is probably the discipline I find hardest. Cut, move on (but keep them informed). 

Communication Cubed

Your communication is critical. It should be regular and constructive, but it also has to be quick. I think most GPs know that responsiveness is a fairly reliable indicator of Founder quality - it shows pace, being on it, innate quick cycle times. It’s the same when LPs ask for anything - it should always be treated as a five alarm fire. And watch out for using AI - it’s good, great even. But it’s noticeable. And cutting corners on something as important as providing an accurate representation of you and your firm in the context of a capital allocation decision is not a signal you want to send. Your convenience is not important - LPs receiving accurate and genuine, transparent information is. The right way is the hard way. 

If it’s your second fund, then your track record of communication really helps. Put in the time to get to know LPs, give them avenues to understand you, your firm, your colleagues, your choices. Ask them their advice. They won’t all come back, but put in the work to minimise the risk of hesitancy at the next funding decision they have to make. They’re your customers - act accordingly. 

Know your edge and tell a story you believe in

All raises are so much easier when you’re raising with a real edge. We don’t have to push the edges of our argument, because it’s simple, true, and enormous. Water is self-evidently important, acyclical, enormous, and no-one has noticed. So, we have had the opportunity to become the firm to beat at the Seed stage in a $1.6 trillion market that is only going to escalate in importance in the coming decades. 

But probably the most important thing is that telling the story doesn’t feel like work, because it’s one that I completely believe in. This is a Fund that LPs should have in their portfolio. There is no other way of effectively harnessing and maximizing returns from the water sector, while also helping to affect the change we need in the management of terrestrial water. The companies we back need to exist, because if they don’t we’re screwed - we’re literally talking about the core of climate resilience. Why wouldn’t I want to tell that story?

Worst case, if someone says no, I’ve spent 30 minutes and bunches of emails helping them understand more about the water crisis than they would have understood otherwise. It’s all upside. That gives me energy, and that means I can be relentless for longer than I would be able to if I didn’t believe in our message as much, or was out for AUM harvesting, or was trend-following. Finding your lane and loving your story have self-reinforcing benefits. 

Finally, in praise of the early closers

Our thanks again to all our LPs who went through this process, and stood by us through the raise. Thanks in particular to Xylem and WovenEarth, our largest investors, as well as those who came in early in the raise cycle (you know who you are) who provided a platform and reference that gave confidence to our later LPs. You were the brave ones, the catalysts that brought this vehicle to life. You have helped create an engine that is already saving, treating, recycling, reusing, purifying millions of gallons of water, that is transforming key elements of utility operations, that is saving consumers and utilities millions of dollars and thousands of tons of GHG emissions. It is a very particular act of generosity and belief to choose to come in early to a Fund to help it get in business - and to all you LPs out there, know that there is real power (and at worst karmic benefit) in not waiting. And I’m super glad you all got 100% QSBS exposure…

Pinch, meet Salt

This is not universal advice. It may not even be good advice. My n=2 (approaching 3 with the Growth Fund, and yes, raising two funds at the same time in an epochally unfavorable environment is not necessarily something I would recommend). So what the hell do I know? I only want to be clear about how I think about this. As time goes on, our approach will evolve. But this is what worked for us, now. I hope it’s useful to have a look under the hood. Thank you again, from all of us on the Burnt Island.