Ep 89: Let’s talk about raising money – One Big Check or A Lot of Small Checks

In the real estate world, I’m a sponsor, a general partner (GP), and that means I raise money from limited partners (LPs). I run a real estate private equity company, and we raise money externally for almost all of our deals. If you’ve listened to other episodes of my podcast, you know the relationship between a GP and an LP.

When raising money there are two routes I can take: one big check from a wealthy investor, or many small checks from a group of investors. Many operators say that one LP who writes a giant check is more valuable, there’s way less paperwork and operating complications, but I kind of disagree. My average LP only has $100K invested with me, meaning no one investor has control over my business or my deals. Nobody can tell me how to run my company, and if one LP disagrees or decides they’re done, they don’t break my business either.

By concentrating your focus on one wealthy LP, you lose your leverage. I work off of a 50% promote, and am able to get better terms than I would if I were to rely on one powerful investor. I get to go to my list of LPs and say to them “Here’s a deal, here are the details, let me know if you’re interested”, and I have full control over the details.

Keeping track of dozens, or hundreds, of LPs is really difficult. If I were doing it in Excel and handling it over email, like over half of PE shops are, it would be miserable for me to process and keep track of. Sending distributions, recording distributions, communicating with investors, and emailing back and forth would be a nightmare. I did one raise involving 26 LPs and it was a ton of work. After that deal, I started to use Juniper Square, and it made this whole process manageable. Distributions, monthly and quarterly reports, and tax documents are now all automatically handled. Funding deals and flowing through paperwork is a breeze.

Raising capital through small investors can create logistical chaos, but it keeps the power in your hands. Nobody controls your business or your money but you, and you don’t rely on one person. You can choose as a GP whether you want to pitch your ideas to a family office or raise money from individuals, both of which have their pros and cons.

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About Me

I started the Sweaty Startup in December of 2018 because I believe the Shark Tank and Tech Crunch culture is ruining the real spirit of low-risk entrepreneurship.