Follow me

Venture capitalists eating our own dog food: Using technology and analytics to make better investments

David Teten AIR Summit Keynote
(To see the video above, please click the image, and then click on the Play button.)

Private equity and venture capital investors are copying our sisters in the hedge fund world: we’re trying to automate more of our job. 

When I was single, I registered for (a lot of) dating websites. When I met my now-wife, I realized that any technology that can find me a spouse is a killer app. That’s why 40 million Americans use online dating sites.  But, most funds raise capital and source deals the same way people looked for dates 20 years ago: by networking at conferences (or bars). 

Most of us want one spouse and we’re done.  But in business, you want a lot of partners.  I’d argue that the same type of technologies that have revolutionized dating can revolutionize our industry.  

In liquid markets, most of the calories expended on technology and analytics are focused on trade selection, or “origination”.  However, in private markets, there is more room to optimize across all 11 steps of the investing process:

  1. firm management,
  2. marketing,
  3. fundraising,
  4. origination,
  5. manage relationships,
  6. due diligence,
  7. negotiation,
  8. monitoring,
  9. portfolio acceleration,
  10. reporting, and
  11. exit. 

I walk through below how progressive investors are using technology and analytics throughout all of their operations.  To learn more about this space, I suggest join an online community I co-founded, PEVCTech.  

The 11 Steps of Investing in Private Companies

1) Manage the firm 

Before you can actually invest, you have to manage your fund. This is harder than it sounds. In the private equity universe, most Partners have primary training as deal-makers, not as managers. When I talk with junior personnel at private equity firms, the quality of firm management is a frequent complaint. 

I’ve used Asana extensively to manage activities firm-wide. I also use several living Google docs to maintain the minutes and the group agendas for my fixed weekly meetings.  I use another live Google doc to maintain my database of companies I’m marketing to other VCs. That Google document provides cut and pasteable text I can share with other investors, based on their stage, focus, and appetite. 

Other investors are using Trello, Basecamp, and Monday for making sure that everyone at the firm knows one anothers’ long-term OKRs and short-term projects. Point Nine Capital uses 15Five for continuous employee feedback. Haystack VC runs almost entirely on Notion.

One aspect of management which merits attention is your own cybersecurity, which should not be left until a crisis to address. Small investment firms often have interns and entrepreneurs in residence passing through, each of which is a security risk. See Bessemer Venture Partners’ A comprehensive guide to security for startups.

Capria leads the “largest network of collaborating fund managers in emerging markets”.  Their product Edge enables you to benchmark your internal processes against other investors.

2) Market 

Kyle Dunn, CEO, Meyler Capital, says, “Investors should focus on building a large audience within a CRM system (having the ability to categorize your different constituents); communicate consistently to that audience; and implement an automation platform that can leverage lead score to profile interest. It sounds simple; however, very few asset managers actually do it.” I agree.

Many tools designed for B2B marketing in general are also relevant to investors. I know of funds using Constant Contact, Goodbits, Pardot and Publicate to create light newsletters for internal and external consumption. A major angel group uses Influitive, an advocate management tool, to track, activate and motivate their members. Other VCs use Contently* or Social Native* to create relevant content.  Meyler Capital is taking the analytical rigor of modern internet marketing and applying it to fund marketing. 

Point Nine Capital’s website is now powered by Contentful; they use Unbounce for landing pages; and Typeform for surveys and other data collection. “We’re using … TinyLetter for our “Content Newsletter” … and Buffer to schedule social media posts. Last but not least, we still use MailChimp to publish our (in)famous newsletter.”  I also use Mailchimp for the teten.com and pevctech.com mailing lists. Point Nine Capital uses Mention for media monitoring. Teten.com is built on WordPress as my content management system.

I use Hootsuite to coordinate my social media activity, which consists primarily of Teten.com, PEVCTech.com, Linkedin, AngelList, and (passively) Twitter and Facebook. I use Google Drive to host my conference presentations, which are all embedded at teten.com. I use Diigo, a social bookmarking tool, to keep a record of useful websites.  I have also configured IFTTT to share on Twitter anything new I post on Diigo. 

Qnary is one of numerous tools which can help build out your team members’ virtual presence. A tool like Quuu identifies relevant, shareable content to keep your social media channels active.  

Sabena Quan-Hin, Marketing Manager at Flow Capital, wrote, “There are two crucial aspects of marketing that investors often overlook: automation and analytics. Automation allows you to spend less time on tedious tasks and will help boost productivity, especially within a small marketing team. At Flow Capital, we use HubSpot’s sequences and workflows functions to automate a bulk of our emails and internal tasks. This provides us more time to develop meaningful relationships with prospects and customers. We use Google Analytics, HubSpot, and LinkedIn Campaign Manager for the majority of our analytics. For our content creation, we use tools such as Canva (graphic design) and GoToStage (webinars platform) to create and share content for prospects to find.”

