Investors vs. Allocators - What's the Difference?

What’s up, everyone? Today, we're diving into a crucial topic for fund managers and entrepreneurs: investors vs. allocators – what’s the difference, and why does it matter? Understanding these distinctions can significantly impact your capital-raising strategy, especially when you’re aiming to raise millions or even hundreds of millions of dollars.

Understanding the Difference: Investors vs. Allocators

Investors

Investors are individuals who invest their own money. This could be friends, family, or other individuals who are willing to put their capital into your business or fund. Here are some key characteristics of investors:

• Personal Capital: Investors use their own money, making them more emotionally involved in their investments.
• Shorter Time Horizons: Typically, investors prefer quicker returns and may be uncomfortable with long lockup periods, such as the 10-year periods common in private equity funds.
• Less Intensive Due Diligence: Investors may not dive as deep into due diligence compared to institutional investors, focusing more on cash flow and capital growth.
• Emotional Decision-Making: As Lincoln mentioned, “Investors will be more of an emotional sale. Individuals are emotion-driven. Allocators will be a logical sale.” This means that when pitching to investors, appealing to their emotions and demonstrating personal benefits can be more effective.

Allocators

Allocators, on the other hand, manage other people’s money. This includes fund managers at family offices, pensions, or institutional-grade investors. Here’s what sets allocators apart:

• Third-Party Capital: Allocators invest funds on behalf of others, making them more objective and focused on long-term growth.
• Longer Time Horizons: Allocators are comfortable with longer lockup periods, often 10 or 15 years, as they align with their long-term investment strategies.
• Thorough Due Diligence: Allocators typically have a team of consultants and analysts who perform rigorous due diligence before making investment decisions.
• Logical Decision-Making: Allocators rely on data, strategy, and track records. Your pitch needs to be logical, well-structured, and focused on long-term value creation.

What Makes a Good Pitch?

Lincoln and I have heard hundreds of pitches, and we’ve identified three core elements that must be communicated effectively in any pitch:

1. Sell Me on the Asset

• What’s the asset? Whether it’s commercial real estate, crypto, or fintech, you need to convince your audience that this is the best asset to invest in right now.

2. Sell Me on the Strategy

• What’s your approach? How do you plan to capitalize on this opportunity? Highlight what sets your strategy apart from others in the market.

3. Sell Me on the Sponsor

• Why you? Do you have the experience and expertise to execute this strategy? Your pitch should clearly demonstrate why you (or your team) are the best choice to manage this investment.

Tailoring Your Pitch: Investors vs. Allocators

The key to a successful pitch lies in understanding your audience. Here’s how you should adjust your pitch depending on whether you’re presenting to investors or allocators:

Pitching to Investors: Focus on the Asset

• Investors are comparing your opportunity to their current options, such as bank accounts or other investments. Therefore, you need to spend the majority of your pitch convincing them why your asset is the best choice. Highlight the benefits and how your investment will help them achieve their financial goals.

Pitching to Allocators: Focus on the Strategy

• Allocators already know which asset class they’re interested in. Your job is to demonstrate why your strategy is superior. What gives you an edge over other managers? Why is your approach more likely to succeed? If you don’t have a clear edge, consider how you can build or acquire one.

Conclusion

So, investors vs. allocators – what’s the difference? Understanding these differences is crucial for tailoring your pitch and effectively raising capital. By focusing on the right elements in your pitch, you’ll be better equipped to secure funding, whether from individual investors or institutional allocators.

If you want to learn more about funds, visit the Fund Launch Blog! If you're ready to launch your own investment fund, visit Fund Launch to see how we can help!

Thanks for reading, and best of luck in your capital-raising efforts!

Bridger Pennington

‍

Want to get direct guidance for your fund? Schedule a time with my Fund Advisors!

DISCLAIMER: This content is for educational and informational purposes only. It is not to be taken as tax, financial, or legal advice. You should always consult a legal professional before taking action. Furthermore, this is not a recommendation to buy or sell any security. The content is solely just the opinion of the authors.