Money Myths and the Biggest Mistakes I’ve Made Raising Capital

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In the last article on Raising Capital, I covered: the Types of Money, the Three Main Investment Asset Classes, and I talked briefly about Synergy versus Diversification.

The main point of that article is that if you understand the different types of money, as well as the pros and cons of each asset class, hopefully you can create some type of synergy, like the most successful investors do.

Many folks think they’re diversified by investing in something like a mutual fund, but the super successful people tend to create a synergy between more than one asset class, much like Buffett does with paper assets and Berkshire Hathaway, or like Trump does with his business and his real estate holdings.

So, once you’ve developed an understanding for these concepts and you’ve found an investment vehicle that you want to present to investors, how do you go about getting started?

Let’s assume you’ve met with your securities attorney, you have all of your documents in order, including your business plan and use of proceeds. Now, it’s time to go out and raise money.

So, What Do You Tell People You Do For a Living?

When it comes to raising capital, you really need to know your audience. Although I first started raising money tied to one property and later did fundraising for commercial deals, it wasn’t until I started raising money for notes that I truly understood what this meant.

For example, if I went to a cocktail party and I told people that I raise money for delinquent, upside down, second mortgages, with no equity, and some of them were in bankruptcy, and then I asked, “Would you like to invest some money with me?” what do you really think they would say?

It may be a good idea to have a couple of descriptions ready in advance, depending on your audience.

Here’s a good example, even when I was raising money for real estate in a down market, when someone would ask what I did for a living, I would say something like, “I raise private money for living.”

If I had said I do real estate, and the media was saying that the real estate market is horrible, most people would think I’m nuts. But if I say, “I raise private money for a living” people usually ask, “Oh, really, what’s that? I’ve never heard of that before, how does that work?”

Now, I’m certainly not saying to make any false statements or attempt to trick anyone; that’s not what I’m about. I’m suggesting that you allow yourself an opportunity to really explain what you do in the right way, a way that doesn’t lead your audience to jump to conclusions or rely on preconceptions.

Today, if I’m in front of a sophisticated audience I might say, “I manage several funds that buy distressed mortgages from banks.” Although it’s more difficult raising capital for an intangible, such as notes, you still don’t want to appear needy, like you need the money to go grocery shopping this week, because your audience will sense that.

There’s a really good book on raising capital called, “Pitch Anything,” by Oren Klaff. The reason I like it so much is because it’s not a manipulative book.

Also, whenever we were starting to fund raise for a project or investment, we use to practice handling all the possible objections we could think of. We would even role-play frequently asked questions, and this really helped us to professionally address client’s concerns, which in-turn builds credibility.

Money Myths

I remember my son, Chris, asking me, “So dad, I guess you just need money to be a successful investor?” And I quickly told him, “No, of course not, you can utilize other people’s money to invest with. What you really need is discipline.”

Often, an investor is not only investing in the project; they’re investing in the management team. If you’re a disciplined, sophisticated person, who handles yourself well, that can build trust. Having a solid business plan and your use of proceeds built out may help to show investors that you will be disciplined with their capital. It can also show them what you’re value system is and how you will prioritize their investment.

Another thing that can set you apart, as well as help you build and maintain relationships with your investors, is to keep everyone in the loop.

Communication

When it comes to raising capital, I think communication is critical and by that I mean before, during, and after the fundraising stage.

I even go so far as to interview potential investors to see if they would be a good fit for my offering. One thing I strive never to do is give people the feeling that they should give their money to me to manage. I prefer to educate them on the investment and how the business model will work, and then it’s ultimately up to them to make their investment decisions. I’m a firm believer in teaching people how to fish as opposed to throwing them one.

If you’re communicating a purpose, especially one that’s bigger than yourself, it makes it easier to raise capital. For example, when I was raising money for a company that was investing in mobile home parks, their overall purpose was to use their returns to fund a private Christian academy. So, people were inclined to invest with them not only due to their business plan, but also because of their purpose.

Another important point to communicate to your investors is your track record, if you have one.

No Track Record

So, what do you do if you don’t have much of a track record?

The best thing in that situation is to introduce them to your professional team of advisors. When I first started raising money for mobile home parks, we had no experience, but we brought in a team of folks who did. We had a mobile home developer, a commercial realtor who specialized in mobile homes, a park manager, and even an attorney, who was very familiar with mobile home parks.

Related: The Importance of a Real Estate Track Sheet In the Face of Judgement

When I started a note fund for the first time, I referenced the track record of my note seller, and my company was modeled after his. It’s important to make investors feel comfortable, and maybe that’s by having a top shelf securities attorney or accounting firm, or maybe it’s just by utilizing audited financials. It really comes down to listening to the needs of the investors.