3) Raise capital

Tim Friedman, Founder, PE Stack, said, “Today’s investors are allocating more to alternatives in an environment where there are record numbers of new funds; and seeking deeper relationships with managers via direct and coinvestments. The past few years have therefore seen a huge rise in the proportion of LPs using specialized tools to manage and understand their portfolios, including platforms such as Chronograph, Solovis, Allocator, Cobalt LP, eFront Insights, iLevel, Burgiss.  The proportion of LPs using technology to manage their portfolios will continue to increase, and GPs unable to provide quality data to LPs will find it increasingly hard to retain and attract LPs. We are also seeing technology evaluation as an increasingly important part of LP operational due diligence. Excel and Google simply aren’t going to cut it if you expect to build a high quality institutional investor base.” 

A more efficient approach to fundraising than haphazard networking is to mine the data exhaust from the limited partner universe to identify those LPs most likely to find your fund attractive, and focus all your energy on them. I previously posted a detailed presentation with sales technology tools useful for B2B sales.

I always make a point of keeping firm records updated in the major data-trackers tracking the VC industry: AngelList, CB Insights, Crunchbase, Dealroom, Dow Jones VentureSource, Pitchbook, Preqin, and Refinitiv Eikon. LPs, coinvestors, and press use these tools, so I work for free for these data vendors to make sure that their data about our activities is correct. (This is a great example of why data businesses have substantial moats.)

Boardex and Relationship Science make it easier to understand and map social networks into potential limited partners. Cobalt for General Partners helps GPs to optimize their fundraising strategy. MandateWire and FinSearches provide leads on limited partners with new mandates which might fit your fund. Evestment is a platform for capital-raisers; Evestment TopQ automates private markets performance calculation. Aptiv.io is an automated sales assistant which leverages a wide range of data signals to help managers identify new allocations and relationships.

I am a heavy user of DocSend, a secure content sharing and tracking platform that can be used to seamlessly share recurring materials with potential LPs. It provides analytics to track shared materials across target senders, and improve the content for future leads. Point Nine Capital uses Qwilr to create modern, mobile-native collateral.

Most funds open data rooms to share previous reports, performance data, pitch decks, legal docs and other fundraising material with LPs. I’ve seen funds using Ansarada, Allvue, Box, CapLinked, dfsco, Dropbox, Digify, Drooms, Google Drive, iDeals, Intralinks, Ipreo, Merrill Corporation, and SecureDocs for their Virtual Data Rooms. These same tools are used by companies raising capital.

I’ve also experimented with using services which are marketplaces between LPs and GPs: CEPRES, DiligenceVault, FundVeil, Harvest Exchange, and Palico. Some funds are using technology-enabled intermediaries to help them sell to retail LPs, e.g., Artivest and iCapital Network.

Deer Isle Group has built the D.I.G. Beacon technology system, which automatically outbound-solicits a universe of over 10,000 institutional investors, without requiring LPs to register for an online network of funds. 

Crystal guides you in how to influence a particular person, based on their online presence.  I use Calendly for scheduling; another option is X.ai, a virtual assistant which can coordinate your fundraising and other meetings.

The standard industry benchmarks often suffer from inaccurate reporting, survivorship bias, and other issues. AngelList built out a “fund performance percentile calculator” for fund managers to compare their performance against other funds, using their detailed proprietary data and other sources.

Aptiv uses hiring patterns, M&A activity, dark web information, and other signals to identify potential LPs, as well as for other sales use cases.

4) Originate investments

Delian Asparouhov, Founders Fund, says on the home page of Matchbox.vc: “Ladies and Gentleman, welcome to 2020. If you ain’t sourcing on Fortnite you’re missing out.”  The site connects founders and investors by playing multiplayer games.

Chris Dixon, Partner, A16Z, observes, “Success in VC is probably 10% about picking, and 90% about sourcing the right deals and having entrepreneurs choose your firm as a partner”. Keren Moynihan, CEO, Boss Insights, said, “Last week at an industry function, we asked a high rolling VC, “how’s your lead gen?”  She answered, ‘We see a lot of deals.’ So we probed, ‘Oh, so you don’t need a qualified lead generation tool then?’  Her answer? ‘I chose my words very carefully. I said we had a lot of deal flow. I never used the word qualified.’

