SSTI Conference Brief: Building your organization’s investment team

One of the hottest topics at SSTI’s 2017 Annual Conference centered on helping communities build the investment system necessary for local entrepreneurs and startups to thrive. Led by several panels of experts, the conversations led to sharing many great ideas, thoughtful solutions, and tough realities. This week we continue our series of stories on how TBED organizations can help communities ensure a vibrant investment system. This second installment focuses on effective strategies and ideas for building your organization’s investment team. In our first installment, we discussed the necessity of creating a strong deal flow to stimulate the growth and success of the system. In the next installment of this series, SSTI will cover topics such as the hard necessity of saying no and developing a fund that matches your region.

“To have an effective fund, you can’t just hire someone that thinks it would be exiting to manage a fund. You need to an individual with certain skills and, ideally, experience.” – Conference speaker

After the importance of strong deal flow, the SSTI panel of experts agreed that the second most vital element of a successful fund is building the right investment team. However, they highlighted the difficulty of building that team within the constraints of a public or nonprofit entity. Unlike private investment firms that can offer high salaries, large bonuses and a guaranteed share of carried interest (commonly referred as “carries”: portion of the profits of successful investments exits), public and nonprofit tech-based economic development organizations are restrained statutorily, by regulation, and ethically in the types and amounts of compensation packages that they can offer their employees.

While even the most successful organizations struggle with this issue, the panel shared with attendees their strategies for building a successful team as well as provided some specific recommendations regarding what to look for in a fund manager and senior investment staff.

The two most common strategies for building an investment team focus on:

• Building around a star player(s) – a strategy focused on the experience of the individual(s); or,
• Cultivating a team of star player(s) – a strategy focused on the traits of the individuals.

In the former, building around a star player(s), the team focuses on the recruitment of an experienced fund manager or investment team. In some regions they may be local, but for many areas this means extending the search beyond the primary region – maybe even nationally.  One recommendation is to target someone that has family roots or other relational ties to the region (alma mater, etc.) or has already succeeded in the private sector, and wants to give back civically. In Ohio, a university-led fund was able to use affinity for home to attract an individual that grew up in Ohio to lead their fund.

Since the star player(s) will take a larger compensation package to land, a key strategy is to have that person or people serve both as the fund manager(s) as well as mentor(s) for a less-experienced team. The remaining members of the investment team may be young professionals or mid-career individuals with specific experience (e.g., legal, key sector expertise, due diligence strengths, accounting). The panel’s investment experts highlighted that internships with local universities are a great way to identify potential young talent to replace team members as they move on to their next job – likely in the private sector.

For other regions, our panel of experts highlighted a strategy that is more long-term focused by cultivating a talented professional. In this strategy, the goal is to identify individuals that have long-term potential to succeed in their specific roles. While this strategy focuses less on previous experience, it is looking more at the specific traits or characteristics that make a successful fund manager. This strategy was deployed in New York State by identifying an individual with a law background that had strong interest in making the shift to startup investing. It is especially effective if you have an active board or partner organizations with the experience necessary to help serve as a mentor for the individual or team.

While there may be differences in these two strategies, the panels highlighted the vital role that mentorship plays for the development of a successful fund manager. In one session, a fund manager shared the impact that his mentors had on his career from understanding the nuances of successful due diligence to the importance of building connections with others investors. It can be achieved multiple ways including:

• In the aforementioned story about New York State, this was achieved through the board (comprised of experience financial professionals) helping mentor the team; and,
• In Nebraska, the organization recruited the star player and he served as a mentor for young professionals.

To help your organization identity a potential fund manager or investment team, the panel of experts agreed on several specific elements that make an effective candidate, including:

• Hiring professionals that are experienced or educated in one or more of several fields (e.g., law, finance, banking, angel investment). In building the team, several speakers recommended that each member brings a specific strength(s) to complement the other team members’ strengths.
• In rural regions, it is especially important for the fund manager to be an effective bridge builder/networker. One fund manager in rural Virginia spends two to four days a month on the road meeting with other investment professionals in nearby urban cores.
• Due to the long hours and relatively low pay, the team members must be driven by a community/civic pride. The panelists highlighted the importance of finding team members that are driven by giving back to their state/region/community and making it a better place to live.
• Finally, all team members should have an entrepreneurial spirit because they are building connections, thinking creatively to address solutions, and building their organization’s brand as well as being able to understand/talk with potential client companies.