I tried to raise $ for a fund for XO once. I failed.
The primary objection was:
- What percent of your (Andrew)'s time will you spend on the fund vs XO's existing portfolio.
- Do I get
mailbox money- i.e. a check every month?
- How do I get my money out?
- How long will the fund last?
They're nice objections. Valid. Nobody likes 10+ year investment horizons. It's also hard with a hold co to know how you'd exit the investment if we never plan on selling some companies.
One solution I've been kicking around is the concept of a Flip Fund ®. A Flip Fund works like this:
- We raise $1M (as an example)
- We buy one company
- We aim to double it, and sell it in 12 to 24 months
This is more like a "come along for the ride with us" type of pitch. We've done 9 acquisitions so far. All of them but 2 have more than doubled in revenue after we bought them. The two that didn't were sold relatively quickly after we purchased them. We made our money back.
This is a nice pitch! We've done this a bunch. We're going to put up 10% to 20% of the capital, take 20% carry (after the initial investment is returned) with no fees and exit in 12-24 months. Everyone can understand it. This is after all what we've been doing for ourselves. The investors would be treated no different than if we raised $ from the SBA. We'd still have personal dollars on the line. The incentives would be aligned. Even though I'm not full time on XO (yet!) I am putting much of my personal cash here.
If after 24 months, we did not reach our target, or we want to sell prior to 12 months, we'd behave no different than if we had purchased it 100% ourselves. We'd sell it if for example we made a "bad" acquisition or if something adverse happened. Whether there was a small profit or loss, we'd return pro-rata 100% of the $ invested and close the LLC. We could then do another LLC and start the process all over again.
There would be no distributions in the 12-24 months. 100% would be re-invested into the business.
This is appealing mostly because of the duration of the investment. A 2 year commitment is radically different than venture which typically requires a 10+ year commitment.
We're in diligence with two companies now. One is large for us. It will eat up most of our cash and we will either:
- raise $
Not sure which we will chose yet. We will wait by default but that might ultimately slow us down. Raising discretionary capital is hard. Having investors might change some things for us too. It's of course quite nice not to have any but there may just not be an efficient way to scale past where we are today without raising money.
Outside of the flip fund we have also thought about raising money directly in the entity that owns all of our portfolio companies. That's also hard and we just could not get a decent valuation last time we tried this so it also didn't make sense. I know people have figured out how to raise in this type of structure but man has it been difficult.