Secret diaries of a fund operator

I’ve spent the last month meeting a large number of VCs in Europe, discovering pain points from GPs/COOs/CFO’s and have come to a revelation - fund operations are beyond broken. To put an analogy to it - if operating a fund was a house it would be suffering from severe subsidence, using coal for heating, have a doorbell that isn’t connected to a bell, and you would be facing a planning permission battle with the council on a poorly planned extension.

What’s actually wrong?

In 3 simple points:?

• OS-less: The operating system and applications used look like they were designed for Windows 95 (I hope you are the lucky few that never witnessed that)
• Fund admin woes: The workflows are so disjointed that it has become culturally acceptable to lose LPs due to a fund admin’s analogue and high friction workflows.
• Manual labour: There are very smart capable operators doing very manual and low value work - including copy and pasting data from one spreadsheet to another?

Let’s break this down in non-fiction anecdotes:

When 1+1=0.5

With the heydays of 2021 feeling far away, fundraising for VCs is taking much longer to raise, and differentiation (beyond prior top percentile performance) is coming down to quality of investor relations, cost efficiency and team.

Sadly (and at the same time thankfully) fund admins can’t solve your team or prior performance, but investor relations matters (how quick and accurately you can you deliver your reporting, tax forms or distribution) or cost (how much of your LPs’ money is paying for archaic and expensive service providers) can make or break your trust with LPs.?

One manager confided in me that his admin’s LP portal was so horrendous he had to purchase a third party system just to do capital calls and LP reporting. The fund admin runs the accounting and then uploads it manually to the LP reporting system (which also means double 4 eye reviews by the manager).?

The admin fees also increased by 25%. That’s small change for a large fund but LPs are taking notice - one fund of funds CFO remarked that LPs are fed up of having to maintain logins into 4 systems per manager and are demanding consolidation.

Onboarding LPs looks more like art than science?

The most unbearable stories are the KYC/AML experiences. Everyone has their war story of how they lost an LP in a deal due to their fund admin’s processes. “Too intrusive, too slow or simply mean” are just some of the nicer adjectives I hear. Almost half of fund admins have little to no digital AML processes. VCs are often surprised when I say we have an automated workflow.

Don’t get me wrong - we live in a high vigilance world (rightly so) but no effort goes into educating GPs or LPs on what to expect by admins. One manager went as far as to call compliance a “dark art”. Something to consider possibly for the next Harry Potter series.?

Death by a thousand paper forms?

In my younger professional life I vividly remember sitting in front of a photocopier and copying a document no one would ever read (a m&a bundle) in triplicate. I felt those days were getting further away, but I’m not entirely sure that fund admins have evolved from this state.

One GP mentioned to me that he gets from his admin a 60 page pdf form to fill every time he does an investment. He was so frustrated he tried unsuccessfully (but gallantly) to use docusign to automate the flow. He earned my respect.

Another mentioned a digital onboarding tool that got rejected by lawyers as incompatible with local e-signature laws and therefore had to be printed and signed. Don’t get me started on the stories with German notaries.?

The data paster

Nothing concerned me more than the number of excel spreadsheets that managers and internal finance professionals need to maintain outside of their financial reporting. One manager has a master excel with over 18 tabs where she manually inputs data points from her fund admin, portcos, cap tables, LPs, valuations and capital calls. I can only imagine that the end of reporting period must be a nightmare.

Additionally, lacking a single source of truth means you are spending more time validating data than analysing your metrics.?The result of this is that VC Finance teams appear to be spending more time on financial control than on strategic finance.?

One small step for fund admins, one even smaller leap for mankind

When I started doing business in Africa quite a few years ago, I was amazed how there had been a technological leap from traditional money movement to cryptocurrencies. No digitalisation step, just one big leap to power the economy.

I spoke to one admin that is exploring a blockchain based fund admin network. I wasn’t as amazed to hear this in 2023. There are enough online tools to automate a subscription agreement - no need to reinvent the wheel on this one.

A new hope?

The good news is that there are some excellent tools out there that solve for specific use cases that traditional fund administrators cannot, e.g.: (1) bespoke LP reporting interfaces, (2) LP KYC/onboarding platforms, (3) micro-fund service providers, (4) bespoke SPV platforms, and (5) portfolio company data capture tools.

But I am yet to see an OS as complete as Carta (I know I’m biased here!). Where other systems are vertically sound, Carta has deep horizontal and geographical coverage to solve both portfolio, manager, GP and LP pain points. It is a one stop shop for all of the above and remarkably cheaper including reducing your excel spreadsheets to virtually nil.

The views in this article are my alone and should not be attributed to anyone else including my employer.