Investors Care About Your Internal Systems

If a sponsor wants to secure programmatic funding, it needs to invest in the technology to attract investors.

Then it needs to tell potential investors about those investments.

“I think people need to talk about how they’re using technology to deal with everything from investor relations to their accounting systems to rent collection to customer interaction,” says Peter Houghton, managing director of Dekel Capital. “If you don’t show that you have technology expertise, you’re lagging in the space.”

But it’s important not to over-rely on technology. Sponsors need to be able to tell stories behind the numbers and not just hand over their spreadsheets to potential investors. “That can be something that differentiates sponsors as well,” Houghton says.

A good sponsor needs to go beyond a mere sales pitch and understand what the investor is trying to accomplish. “You really have to go through and qualify the investor pool,” Houghton says.

Sponsors need to understand who their investor is. And who it isn’t. If your strategy is biotech incubator space, you need to identify who wants to invest in that realm. “It all starts with investor strategy and qualifying the right pool of investors,” Houghton says. “If it’s not right today, track it for the future. Frequently you have to be super patient.”

During that time, it’s essential to build a relationship. “You can spend years building the relationship,” Houghton says. “So you have to choose those places where you’re investing your time because it can pay off in a big way. You can build a whole company around one investor, not that you want to. But each relationship that you’re building is so important.”

Sponsors need to divide their annual production into three or four pools. Then they should find an investor for each of those pools. “If you’re trying to do a half a billion dollars a year, and you’ve got four pools of $125 million, those kinds of volumes are more institutional in nature,” Houghton says.

Often sponsors are looking for a programmatic relationship because they’ve had a difficult time with high-net-worth investors. “Frequently, they [high-net-worth investors] are investing their own money,” Houghton says. “If you’re not going through an investment advisor, you’re talking to the guy who made the money, and they’re very careful. They can be over-conservative. In a lot of instances, they can get you right to the finish line and then blow you out.”

For a sponsor who wants to get away from investors who could depart at the last minute, programmatic money makes a lot of sense. But while that situation is better, there can still occasionally be pitfalls. Often they get assigned to less experienced staffers.

“If you have someone inexperienced within your product type, that’s going to be a more challenging relationship,” Houghton says. “But the places where I see true red flags getting waived is at the high-net-worth level.”