Matt shares the three most important lessons he’s learned.
Last week in Portland OR, we held our first ever CapitalFlow Conference. The event was conceived and designed for the unique circumstances and challenges facing Small Balance Real Estate (SBRE) entrepreneurs, which I define as any entrepreneur running a real estate asset based enterprise which requires them to systematically raise capital from other people to fund their deals.
The purpose of the event was to gather people with common interests, realities, and issues to discuss those issues, share their experiences, and to provide practical take home value, with a focus on the capital raising side of the equation, and to have some fun along the way.
The event was an unqualified success and many attendees told us it was the best conference they have ever been to. I almost hate to make that statement, lest people think I am exaggerating, but it is absolutely true. And I believe the reason why people like our events so much is that they deliver relevant, real world content that people can immediately use and because they are authentic and real.
I kicked off the event with a talk called “The Small Balance Real Estate Vision” during which I shared not only our vision of SBRE but also some lessons I have learned along my journey and some stories from that journey.
The common thread that runs across all SBRE entrepreneurs, regardless of their particular asset model, is the ongoing necessity of raising capital in order to originate and acquire deals. This requirement is foundational to their business, yet is highly misunderstood, underdeveloped, and/or neglected. Especially when done in a blind pool or discretionary fund format, raising capital successfully requires an understanding of a myriad of interrelated factors that combine to influence success or failure.
There are so many elements that combine together to produce an outcome that very few SBRE entrepreneurs I meet really understand how those factors interact together and their impact on one another. Each entrepreneur, strategy, and situation is different, and yet many or most of them actually share many common attributes when it comes to how to successfully raise the money they need to execute their business model. Having been an SBRE entrepreneur myself raising money for our deals for more than two decades now, I have learned many lessons the hard way through experience, trial and error. Three of them stand out.
The first lesson is to “Know Thyself”. Each of us has our own unique combination of strengths and weaknesses, personality traits, and predilections – let’s call it our “being”. Knowing precisely what these are for you and acting in accordance to your own being rather than in contradiction with it makes everything you do easier. Many people, opportunities and paths will present themselves to you during your life and career, some of which are naturally suited to your being and some of which are simply not. If you do not “Know Thyself” well, often those that are not will appear charming, seductive and lucrative. It can be easy to believe that what other people are doing or saying is the way you should go. But if that direction is not well-suited to your particular being, you are highly unlikely to be happy with that person, that opportunity, that path. This is true across all areas of your life and is manifest most obviously in the relationships you have with other people – your spouse, your employees and co-workers, your business partners – and most certainly your investors and your capital structure.
Not so many years ago when I was considering how to increase our capacity to fund more deals we felt we could originate, we had the opportunity to obtain a large credit line from a national bank who dealt in specialty finance (lending to hard money lenders). There were many very good reasons to do it that my rational brain could justify, but something inside of me that I could not identify was signaling to me that I would not be happy with that direction. I suppressed those signals, rationalized my decision, and went forward anyway. The trade-off I accepted for access to that capital was the establishment of rigid eligibility requirements for the assets we would originate, borrowing base reporting requirements, agent (meaning bank) underwriting discretion, and ultimately veto power over our previously nimble hard money lending business. Basically, I spent the entire duration of that four-year relationship feeling as if I worked for that bank.
As a lifelong entrepreneur, I know myself well enough to know that I struggle working for someone else, especially an organization as regulated, bureaucratic, and nonsensical as a large national banking institution. After having had full discretion in our lending decisions for many years (and having clearly demonstrated our capacity to handle such discretion), operating under bank guidelines and requirements that existed more to satisfy regulators than to enhance practical deal structure or mitigate risk made my life miserable. When the bank eventually failed to renew our line, despite perfect performance within their covenants and guidelines, it caused me to have to wind down the largest fund I had ever built and go through some of the most difficult times of my professional life. In short, I pursued a path inconsistent with my being and I paid the price in a big way. I tell this story more extensively in my book, Capital Attraction: The Small Balance Real Estate Entrepreneur’s Essential Guide to Raising Capital.
The second lesson is to “Be Worthy”. If you desire anything in life – friendship, love, work promotions, career success, and especially trust – you need to first be worthy of it. Nowhere is this truer than with investors in a blind pool, discretionary SBRE (or any other) fund. Once you go beyond your finite circle of friends, family and relatives who are already familiar with you and may invest with you due to long association, you must rely on raising capital from people you do not know well or have never even met. How do you get them to trust you enough to give you their money and hope that you will act as a competent, capable and honest steward of that money?
The starting point is to be worthy of that trust and actually BE a competent, capable and honest steward of that money. You will still need to demonstrate that and convince people, but in the long run it is far easier to do that if you are indeed such a person. This means focusing on developing your talents, skills and character first, something that requires effort and work and that few people are willing to do thoroughly.
When you are running a discretionary fund, the fact of the matter is that you will be presented with situations that require choices between doing what is in your best interest and what is in the best interest of your investors. Your investors will not be privy to every such situation and in fact will be privy to very few of them. Sometimes those interests will be fully aligned – in which case it is easy for you to do the right thing for them since it is also right for you – and sometimes those interests will be diametrically opposed – especially financially in the short term.
It is the choices you make in these situations that will define you in the long run. I know exactly what it means to face such decision points and what it feels like to be in that position. Having been there, I can also understand how fund managers and other SBRE entrepreneurs sometimes end up finding themselves running a Ponzi scheme. I believe that they usually do not set out to do it, but rather they make a poor decision at a critical juncture and go down the wrong path that ends in disaster. The lesson I have learned is to not succumb to the pressures or temptations to subordinate the interests of those who have trusted me to my own, no matter how hard that might be sometimes. Be worthy.
NEVER GIVE UP
Finally, my third lesson is to “Never Give Up”. Being an SBRE entrepreneur is hard. It requires courage, fortitude, discipline and faith. Particularly as it pertains to raising capital – the common thread of all SBRE entrepreneurs as I define that term – it often seems that nothing is going work the way you wanted it to or thought it would, especially as you launch and try to grow a pooled investment fund. Deals fall apart, employees or partners disappoint, investors who said they were interested go dark and won’t return your calls, and much more.
We all have our stories of adversity, some more intense and severe than others, and we all face problems, challenges, and setbacks. It is those that push on despite those difficulties and obstacles and continue to study, learn, grow, apply themselves, and be worthy of their investors’ trust that can and will grow their fund and achieve their goals. It feels like forever sometimes, but it really is just part of our human experience that in order to succeed greatly one must experience adversity. As Winston Churchill said, “never give in, never give in, never, never, never – in nothing, great or small, large or petty – never give in except to convictions of honor and good sense.” If you know thyself, are worthy of investors’ trust, and never give up, you will eventually reach the success you seek.