For both origination and competitive due diligence, a host of data companies aspire to be the “Bloomberg of private companies”, including Boss Insights, CB Insights, Crunchbase, Cyndx, DataProvider, Oracle DataFox, FuelUp, Hauniv, Qodeo, Startus Insights, Tracxn, and Zirra. Data companies focused on early-stage startups include Aingel, fundsUP, Kahler VC.x, Preseries, PredictLeads, Sfumato, and Sploda. Data companies more focused on later-stage companies include Avention, Bureau Van Dijk, BizQualify, Dow Jones, FactSet, Genesis, S&P Global Market Intelligence, DueDil, Core 2 Group, D&B Hoovers, InsideView, LexisNexis, Pitchbook, Preqin, PrivCo, SourceScrub, Refinitiv, Udu, and Unquote. Coalesce address the more general problem of searching through large data sets for best fits. Nepfin focuses on lower middle market transaction activity.  A number of analysts have particular focus on serving the customers of technology companies, e.g., Gartner and 451 Research, and their work is also relevant for investors.

Investors are also mining for leads such sources as:
– product crowdfunding sites (Indiegogo*, Kickstarter);
– tech communities (Producthunt);
– angel group platforms (Gust);
expert networks (e.g., Atheneum Partners, AlphaSights, Dialectica, CAPVision, Coleman Research Group, GLG, Guidepoint, Insight Alpha, Lynk Global, Maven Research, Kingfish Group (specialize in private equity), Primary Insight, ProSapient, and Third Bridge);
– highly gated and focused face-to-face professional networks (Meetup, Voray);
– buyer review sites (Capterra, GetApp, G2Crowd, SoftwareAdvice, IT Central Station, TrustRadius);
– family office coinvestor networks (Clade, Sharenett);
– private equity-focused coinvestor networks (Trident); and
– angel investor networks (AngelList, FundersClub, OurCrowd, Republic*, SeedInvest). 

Russell Rothstein, Founder and CEO, IT Central Station, a product review site, said, “We see VCs on our site very often. They read reviews of the products of target investments. They also frequently visit our comparison pages where they compare one company with another.”

Later stage investors are using for sourcing private company marketplace services focused on more established companies, listed below under “Step 11: Exit”.

Some examples of VCs originating in creative ways: Pioneer runs an extremely open contest focused on lowering the bar to raising capital for “scientists, artists, entrepreneurs and civic activists.”  Members of GSV Passport™, an online entrepreneur community, have access to “100+ mentors, 450+ investors from all over the globe, hundreds of templates and guides, and $450K in free and discounted services from our 50+ preferred partners.”  On Deck focuses on connecting talent in transition with opportunities in the venture universe.  Pollen VC offers a LTV calculator. NFX offers FAST Seed, which has an unusually transparent and easy-to-use application process. Another VC uses Spoonbill to track which companies are highlighted in Twitter bios, which correlates with which companies are “hot”.

I use Feedly to track information about the companies and industries I am tracking, and share that information internally. I use Superhuman, an email app which speeds up my email processing, and also gives me background information on all of my correspondents. Another VC said, “I’m a heavy user of Streak, which is a CRM that lives in your Gmail and allows you to create contact pipelines, snooze / track e-mails, save snippets, etc. For networking, I’ve started using Clearbit and Hunter to verify e-mails, and have Dux-Soup plugged into my LinkedIn to streamline some of the sourcing processes.” Other VCs endorse Mixmax to automate repetitive processes.

To enrich Linkedin and help you find out the emails and phone numbers of people you want to talk with, try Contactout or Aeroleads. LeadIQ Scout provides access to peoples’ email addresses as you browse websites. 4Degrees helps leverage your network for sourcing. Sutton Place Strategies helps private equity funds identify the best-positioned intermediaries (investment banks) for their thesis.

Serge Salager started Visualping to monitor for changes on websites. One of his major client groups are private equity/VC funds, who are using Visualping to track such changes as new research reports; new patent filings; clinical trial outcomes; industry statistics; keywords (such as “price increase”); and key company pages (“Clients”, “Management”). Salager reports that Sequoia’s HR teams also using the tool to track their portfolio companies’ job openings, to proactively send these companies rock-star candidates they have on file. Deal makers are also monitoring changes on companies they are negotiating with, to know if a competitor has closed the deal before them. On a lighter note, StrictlyVC reportedly used Visualping to know when startups fall out of favour and their logo is removed from VCs’ portfolio sites.  For more on gathering data and using it to assess companies, see How to Assess Startups Using Machine Learning.

Hilary Mason, Data Scientist in Residence at Accel Partners, has a TED talk on how she replaces herself with a shell script to handle her email deluge. She is a model for us all!

Lastly, some VCs try to front-load the processing by creating standardized questionnaires for companies; here’s a list of VCs with open application processes. The advantage of this is cleaner data, but the disadvantage is it deters some applicants who are used to just forwarding a deck to an email address.