If you really think about why people have trouble raising money, it’s because of things like reputation, integrity, track record, or just having a small network of accredited investors.

Mistakes I’ve Made Raising Capital

One of the biggest mistakes I made starting out (and I’ve made them all) was pooling money the wrong way. Did you ever have the wrong attorney or accountant?

I first made the mistake of hiring a real estate attorney when I really needed a securities attorney. It only took me two years to clean up that mess, but everyone did get paid back in the fund and it ended up okay. Then, you also know you have the wrong accountant when they make statements to you like, “This note thing is pretty neat, I’m really learning a lot.” Hello… Yes, you’re learning a lot on my dime. Needless to say, neither one of those folks works for me today.

The second big mistake I made when I was getting started was that I was slow to expand my network to include the accredited investors. I didn’t really have any mentors that were raising capital from high net worth investors, and so I was looking for these individuals in an audience of unaccredited, who weren’t necessarily eligible for the fund, although they could still purchase notes.

So, even raising capital comes down to those three steps someone can take to succeed: getting educated in the space, finding a mentor, and networking.

Related: How to Rock at Finding a Mentor in Real Estate: The Definitive Guide

Another mistake I made while raising capital was advertising our private offering online. We didn’t realize we were even doing this, but a state regulator thought we were by some of the statements being made on our website.

Today and moving forward, this may not be as much of a concern, given some of the new changes with the Jobs Act. Specifically, section 506(C) of the Securities Act now allows for general solicitation, which in a nutshell means you can now advertise to the general public if you take the appropriate measures to make sure the investors are accredited.

This isn’t to be considered legal advice. If you are looking to set up a Private Placement Memorandum as a 506(C) filing, you should really consult with a Securities attorney.

I will be covering these last couple items in more detail when I cover some of “The Best Ways to Raise Capital,” as well as ongoing “Investor Relations” in my next article. Stay tuned.

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About Author

Dave Van Horn is President at PPR The Note Co. - an operating entity that manages several funds that buy/sell/hold residential mortgages, both performing and delinquent. Dave has been in the Real Estate business for 25 years, starting out as a Realtor and contractor and moving onto everything from fix and flips to Raising Private Money.

7 Comments

  1. Good article, great points.

    When I was a licensed Realtor® and was asked what I do I used to answer:

    “I help people borrow money with the federal Government without any repayment schedule at zero percent interest and if you do one thing, the loan need never be paid back”.

    I was a Realtor® and 1031 Exchange Specialist.

  2. Dave – Thanks for sharing your expertise on this subject. Raising capital is a skill I need to acquire to continue the growth of my business. Your thoughts on interviewing the potential investor to make sure they are a good fit for you resonated with me. From a psychology perspective, it seems like that would tend to make the investment opportunity the prize rather than the investor. Anyway, I understand you will be speaking at the NoteWorthy conference. Looking forward to it.

    Mike

    • Dave Van Horn

      Hi Mike,
      Thanks for the positive feedback!
      I agree that it could have an effect as to make the investment the prize, but it also allows me to determine if the investor is active or passive, how much time they want to commit, what level or risk tolerance they have, etc. If it’s a good fit, it’ll be a better partnership in the long run. It’ll be easier for them to understand the investment and easier for us to assist them in that understanding, which in turn allows us to dedicate more time to managing the funds to the best of our ability.
      I actually won’t be speaking at Note Worthy this year, but hopefully I’ll see you out there on the note trail. Coming up, I’ll be at an event in Dallas and Newport Beach.
      Best,
      Dave

  3. Hey David,

    Great post! I was wondering if you can touch on how you started out by doing Collateral Assignments with your notes? How to approach a private investor for this.

    Thanks!

    • Dave Van Horn

      Hi Arthur, thanks for reaching out!
      In the beginning, after we had our investors together and we went to the market to purchase notes, we still had yet to build out a market for the assets, or in other words, a network of note buyers to purchase the notes. So, we utilized Collateral Assignments as a way to recapitalize and continue buying notes.
      For example, we borrowed money backed by our re-performing loans, and by doing so, we had tax-free capital to go back to market. As a company just getting off the ground, it was a great strategy for us.
      I preferred collateral assignments with real estate investors, as they understood that if I were to default, there was just one extra step between them and their collateral. However, there was more equity in the market at that time.
      I hope this info helps! Let me know if you have any questions.
      Dave

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