PALM DESERT, Calif. — Blackstone Group is a financial juggernaut, with $361 billion in assets under management and a market value of $31 billion.
But before the private equity firm and hedge fund giant became a dominant player in finance, co-founder Stephen Schwarzman made one of the biggest entrepreneurial mistakes in the book.
What was it?
When starting the investment firm in 1985, Schwarzman — the Yale-educated son of a Philadelphia home products retailer — targeted the customers he knew the very best … first.
That was a critical error. And Schwarzman struck out in his initial pitches to investors, going zero for 18 with his top prospects.
“That’s not a confidence builder, when the people who know you best say: ‘please, get lost and don’t call me back again.’ It just becomes very depressing,” said Schwarzman, who spoke Wednesday morning at the EY Strategic Growth.
In his view, you should hold your best prospects in reserve, at least until you have a better idea what you are doing as a business. After all, the billionaire philanthropist said there’s enormous “pain” around convincing people of your mission. Schwarzman noted:
“On our first private equity fund … we made the mistake of every entrepreneur in this room. I don’t even know you all, and I know you made this mistake: You go to your best prospects first because they are the highest probability sale. But the only problem is, you don’t really know what you are selling yet because you have not heard all of the objections to your product, so you burn all of your best prospects. You should go to your best prospects, as like #20 to #40, not #1 to #10, because you are not showing yourself off best.”
Schwarzman’s luck changed, and over a lunch in Newark, New Jersey he was able to convince the chief investment officer of Prudential Insurance — who happened to be devouring a tuna sandwich — to provide $100 million to Blackstone.
“We zeroed with everybody else, and this is the most important investor in the world. And, I mean, I will never forget tuna,” said Schwarzman to laughs from the crowd. “Because I knew if we got them, because they were so important, they were the reference institution, that we’d be able to raise money all over the world, based on their reputation.”
Blackstone ended up raising $1 billion from 32 investors, the largest first-time private equity fund ever. In some of those pitches, Schwarzman said they had to make five separate visits to convince the leadership of the organization of their abilities. In total, they sent out 488 offering circulars to potential investors, meaning 456 organizations passed on the opportunity.
“It’s like when I was talking about being an athlete. It is the ability to take pain,” he said.”You need a great concept, you need something that is worthy, your timing has to be right, and you can never, ever, ever, ever give up.”