5) Manage relationships (CRM)

Many VC funds rely on general-purpose CRM and sales funnel solutions like Copper, Pipedrive, Salesforce, Streak, and ZenDesk. These typically have a larger support ecosystem and greater assurance of long-term stability than the custom vendors.  That said, I have seen a surprisingly large number of custom CRM solutions for PE/VC funds, including from Altvia, Backstop Solutions, DealCloud, Drooms Dealflow, EquityTouch, Foundersuite*, Fundstack, SalesLogistix, Satuit, Sevanta Dealflow, Navatar, Obsidian Suite,  and Touchstone. Some VCs are using Act-On, Ebsta, or Hubspot to support their CRMs. Skype and Zoom are useful for video/audio conferences.

Point Nine Capital uses Contactually for contact management. I use FullContact to import business cards and sync other data sets with my CRM.

I personally use Salesforce. It’s not right for everyone, but they do have the advantage of being integrated with numerous other other services, like some of the ones I list here. 

6) Due diligence

Wonder* provides short-form custom research on almost any research topic, e.g., “Tell me the major competitors to ____”. Earnest Research* and Drop Technologies* mine proprietary data sets (e.g., credit card data) to provide analyses unobtainable through other means, e.g., “How much did consumer spend on each of these 5 competitors grow last month?”  

To measure product usage and traction over time, I have used tools like Alexa, AppAnnie, and Google Analytics. To quantify consumer trends and market opportunities, useful tools for “top down” assessments include IBIS World and eMarketer. For more rigorous, bottoms-up sizing exercises I suggest tools such as Statista and the United States Census Bureau (also their North American Industry Classification System database) to help identify more specific data.

The majority of funds are using the popular B2C websites and services for basic due diligence, e.g., Linkedin, Twitter, HackerNews. TruthFinder and Intelius provide basic background vetting. Pacer is useful to search prior litigation, bankruptcies, etc. Opencorporates helps in hunting prior company histories and principals. Pro Publica has a Nonprofit Explorer database searchable by principal name on all nonprofit filings, so you can see a person’s nonprofit activities. 

Technographics vendors such as Builtwith, Datanyze, HG Data, Stackshare, and Stacklist help CEOs identify the right tech platform on which to build their business; they’re also helpful for investors to due diligence a company’s tech stack choices. Similarly, Corsis uses benchmarking data to understand technology spend patterns.

Lean Case provides standard business models & metrics, so you can apply a standard approach (not just Excel) to business planning, modeling, and profitability tracking.

Spring Lane Capital uses a highly-structured, deep-dive interview format with founders, which they compare internally vs. their in-house scorecard. Tribe Capital has developed A Quantitative Approach to Product Market Fit. TABS Group offers a standardized due diligence scorecard, TABSScore.

An example of a tech-enabled VC is Corl. Derek Manuge, CEO, says that “Corl evaluates startups by assessing the risk-adjusted return of an investment based on over 500 metrics across financial (300+), banking (75+), payment (75+), marketing (25+), and team information (25+). Some notable metrics are revenue growth rates, free cashflow, leverage ratios, historical financing amounts, returns on marketing spend, customer acquisition costs, lifetime value of customers, customer churn rates, and team social scores. Most of this data is sourced directly from the business through service providers such as QuickBooks, Xero, MX, Shopify, Stripe, Google Analytics, and Crunchbase. In addition, Corl uses automation to generate due diligence reports that are produced within 24 hours of a business applying for investment, which is used to streamline the non-quantitative aspects of due diligence to as little as 2 weeks. The reports showcase raw data, analytics, visualizations, and benchmarking statistics on the company from dozens of sources, including team, intellectual property, technology, product, financial, banking, marketing, customer, risk, valuation, and investment information.”

To share diligence notes internally, popular tools include Google Drive, Evernote, and Notion.

I have not found a thorough platform to track all steps needed to due diligence all aspects of a potential investment. If you have one, please contact me.

7) Negotiate 

I gain insight into the management style of portfolio company management in part by assessing their social media activities and digital exhaust. If you’re negotiating with a CEO showing photos on his Instagram of yachts and parties, you might want to particularly put in controls on his expense account. The Pocket Negotiator is very early-stage attempt to aid in the negotiating process itself.

Founders are often disadvantaged in their negotiation vs. investors because they’re less familiar with the long-term implications of different structural options. 645 Ventures released a cap table simulator to help level the playing field. Capital has built a free online tool for founders to calculate their cost of capital. Lighter Capital, a Revenue Based Investing VC, offers a Cost of Capital Calculator. Other similar visual tools not tied to a specific investor are Venture Dealr and NoteGenie.io.

