Part 2 of the Institutional Investor and Fund Manager Improvement Series:

How to Find and Approach an Early Stage Company for Learning Purposes

Last week, we discussed how and why institutional fund managers and intuitional investors can improve their performance and businesses by learning directly from startups and early stage companies.

However, there is a critical issue (person really) in this blog which needs to be addressed early on in our discussion:  The KNOW IT ALL Institutional Investor or a “KIAII.”

Many institutional investors, with their high powered Ivy-League finance degrees and correspondingly large egos, think that they run their fund(s) well and claim they can’t be taught anything from an Investee, much less an early stage business in whom they don’t even invest a penny. After all, these KIAIIs will say, “I’ve got my returns, so I’m successful; thus, I don’t need to learn from other businesses.”

So, are the right, as they have solid returns on the funds and the investment companies under their management?

Actually, yes, the KIAIIs are correct concerning the past and present facts but catastrophically wrong and short sighted regarding future results.

The actual long term (5-10+ year) performance of fund managers is an accurate assessment (if done honestly) of how effective an investor has been in the market.  Of course, these KIAII (falsely) assume the past and present performance will be 100% relevant to future conditions and every unknown future problems in their business and industry.  Such an assumption is rather comforting and ego boosting but it is entirely (and dangerously) false.  The world we currently live in is extremely dynamic and the only way to obtain an advantage is to be on the cutting edge of innovation in every industry.

Allow me to provide you with a concrete example to clarify my position.  Let’s assume you have a successful institutional investment manager with 20 years of experience in the industry.  He (and it is likely a “he,” finance needs more gender diversification) is comfortably resting on his past and current laurels and sees no need to understand emerging Artificial Intelligence (AI) systems in the area of finance whatsoever.  After all, he is and has been successful, correct? The KIAII is actually correct regarding the current data and facts, so he will be wholly oblivious to the impact of AI on finance and fund management.  He will have a very pleasant life until the day the AI based machines result in his sudden job loss and then take over most, if not all, of the finance industry (i.e. our  “successful” KIAII will then find himself to be permanently unemployed in finance).

Learning and humility are required to stay at the leading edge of your industry, period.  The good news is that you don’t have to innovate alone or come up with new or “green fields” solutions to your problems.  There are numerous individuals and companies around who can help you out with this process.  Hopefully, I’ve convinced you that talking to an early stage company as an institutional investor is valuable and perhaps even critical to your long term success.

So how do you go about actually learning from an early stage company?

There are two important first steps in this process:

First, you must define or frame the problem(s) that you want to discuss with the early stage business.

Second, you must reach out and communicate with an early stage company to begin the learning dialogue to improve your performance.

In my experience, one can easily become “hung up” on endlessly attempting to define or frame the applicable problem in your company.  Endlessly “word smithing” and revising the phrasing of the problem will prevent you from engaging with dynamic and innovative companies and individuals.  Accordingly, I would not be too troubled if you cannot perfectly or narrowly define the problem you wish to discuss with an early stage business.  In a nutshell, promptly and simply define your problem and then move on with the process of engaging with innovative companies.

After you have the problem you wish to discuss adequately defined, the next step is to research and reach out to an innovative company and/or entrepreneur.

So how do I find these innovative companies and individuals now that I have problem clearly and simply defined?

The typical answer would be to research the numerous media sources available in print and on the internet.  However, I would offer to you that the best solution is to reach out to local business schools (especially professors) and/or business and trade groups and ask the following question: Who are the most innovative or interesting companies or individuals that you personally know?  You will likely hear names that haven’t yet come up on the radar of other media publications and may have a direct “in” in terms of an introduction or meeting with these companies or individuals.

Of course, the directive, “Just go talk to a successful startup or early stage company and learn something,” is very easy in theory but is shockingly difficult to implement in practice.  Many institutional fund managers have no actual experience working in an early stage business.  Sadly, the large majority of investors are purely “numbers and finance people” who have zero operational experience at any other aspect of business, much less an early stage business (i.e. marketing, management, IT, HR, Accounting, etc.).  Accordingly, institutional fund managers will find the “problem landscape,” vocabulary, and common problems at early stage businesses to completely alien to them (which is actually part of the point).

So how do Institutional Investment Managers bridge this enormous and potentially intimidating cultural gap? 

The short answer is personal touch, humility, and food.  Humility, above all, will open doors and allow you to be successful in this process.  When you initiate contact, use the phone (not texting or email) and reach out to the company or entrepreneur in a highly personal fashion.  You should offer to take someone out to coffee, breakfast or lunch on their schedule.  You will find these people will often be flattered at the request and will appreciate your inquiries.  If you have a referral or introduction, please do not hesitate to use them in this situation.