What it's like to try and start your own shop and fail
This is not a post to vent, look for feedback, dissuade, but wanted to share my experience in starting my own shop, what I wish I knew, and things for other people to think about who are looking to do something similar. Would be good to hear from other's as well who may be in similar situations/have similar experience in this.
Have been in the industry for 10+ years, most of which have been on the investment/development side. Decent college pedigree, most of my experience has been in development management and acquisitions working for top shops and well experienced startups. Thanks to working for some smaller shops, I have/had great real time experience in what it's like to run your own business vs. just being siloed at a larger firm and built some LP relationships through that last role. My last company I was with was struggling and I could see the writing on the wall. I had started to put together a business plan (not in an area of my direct expertise, but a vertical I thought had legs) over about a year's time, and when I found out the shop I was at was on life support, I applied to a couple jobs but realized that I really want to see if this could work.
Although mid 30's, didn't have a wife/kids to support so did the math and realized I could stay afloat for some time/have DD dollars to spend. The plan was to try for 1.5 years and if it failed, go back to corporate. It has been almost 2.5 years, no closed deals despite having multiple deals under contract and having probably 25 LOI's out (with LP's behind them), some small income coming in time to time, but virtually a race to the bottom at this point as none of that has really been meaningful. I am still pursuing deals and have dual tracked applying to jobs the past 6 months, but have gotten very little bites from the job market as it's a tough time for someone in acquisitions and no major track record the past 2.5 years that I can show for except for a lot of swings. I know people think you can just hop back to corporate after going out on your own, but a lot of people seem to look down on it. Only 1 of the deals I was under contract on didn't workout because of capital raising, and each of the LOI's I had sent I pre-vetted with the LP's but were not competitive enough. The rest have been title issues/lying sellers/uncovered DD that killed the deals, a lot of bad luck and wasted time/dd dollars.
What I would have done differently:
- Brought on a partner. I started this solo, so maybe bringing on a partner would help. I don't regret this as this is NOT something you want to force, but having a partner (s) with complimentary skill sets or a mastery of different assets would be smart.
- Don't go too narrow. Starting niche helped me build LP relationships as they would give me the time of day to connect vs a random person doing multi value add, but it made finding deals more difficult than I had estimated. After about a year 1/2 of focusing only on that vertical, I pivoted to focus more so on special sits and what my LP's want vs. a specific asset/geographic specialty. It has helped, and opened my aperture significantly but maybe too little too late and maybe not the long term approach. If you have a mastery of a well favored asset/geography that is probably best.
- Started with a deal. Although my previous company was probably going to shut down or I was going to get laid off, I jumped ship before the first deal. The only counter to this is that it is hard to be all in unless you jump ship and if your current company finds out your chasing deals, it might not look good.
- Focusing on smaller deals. Most of my connections in the LP world except for a couple family offices are funds so the deals are bigger. I did not like the idea of doing friends and family as I do not have a huge rolodex of 50-100k investors so focused mostly on mid market/largish deals. I am still getting looks from sellers as I am bringing in LP's at the LOI stage, but hasn't worked yet.
- Networked more. As I have been so cash strapped I have shyed away from the conferences and so forth which are expensive and hard to see the ROI, but one good connection can payoff sevenfold.
Different things to think about:
- You need to have extremely thick skin, a high tolerance for risk and be very self-driven (especially if going off on your own with no partner). If you have not been in a seat that has had exposure to a lot of failure/issues with direct responsibility, I think it will be very hard to stomach starting off and going through the ups and downs.
- I would recommend getting a coworking or small office space. Very hard to keep yourself accountable working from home.
- Really look at your finances, overhead, etc. and think about different ways you could make money during slow times.
- Make sure you have good LP relationships beforehand that you think will back you. You can always build more, but when push comes to shove, someone will have to bet on you. Just because you have a great deal, doesn't mean it'll get funded.
- Times will change, but the expectations from fund LP's to meet what they promised their LP's is extremely challenging to hit right now. Hard time to do deals.
- If you don't have a balance sheet you need to build CoGp relationships who can help, although a lot of them won't sign on guarantees. You also most likely will have to bring the LP relationship.
- Deals take a LONG time. Most of the deals I have gotten close on have taken 2-3+ months to get to a PSA which will take a month followed by DD. If one of those fails you're out a lot of time and money if you've been spending too much time on that one deal (which is hard not to if you're one person).
- Expect to sacrifice a lot. Unless you have an enormous amount saved up, expect to live a more frugal lifestyle until you're getting promote or getting fees to cover overhead.
Overall it has been an incredible experience. I've learned an insane amount, built a great rolodex of LP's, have built a great pipeline of different deals and gained expertise in a ton of different assets/geographics, but also very humbling coming from a great career, having emptied my savings and little feedback from the job market. I've gotten close enough that I know one of these deals will hit, but at this point just can't keep afloat too much longer.
Keep chugging. It’s a tough market. Unfortunately even many experienced GPs are shutting down. If it makes you feel any better, I’ve been hunting for deals off the side I’ve my desk - 28 LOIs and keep striking out. This is the last 15 or so months. Similar background to you.
What asset class / geography did are you chasing? Why didn’t you stick with the vertical you did at work?
Great stuff here, thanks for sharing and for the transparency. Best of luck going forward, sounds like you are on the cusp - be it this go around or another. Just a brutal market.
Plenty of questions, but starting at the front. Can you (and a little personal so no sweat if not), share a bit more about your balance sheet going into this? So you gave yourself 1.5 years of presumably slimmed down living expenses, and then some pursuit costs.
How much did you allocate to pursuit costs from the outset? And was that from prior successes during the w2 years? I would think at the level of deals you are pursuing, you probably needed +\- 500k or so to be dangerous?
Always a tough balance and easy to say now you wish you had more, but never the fully the right time to take the plunge. Was that just saved up over time or did you hit a promote or two along the way at the prior jobs?
And generally, are the deals you are pursuing ground up or existing?
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