Bulletpoint Network is improving financial modeling by enabling more sophisticated and quantified scenario planning. “One of the most powerful things we do is to improve the way investors can predict future multiples,” says Mike Ryan, CEO, who formerly managed $18 billion for the Harvard Endowment and was a partner at Goldman Sachs. “Multiples reflect the outlook at any given point in time. Investor expectations for long term growth, eventual profitability, and scale potential are much more important drivers of valuation than looking at a list of comparable companies and pegging a number to multiply by a given year’s revenues or EBITDA.” (See their blog post on multiples.)

Modano standardizes Excel models to improve comparability and reduce error rates. GF Data collects and publishes proprietary valuation, volume, leverage and key deal term data contributed by over 200 lower-middle market private equity funds and other deal sponsors, providing a unique negotiating tool.

The National Venture Capital Association (NVCA) partnered with Aumni, an investment analytics company, to launch the Enhanced Model Term Sheet, detailing the usage and frequency of legal terms found in this model agreement.These insights are the result of analyzing over 35,000 financing transactions, representing more than 17,000 unique investors.

For negotiating a contract, I’ve looked at Anduin Transactions, IroncladApp, SpringCM, Concord, ContractRoom, Dolphin Contract Manager, and Juro, and SRS Acquiom. Contract Logix helps to generate contracts with preapproved terms. Agiloft, ContractSafe, ContractZen, Contractworks, and Entity Keeper help in managing your set of executed contracts. I use DocuSign a lot, which is steadily reducing the need for paper signatures, and is also a more streamlined method for communicating contract changes in a secure manner.

Atlassian open-sourced their M&A term sheet, a very aggressive move which helps smooth the M&A process, by reducing the number of degrees of freedom in a negotiation. This move also undoubtedly created more inbound M&A opportunities for them. 

As benchmarks for negotiation, popular tools include Bloomberg (if you have a big budget), Yahoo Finance, S&P Capital IQ, and PublicComps.

For the broader use case of helping startups execute their legal paperwork, I suggest Clerky (in US) and SeedLegals (in UK) as focused solutions.

8) Monitor 

Melissa Craig, Director of Financial Ops, Lukka, Inc, observes, “LPs want to know and have a right to know, in near real time, how each company in the fund is performing. But, GPs are overwhelmed by investor requests because they don’t have the technology that makes transparency possible. All the outputs that investors want are in the monthly financial data that funds collect, normalize, analyze and report. Yet, according to my own surveys, a majority of private capital funds (including funds that specialize in fintech!) still perform the repetitive functions of data collection and investor reporting manually.”

The simplest way to track a company’s performance: have them give you access to their internal metrics dashboard. But some companies are not comfortable with that level of transparency, and of course the data is inconsistent across multiple portfolio companies’ dashboards.

I used Ipreo heavily at one of my prior VC funds.  Jaime Hildreth, Managing Director of GP and LP Strategies at Ipreo, said that 97% of Ipreo’s GP clients report that data requests from LP’s have increased over the past two years. Close to 80% responded that manual processes, such as tracking down support, preparing reports and pulling data from different sources, are the biggest pain points they face in the valuation process. Satisfying LP demands and streamlining the valuation process are primary drivers in those clients’ adoption of Ipreo’s portfolio monitoring and valuation solutions, iLEVEL, iVAL, and Qval.

Monitoring and reporting solutions include BaseVenture, Burgiss, Davigold, Chronograph, DocDep, eFront FrontInvest, Framework, Investors Economic Assurance’s CapAssure, Netage Dynamo PE, Q-Biz Solutions, Qualtrics, SS&C GlobeOp, and Vantage Software. Fund/SPV management services specifically are provided by Assure Services, Proteus Capital, and Vauban. Fincura specializes in serving lenders. Betterfront.io is a startup focused on VC fundraising.

ff Venture Capital hired two full-time engineers to build out Totem. Totem is a modern operating system designed to be the everyday tool fund managers use to manage their deal pipeline and portfolio. When I was a ffVC Partner, I would go into meetings and show other VCs the app on their phone, and hear, “I could really use that—that’s like having an Analyst in your pocket.” As of the beginning of 2017, ffVC spun out Totem into a separate business. Kushim manages your deal flow and track portfolio performance. VisibleVC helps companies to provide data-driven updates. Carta, Captable.io, Certent, EquityEffect, MyStartupEquity, Shoobx, Pulley, and ShareWorks by Morgan Stanley track private company cap tables. 

From a startup’s point of view, Abaca helps a company identify in a standardized way their level of development. The self-assessment methodology, developed by Village Capital, is called VIRAL, for “Venture Investment Readiness and Awareness Levels.” 

9) Accelerate portfolio company value

Many portfolio acceleration VCs work to evangelize modern analytical tools to their portfolio companies, particularly to improve their board management, research into new business ideas, sales, recruiting, and financial management.

