A mentor is one of the most beneficial relationships you can create in any business. It is invaluable to connect with someone who has been in your shoes and gained critical experience in the business world. You may have even mentored others in your area of expertise.
A business partner is someone that shares similar goals, values, philosophies, and practices. Not only should you fully trust them, but you should actually enjoy doing business with them too.
A sponsor works as both a mentor and a business partner. They are there to provide feedback, demystify your options, and guide you through the process of investing while offering first-hand insights to help you avoid any pitfalls.
But most importantly, they should have your best interests at heart.
How do you find the right sponsor when you’re ready to invest? We recommend using the 5 Ts: tenets, track record, thesis, transparency, and timeliness.
1. Do you align on business tenets?
You and your sponsor should be able to talk frankly about business philosophy and ethical standards. For example, some investors focus heavily on businesses that utilize sustainable practices. Others may prioritize investments that support community building or certain charities.
From an operational standpoint, you should seek out a sponsor who puts investors’ interests above all else. You also want to consider how much risk you are willing to take. If you and your sponsor do not align here, you will be hard-pressed to find an investment that fits.
2. What’s the sponsor’s thesis?
Your sponsor will likely have a very specific business style. They should be able to share a thorough business plan and clearly articulate their strategy, including:
- How they plan to raise capital
- How they deal with market uncertainty
- Best practices for increasing revenue
- A clear iteration of their value proposition
For example, if they are fundraising for a multifamily rental property, self-storage building, or a multi-asset fund, they should already have a rock-solid plan in place for how they will manage and improve the property(s) through rent increases, renovation schedules, marketing, etc.
Download our free e-book packed with valuable tips to help you diversify your portfolio with private real estate. You’ll learn why diversification is so important to achieving stellar returns, how real estate can help diversify your traditional portfolio, the options available in both public and private real estate investing, and much more. Get your copy now.
3. Have you considered their track record?
A sponsor should not (and cannot) promise that you will earn a set profit or that any investment will be an automatic success. However, they should be able to exemplify what this endeavor may look like through a strong portfolio of their past and current investment efforts.
Here are some questions to ask while you are evaluating sponsors and checking out their credentials:
- What is the typical return on your investments? Does that percentage range align with the risk your investors take?
- Who have you worked with and how have you developed this network?
- Do you have any investors or other sponsors that I could reach out to for a reference?
- Have your investment projections ever fallen short, and if so, what have you done to remedy the situation?
You want to hear about these business practices in their own words. Sometimes, you can gauge their authenticity on instinct alone—other times, you cannot. There is no Yelp or Glassdoor for sponsors. It is still a referral business, so ask around before making any final decisions.
4. Can you count on them to be transparent?
As we already noted, you should seek out a sponsor who puts investors’ interest above all else. This may require some inquiry into the sponsor’s micro and macro business practices, and top-quality sponsors will be forthcoming with this information. Transparency should be a non-negotiable here.
Ask your potential sponsor about their reporting system. Do they provide monthly, quarterly, or annual reports? If you have a specific question, how long does it take them to get information over to you?
They should also have a clear due diligence process. Take careful notice of when you ask for this information. Do they deliver? Or do they defer or deny? If it is the latter, your warning lights should be flashing.
5. Does the sponsor communicate in a timely manner?
Beyond their responsiveness to questions, requests, phone calls, and emails, how often does the sponsor communicate about investment performance? There is actually no wrong answer here; it comes down to how often do you like to be in touch with your sponsor. Timeliness is critical, but it can also be in the eye of the beholder. You should know how active or passive you would like to be and set that expectation upfront.