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I recently had breakfast with one of my advisory board members, Charley Ellis. Charley has seen it all: Not only has he built one of the iconic firms of our industry – Greenwich Associates – he has also studied and advised some of the world’s most successful financial firms. The hour per month with Charley is precious. It gives me time to reflect with him about the hundreds of small and large issues that face an asset management entrepreneur like myself.
It is often tempting to jump into what many consider the critical questions: how to raise money; which investment strategy to employ; when to hire a trader or a CFO; and so on. But while important, these issues are secondary in nature. Instead, the question I wanted to discuss with Charley regarded the probability of success.
There are hundreds of start-up hedge funds and money management firms launching each year. Only a handful of them make it. An even smaller percentage grow to be scalable businesses. The line separating the successful from the herd is never obvious. Early funding or an established track record does not guarantee success. At this particular breakfast I wanted to brainstorm with Charley on everything I could do to increase my probability of success as an entrepreneur.
Being a storyteller, he shared a metaphor. Around Christmas time in Manhattan, there are thousands of 10-foot and taller trees decorating streets and buildings. Where do they come from? How do they grow? It turns out that, while tall and luxurious, most of these trees are only two or three years old.
Charley told me that farmers graft the shoot of a new tree on top of the stump of an old tree with sprawling roots. The new tree pulls from the nutrients of a rich ecosystem that has fed a much bigger and stronger tree. That type of nourishment enables the new tree to reach the height and strength of a ten-year-old tree in one third of the time. Such a tree is also less likely to die in the process.
For an emerging manager it is the network effect of the partners, providers, advisers, and strategic investors that allows such growth. If there is one important lesson I learned in the past year of getting an emerging manager off the ground, it is the lesson that Charley described during breakfast: the importance of proactively seeking where to plant my tree.
But who are the roots of an emerging manager?
The service providers. The right prime brokers, lawyers, accountants, and compliance consultants are critical. Before I started, I knew the importance of the right providers – in theory. I quickly learned the value in practice. Selecting the right firms is essential because their reputation becomes associated with your reputation. What is even more important is finding the right like-minded people within these firms who believe in the vision of your business and are willing to personally invest in your success. Do not look at immediate cost. Cutting corners costs far more in the long run and runs the risk of blowing up your business.
The advisory board. Tech start-ups often have advisory boards – formal and informal – but hedge funds rarely do. That’s a mistake. Taking the time to establish an active advisory board that has the wisdom, expertise, and relationships to propel the firm forward increases the chances for success. The ability to draw upon the experience, network, and insight of some of the top industry leaders – like Charley Ellis; Mary Cahill, chief investment officer of Emory University; and John Myers, former CEO of GE Asset Management; among others – has been priceless.
Sharing similar values and views of the industry with your advisory board makes the relationship natural and fulfilling for all. For example, research on disruption in asset management – which I explored in a co-authored article for Institutional Investor (April 2016) – helped us attract a like-minded advisory board.
Strategic investors. Not all capital is created equal, and the fastest capital is not always the best capital. It is worthwhile to find the right early strategic investors that can also be partners in building the business.
The relationship must be symbiotic: Investors will demand not only returns but investment thought partnership from a manager, while the manager receives support from the right strategic investors, ranging from co-designing elements of reporting and operational processes to attracting other investors.
Be selective about where capital comes from – are these people who tend to be long-term committed investors; do you have similar cultures; are they asking for provisions that may hurt your business in the future? Some seeders ask for a revenue share so large that it may hinder your ability to attract talent or invest in infrastructure as you grow.
For new managers the eagerness to launch can be overwhelming. Yet Charley’s advice is sound: To be a 10-foot tree in three years, it’s worth the investment of time and scarce resources to build out the extensive root system first.