The segment with the best developed tools are providers of board management systems, e.g., Aprio, BoardEffect, Boardable, BoardBookit, BoardDirector, BoardPaq, Boardvantage, eBoardSolutions, Diligent, Dilitrust, DirectorPoint, Loomion, Passageways. That said, the quick and dirty approach to using technology for better board stewardship is just to use existing file sharing systems (Google Drive, Dropbox, Box, etc.) and project management and collaboration tools (Asana, Huddle, Basecamp, Sharepoint, Central Desktop, Trello, etc.)

For most investors, the most important tool for supporting their companies is their network. We can use technology to make sales far more efficient. 

Accordion Partners recently launched Maestro, a technology platform designed to institutionalize a private equity firm’s unique approach to accelerating portfolio company value. According to Nick Leopard, CEO, the major advantages of a systematic and documented approach to portfolio acceleration include: 

– Avoiding missed opportunities by systematically applying all a firm’s value levers to a company;

– Saving time across the deal team by preserving associates from manually updating excel trackers assessing the portfolio;

– Faster identification and remediation of talent gaps on the management team; and

 – More effective board meetings and weekly/monthly calls to focus on solving issues at hand (that have now been already identified); and

– Better responsiveness to LP questions in due diligence around the fund uniquely creates and tracks operational value-add.

Foundry Group is using their portfolio company Monday to aggregate portfolio companies’ job postings on their own jobs page; Point Nine Capital uses Recruitee for the same purpose. Other firms are using Talent Relationship Management tools, e.g., Thrive

Sapphire Ventures launched SV Explorer and AXA Venture Partners offers the AVP Library. Both are online discovery tools for corporate and IT leaders to learn about emerging technology companies. These VC firms are positioning themselves as trusted advisors to large enterprises on the right startups whom they should buy from or invest in. 

One of the most important aspects of accelerating portfolio company value is helping your companies raise their next round. I use the vendors of PE/VC investing data I listed above to track the interests of potential private equity/VC coinvestors, and selectively introduce investee companies as we build out a syndicate

To help company management directly, Signal is a fundraising tool for founders run by NFX Guild, which identifies the most relevant VCs for you. I’ve seen other VCs use Bridge to more efficiently make and track introductions.  

The Long Term Stock Exchange is building out a set of tools for founders for managing their cap tables, 409A valuations, cash on hand, options pool, investor relations, etc.  Nathan Backord, CEO, FounderSuite*, said, “Foundersuite has expanded its investor database to include 100k angels and high net worths, as well as 41,000 VCs, Private Equity, Corporate VC, Family Offices, Fund of Funds, Foundations, Lenders, RIAs and more. Foundersuite also has a new product called “Agent Model” which enables you to set up one master account and then create multiple private, separate companies / deals under that account. Originally designed for investment bankers, it’s now also being used by VCs to help portfolio companies with fundraising.”

A number of companies help companies (as well as funds) who are crowdfunding manage the process in a legally compliant way: FundAmerica, iDisclose, RegisteredTransferAgent,VStock Transfer, and Wealthforge

10) Report

Many PE and VC firms use Archway Technology, Allvue, eFront, KPISoft, or Sungard Investran for their fund accounting. ComputerShare provides financial administration for private and public companies.

Advise Technologies focuses on regulatory reporting. Imagineer Technology Group provides solutions for investor relations, fund marketing, and reporting.

To serve founders’ needs, Foundersuite* has a dedicated “Investor Updater” toolInvestory offers a two-sided investor relations tool for founders and investors, as well as advisors/agents, with a focus on the European markets. Quaestor is automated data platform that enables financial transparency between startups and investors.

Hedge funds don’t want you sharing their letters, but unfortunately you’ve got a camera on your phone and can take photos of their confidential information. Some technology vendors are providing options to limit distribution of confidential information from GP reports. DRM services to help with this goal include Blackberry Workspaces and Citrix ShareFile.

11) Exit 

A range of companies are working to make the M&A process more transparent and less serendipity-driven for later-stage companies, including Axial, BankerBay, Intralinks Deal Nexus, Interexo, and MergerMarket. EquityZen, SharesPost, and ZenPrivEx, help employees and investors liquidate their positions in late-stage companies.  ExitRound helps early stage companies identify buyers in smaller exits. 

Atish Davda, CEO, EquityZen, says, “EquityZen [and some of its peers] offers a customizable watchlist users can keep updated regularly. These advanced features are a two-way street: they help the platform focus time and resources to surface relevant offerings, and in turn, help ensure investors are aware of opportunities when they become available. An added benefit is that investors can indicate the specific price per share or valuation of the company they want to invest in.”

