The VC software stack — the untouched vertical.
Software is one of the key markets for VCs, there is no doubt about that. With the explosion of SaaS and Software eating the world, it would probably be very hard to find an industry vertical not pursued by startups. Sites like Getapp.com or Bestvendor.com list thousands of applications disected by industry or a specific business process. You would think that there would be an array of apps dedicated for VCs themselves, right? Wrong!
Couple of weeks ago Nicolas Wittenborn (Investment Associate @ Point Nine Capital) wrote a post on Medium about Point Nine’s tech stack — explaining what software they use in their workflow. Software listed in that post resembles a lot what we use at Innovation Nest and that got me thinking — why there are virtually 0 startups building software specifically for the VC vertical?
I went on Quora to check if there was any interest in software dedicated for the VC industry. I found a couple of questions:
Software mentioned in the answers to the questions above could be grouped as follows:
• portfolio management
• network (contacts) management
At first glance from my own personal experience each topic is huge on its own. Today to deal with those processes most VCs use software like: Gmail, Gdocs, Dropbox, some kind of CRM, Excel, and maybe a task management tool like Trello. The more advanced VCs will probably also use some kind of a connector to connect different APIs to form a workflow. This is done by apps like zapier.com or ifft.com. Although after stitching all this software together you can get the job done, the whole workflow is not pretty.
The simple answer as to why there is so little software for the VC industry is that maybe the industry itself is a niche market and it would be difficult to build a meaningful business out of it. I strongly disagree, simply because we have a worldwide explosion of VC activity. Angels, accelerators, incubators, early stage VCs, growth funds, they are popping all over the world. One might say that the startup economy is booming on both sides of the market.
So how big is the VC market anyway? To get a sense of the numbers I’ve only focused on the data provided by angel.co. As Angle List reports, there are more than:
• 2 500 incubators
• 30 000 investors
• 300 000 companies
For the arguments sake let us threat these numbers only as a sample of the whole market. For a minimum viable segment — these numbers are big enough to make a valid hypothesis that there is a market for software targeted at VCs.
If the size of the market doesn’t look like a huge problem, than why are we not seeing more activity in this space? Maybe VCs are comfortable with the workarounds they are currently using and the pain is not strong enough. Coincidently one of my friends, Artur (cofounder of Fokus) asked Marc Andreessen a similar question.
Marc’s answer might suggest that top tier VC firms don’t see this as a problem. From an early stage VC perspective I also have to disagree with this statement. As the VC industry gets more competitive, software might be one of the things building a competitive advantage. I might not be the only one with this thinking — Sam Altman, the President of Ycombinator often talks about the inhouse software YC uses to review applications, manage their extensive network of YC Alumni, mentors, investors.
Looking at the way we organize our workflow at Innovation Nest I would say that there are 3 areas where dedicated software would be very useful.
Currently at Innovation Nest there are three partners who look at deals. Each one of us is the initial point of contact for new investments. We have implemented a specific structure, how companies go through the investment process at our fund. To manage this process we have deployed Trello as the main tool for gathering information on companies we are talking to, the tasks we have planned ahead and to mark the state of the process for each company. Trello is flexible enough to handle this process but there are a few areas where it gets really hard.
Most of the communication between us and the company, and between the partners is done through email. There is no deep integration between the email protocol (in our case Gmail) and Trello. If a company sends us their pitchdeck we have to manually add it to Drive, and then switch to Trello to add that pitch to a card associated with the company. If there is some important piece of information in the email, we have to copy it, switch to Trello and paste it onto the Trello card of the company. There is no way to associate emails with a card in Trello. The list of these “small” problems goes on and on.
I think that for most VCs the initial contact with a new company is done via email. I would also think that a great number of investors use cloud products like Gmail. As most of us spend many hours of the day in our email client — it almost feels natural that there should be a “dealflow app” that integrates deeply with the email protocol so that most of the initial tasks are done automatically. Tasks like:
• setting up some sort of a record for the company,
• pulling data about the company from publicly available sources like Crunchbase or Angel.co (maybe even Mattermark),
• pulling data about the founder (Raporrtive style),
• suggesting potential connections to the company and the founder based on LinkedIn data from our account,
• linking the email thread to the company record,
• sharing with other partners (which are predefined by the process)
These are just a couple of the most obvious examples. If you are dealing with only a few companies per year maybe you are not experiencing this problem. Once you reach a larger scale this becomes a real pain.
2. Portfolio management
One of the key issues we are seeing is to gather key data from portfolio companies. As we are mostly dealing with B2B SaaS companies, in order to monitor the performance of each company we are mostly looking at key metrics like new visits, signups, paying customers, churn. To get all of these metrics form each company in a similar standard (so we could benchmark) becomes a real pain. Each company uses a different method to gather this data and then to report it.
The second key issue is an investors update. There is also no standard in this case. As most investors have information rights, it is expected to receive regular updates from portfolio companies. Some CEO’s prefer to write emails, some have a special doc format. Again there is no structure and process how to gather these updates.
As an investor there are a couple of things which are important and which should be looked at on a regular basis (I only speak from my own experience as an early stage investor):
• key metrics (these can vary from company to company especially if an investor is not focusing on a specific market). You should be able to have easy access to the latest figures. Also it would be very helpful to benchmark companies against each other. In early stage, where the biggest challenge is to get to product-market fit, looking closely at numbers is very helpful in mentoring/advising the company.
• what the team is currently working on
• what was planned but not achieved. In early stage startups things move very fast. Most teams have very ambitious plans which then get crushed by customers and the market.
• help needed. The main role of each investor is to support the company. This support can take many forms. The most obvious is money, but it surely isn’t the most important one. Access to people and companies is probably the biggest value an investors can bring to the table. Portfolio companies should regularly communicate what sort of help is needed.
These investor updates play two roles a) inform about the current state of the company b) allow to track progress. Both are crucial in making further investment decisions.
The VC business is all about people. Founders, mentors, advisors, coinvestors. An active VC is consistently expanding his network. If we have look at LinkedIn profiles, most VCs have more than 500 connections.
We have noticed that in the last 12 month, the network around Innovation Nest has expanded so much that we should implement software to manage all those relationships. As there is no CRM which would fit specifically the VC process, we tried to use typical CRM apps. The ones we have tested seem to be to “heavy weight” for our needs.
When I think about a dream “network app” it would be something in the spirit of Intercom. As with dealflow, network is heavily rooted in the email protocol. Email is still the main communication platform. Gmail offers a ‘contacts” functionality but it is very limited and also closed. The “network app” would have to live on top of email. Additionally it would have to be smart enough to pull any additional data about a contact provided by external databases and platforms.
In a perfect world all three (dealflow + portfolio management + network) apps would have to work seamlessly together as they provide data sets which are valuable across all three apps. If we go even further, there might be a need for a whole “operating system” for the VC industry. There are many more apps I haven’t mentioned like: news monitoring, lp management, fundraising to name just a few. I hope we will soon see this vertical populated with interesting startups tackling some of the problems I’ve mentioned. If you are working on such a product I would be very interested in talking to you.