How to build a tech-driven fund?
Living at the forefront of the technological processes, venture capital funds and private equity funds move the technology market forward through investing in a wide variety of innovative solutions. Yet most funds still use simple algorithms for the management of their internal work processes, with some switching between Excel and Google cloud products. With continuous growth and development of the investment fund, accordingly, comes the need for an independent specialized IT product, like AIRR, that would meet all the investment management needs.
We ourselves are a VC/PE fund, and recently we have created AIRR in order to automate the data gathering process for a sophisticated basis on which an investment decision can be made. So we went through this process ourselves and consider it of equal significance to share our expertise.
Fundamentally, each investment fund utilizes a customized strategy, based on the investment stage, size of the investment fund, choice of industry, geography, check, transaction structure, all impacting the set of management tools required.
INVESTMENT STAGE
A fund investing in the early stages relies heavily on working with the pipeline, as it enables the fund’s system of internal work to keep records of numerous companies and actively monitor market transactions. The quality of the funnel they form will determine the further fate of the entire fund due to the level of transactions that they will enter.
The ability to be the first to notice a project and to reach a good deal is extremely important for early-stage funds.
On the other hand, a fund focused on later stages works less with the pipeline, and therefore does not require a high level of automation. Funds in later stages rather consider each transaction in more detail, thus the focus is shifted to tracking metrics for the existing portfolio.
Through the implementation of blocks for early / later stage funds, PE, and family offices, our IT product was able to respond to the market demand. The project’s multifunctionality allows each investor to use the block of tools they need for a specific request. Quite naturally changing with the arrival of new customers, the software is constantly in the process of developing new functionality, in order to find new solutions that would help investors save time.
SIZE OF THE INVESTMENT FUND
At the early steps of the fund’s formation, generally, large amounts of data tend not to appear. With relatively few investors and two or three transactions in it, Excel and Google cloud products can easily handle it. As the fund develops and builds some kind of legacy, the number of investors and transactions is continuously increasing, the team is growing, the tasks get bigger but at this stage, the fund still manages its data with a number of separate systems and programs. This transition happens gradually. Adding a system for managing investor relations once you notice the number of LPs grow; adding standard reporting forms to fill out as more companies come into perspective. Suddenly, your fund finds itself using many systems that are poorly integrated, and integrating different market products is a separate IT task.
At this stage, there comes the need for a full-fledged independent IT product, in order to avoid the pitiful scenario of numerous logins and passwords from different systems. In fact, our team has experienced this transition quite recently, which is why we created software to combine all the processes inside — a system that synchronizes the work of the fund team, investors, and external participants.
Nonetheless, not all funds reach the point when they need to introduce a special IT product: as long as your fund is small, it will successfully maintain with Excel. Although, most commonly, the issue of technologization arises eventually, as it is an evolutionary process, thus we advise every investment fund to consider this beforehand.
Rebuilding a fund with a long history using technology will not be a painless process, but rather time-consuming, and requiring the involvement of the team and processing large amounts of information. However, it is an essential step for the fund’s further growth and development.
When working with funds, we undertake some part of the work on the transition to an automated system, because we ourselves went through this at iTech Capital and can advise a lot, carry out integration, partially transfer some data, and suggest how to best organize it on the platform. Even so, it is impossible to complete without involving the fund’s team as no one knows the specifics of the work better than the employees.
GEOGRAPHIC MARKETS
Each geographic market has its own characteristics. Taking different jurisdictions as an example, the responsibilities and the workload of a fund administrator differ according to the requirements. In the UK, a fund administrator is a required position with a fairly large salary, demanding the workers to be in charge of accounting, legal issues, KYC, and enabling funds to outsource these processes. It’s pretty convenient since the people in the team are engaged in deals and monitoring, and the back office is outsourced.
Yet a common issue arising from this approach is the difficulty of managing everything related to investor relations. The work of administrators tends to be more time-consuming and is prone to a certain degree of human error, making it challenging to react promptly and analyze relevant metrics.
When all the data is collected in one place and is available to all team members, the fund begins to work more efficiently, presents its performance to investors more clearly, and becomes easier to manage.
CAN ALGORITHMS BE TRUSTED TO MAKE INVESTMENT DECISIONS
The whole venture is about taking risks, as unpredictability and chaos are integral to the venture investment market. However, neither can algorithms predict the future nor are they developed for this purpose. Yet what a specialized IT product can do is highlight the segments that a particular investor is interested to invest in. Take for instance a situation where investors are interested in AI deals of a certain size in the corresponding geography because they anticipate the growth of this industry. Algorithms will then help to find projects in all connected databases that fit the named criteria and show them to the investment team, so they are the first to know about them. Therefore, eliminating the possibility of a human error, algorithms increase efficiency and help investment funds find good deals.
The final investment decision is still up to the investment team and the investment committee, greatly depending on their ability to efficiently work with the gathered information. In other words, the final decision always has to be based on the analysis of numerous factors ranging from the background of the founder and the timeline of the company’s development to diving deep into market prospects. This means that an IT product is not the key factor, and finalizing the resolution is primarily about the talent to notice unique investment opportunities.
Nevertheless, no matter how much IT solutions can accompany the fund’s evaluating process, not all funds will switch to technological solutions like ours, simply because not everyone needs it. Ultimately, this then depends on the team’s requirements and the investor’s requests.
Because the development of this area directly depends on the needs of investors, an advantage of an IT product like ours is accessibility and mobility: an investor can find any documents and most recent transactions in just a click away.