I asked Peter Lehrman, CEO, Axial, what were the best practices of his power users. He said,

“Axial power users employ the following three best practices to maximize their pipeline and visibility to sellers: 

– “they have between 5 and 15 unique ‘projects’ set up that express all of their specific transaction interests, broken out by industries, geographies, transaction type (minority vs m&a, roll-up, etc).

– “their buyside projects are BOTH clearly articulated and credentialized with historical transaction data, links to CEO endorsements, and explanations backing up their investment interests and thesis. This drives up their visibility and their conversion with Axial’s choosiest and most private sell-side members, who will only approach a subset of capital partners. 

– “they consistently respond to inbound deal flow within 24 hours, which helps them maintain their top member rankings on the platform, in turn earning them greater visibility in the search results.”

Fortis manages the post-closing process on behalf of selling shareholders in private M&A transactions. MeltingPointSolutions is an online market for secondaries in alternative assets.

Some private equity funds are quantifying their exit strategy in a concerted way. They are tracking information available on Pitchbook, Bloomberg M&A, and other similar sources to conduct factor analysis in order to identify a series of factors that would kick-off the exit process. According to Mariya Osadchaya-Isa, Head of Growth at Mercury, one fund she has a relationship with, “tracks the available private company data for same sector companies and the relevant exit data and use basic correlation analysis to identify moments of the largest possible multiple expansion. This process is very similar to what a growing number of private equity houses are doing during sourcing, so I feel it’s a natural extension of their capabilities to do this in order to more effectively time the exit. This also can be a valuable tool for increasing fund transparency and communicating with LPs.”

Vested helps employees and employers calculate exactly how much their options are worth, and when and how to monetize.

I have embedded below the presentation from a talk I gave at the “Alpha Innovation Required” summit on “Who is Building the Renaissance Technologies of Private Markets?”; you can see the video here.

Where are we today?

VCs tout our industry as frontier technology investors, but most of us are using the same infrastructure tools we have used for the past 20+ years: Excel and recent college grads searching Google. We’ve seen some modest progress in people upgrading from Excel to Google Sheets; use of CRM; and a cloud-based storage service. But according to Sebastian Soler, Data Science at Lux Capital, under 5% of US VCs have a full-time team member focused on technology. 

Tim Friedman, Founder, PEStack, said, “While the arguments for adopting the latest technology are now too compelling to ignore, finding the required budget for specialized tools can often prove to be a major challenge, especially for smaller managers. Comprehensive market data can cost upwards of $25k for a leading service, portfolio monitoring can be double that, add in front office tools and you’re quickly into six figure sums. My advice is: there are now more products than ever which focus on quick implementation and offer a lot of functionality at a fraction of the cost of some of the larger legacy providers. TotemVC* is one example of a high-quality solution which offers a powerful platform with a transparent, affordable monthly rate.  One piece of advice would be to use a service like [PEStack’s] free Vendor Profiles platform to identify viable providers and build up a shortlist. We also track sample clients so that our users can see what their peers are using. I would always advise managers to talk to other professionals to get the real inside scoop on which products work well, how painful the implementation was, and how good the ongoing support is.“ 

Jonathan Balkin, Founder, Lionpoint Group, observed that the highest-impact technology initiative for a new PE/VC fund is typically to configure and enforce usage of a CRM system. The next most impactful initiative is usually to create an easy-to-use LP portal.

Johann Kratzer of Blue Future Partners, a VC fund of funds, wrote, “The majority of the hundreds of funds we’ve diligenced rely predominantly on their relationships to source deals. However, an increasing share of VCs in our database are trying to build a competitive advantage by crawling large amounts of publicly available data and building analytical functions to flag companies with accelerating traction to them. However, it’s still quite unclear, how (and if) the use of technology correlates with financial returns for VC firms.”

Historically, investing was a manual, artisan process. An investor had few hard metrics other than the actual financials, and little technology to make the process scaleable. Over the past few decades, better metrics became available, and investors could take a more analytical, data-driven approach. The extreme example of this are algorithmic investors in the public markets, who design algorithms which trade on the designer’s behalf, as opposed to making trading decisions directly. High-frequency trading, algorithmic by its nature, is estimated to account for at least 50% of US equity markets trading volume.

Quantitative, technology-enabled investing in private companies makes sense, but is structurally very difficult, and will become a more common strategy at a much slower rate. The private markets are more opaque; they offer less of the hard data critical to a true quant approach. In venture capital in particular, early-stage companies are often operating in frontier industries, where the rules are unpredictable and conventional analytic frameworks may be misleading. Even for later-stage companies with predictable financials, the lack of liquidity, audited financials, and standardized metrics creates real challenges to scaling quantitative investing. However, there is a lot of room to use technology to make the actual investing process more efficient.

Why is it now more feasible to use technology in the VC investing process? Sebastian Soler observes, “Structured, accurate and accessible data never really existed before for the private markets, at scale. Advances in machine learning, specifically natural language processing, have made generating these baseline, aggregate datasets possible, at scale, with high accuracy. Sources like Crunchbase, AngelList, and SeedInvest even give this data away for free or very low cost. The problem that faces startup investors now is how to mine this new data layer efficiently to increase returns.”

As an example of what’s possible, CircleUp has built a platform, “Helio”, which proactively finds, classifies, and evaluates consumer packaged goods companies — a “knowledge graph for CPG”. They specifically focus on CPG because they believe that’s the sector in private markets where analytic techniques are most applicable in origination. Today, Helio tracks over 1 million companies across more than 200 sources, comprised of a combination of private, public, and partner data. CircleUp has built three investing strategies on top of the Helio platform: CircleUp Growth Partners (a $125m venture fund); CircleUp’s credit fund ($200m AUM), and their upcoming “Systematic VC” strategy, which relies entirely on Helio to quantitatively select the portfolio of companies. 

Stereotypically, venture capitalists are viewed as less numerically focused than private equity investors. With regard to analyzing a given company’s financial model, that is a reasonable stereotype, given that VCs do not typically use financial leverage and financial forecasts of early-stage companies have a very high uncertainty rate. That said, I’d suggest the VC industry is more advanced than private equity in using technology in many other steps in the overall investing process, given the technology savvy of VCs, the transparency of many companies in the technology industry, and the relative receptivity of our limited partners to trying new ideas.

In private equity, the investors most proactively trying to use quantitative techniques are primarily sector specialists. According to one study, sector specialists regularly outperform generalist funds, returning an aggregate 2.2x Multiple on Invested Capital versus 1.9x MOIC. Sector specialists have always subconsciously correlated certain factors as drivers for future growth, but this knowledge is now being distilled into quantitative analysis.

Ms. Osadchaya-Isa, who worked previously at a sector-focused private equity fund, observes, “Sector funds, because of their ability to mine sufficiently targeted data, are working backwards to identify key correlations between different KPIs — including more unusual ones like positive PR releases to more basic fundamental analysis — that drive value at exit. This information is used to automate screening during origination. Automated screening ensures a higher quality deal pipeline that isn’t as prone to performance drags like mission creep and personal bias. Sector funds lend themselves well to doing this because it’s easier to quantify the characteristics which drive value on a sector basis, e.g., if you focus on SaaS companies you can identify annual change of >10% in recurring revenues as an indicator of future stability of revenues. This kind of ability to build a multivariate analysis suitable to be deployed on a company by company basis is not suited for generalist funds, unless they have sector strategies nestled underneath a generalist umbrella.”

For further reading:

PEVCTech.com:  a community for investors and technologists responsible for investing in private companies, primarily at private equity and venture capital funds

PEStack.com: a comprehensive database of private equity focused software, data and marketplace providers

What’s Your VC Tech Stack? Results from a Survey of Early-Stage VC Funds

Venture Capital Tech Stack — 2020

The VC Tech Stack – identifies major vendors with APIs

VC Tool Stack – exhaustive database

The Ultimate Early-Stage Investor’s Tech Stack

NBER Overview of VC Data: Opportunities and Challenges

Stanford List of Venture Capital and Private Equity Sources

Harvard Business School Current Research Sources for Private Equity

Private Equity Software and Services Directory

The VC Software Stack — the Untouched Vertical

A (Micro) VC’s Tech Stack, and the sequel, Revisiting Point Nine’s tech stack

83 VCs using data/ai/proprietary software to better source, evaluate and support investments

ULU Ventures’ data analytics tools for VC

On building a VC

Syllabus for how to launch, manage, and invest a VC fund

Microcredentials for the Effective Venture Capital or Private Equity Investor

How Private Equity and VC Investors Are Using Social Media

* I’m an investor in this company, via ff Venture Capital, HOF Capital, and/or an affiliate thereof.

Special thanks for their comments to Blue Future Partners, Karim Fattal, Steven Greenberg; Clay Hunt, Andrew Kangpan; David Levine; Mariya Osadchaya-Isa; Sebastian Soler; Andrew Sudol; Jim Tousignant, CEO, FinTech Studios; Franklin Tsung; various anonymous friends; and to research firm AskWonder, in which I’m an investor.

Cross-posted at Techcrunch: Part 1 (Progressive VCs and private equity are using tech and analytics to revolutionize investing). and Part 2 (These New Data Sources are Creating High Impact Tools for Investors)

 

Subscribe to my newsletter

Discuss On Twitter