From AIRR to Motherbrain: What tools VCs are using to run the operations and make decisions

Editor's note: This is a guest post co-written by Julia Momblat, PR at iTech Capital, and Yulia Naumova.

Manually gathering information for a sufficient basis, on which an investment decision can be made, as well as maintaining a strong bond with clients, investors, and employees through regular communication and reporting used to be a thankless job that required numerous human hours. The revolution, however, has begun, with robotic process automation and artificial intelligence changing private equity forever.

Most VC/PE firms now use at least one form of SaaS in their business. Predictions that once took months to generate and required frequent manual tweaks could instead be handled by powerful technologies that operate near-autonomously. A software is able to structure, visualise and synchronise the information received, allowing for more efficient decision making.

The traditionally stoic and relationship-driven industry of private market investment is not being spared from the rise of technology. In 2025 Global Assets under Management will almost double in size from $84.9 trillion in 2016 to $145 trillion; in turn, this will propel the global investment management software market to reach $5.76 billion by the same year. Private equity and venture capital investors use technology and analytics throughout all of their operations in order to understand the demands of the modern institutional LP, build a large audience within a CRM system (having the ability to categorize your different constituents) and communicate consistently to that audience, manage the firm and provide cybersecurity.

Let’s dive in one of the most opaque investment industries: direct investments.

Fund stage

Each fund has its own strategy, which implies the choice of industry, investment stage, check, geography, transaction structure, which certainly affects the set of tools that each team uses. When a fund is just being formed, as a rule, there are several investors and two or three transactions in it. Large amounts of data do not appear from day one, so Excel can easily handle it.

As the fund develops and builds some kind of legacy, the number of investors and transactions is increasing, the team is growing, the tasks get bigger — but at this stage they still manage their data with a number of separate systems and programs. Everything happens gradually. Once you notice there are a lot of LPs, you add a system for managing investor relations. When you see there are more companies, you add standard reporting forms to fill out. And in the end, the fund finds itself using many systems that are poorly integrated, and integrating different market products is a separate IT task. At this stage, there is a need for an independent IT product, because the situation when you have 10 logins and 10 passwords from different systems is rather sad.

We at iTech Capital use AIRR, an investment management platform we've developed in-house, which provides a professional set of tools for fund managers, as well as structures, visualizes and synchronizes the information received. AIRR is built as an open integration platform that allows exporting all data through APIs and integrating ready-made solutions in the investment management market. Pipedrive, Salesforce, Xero, PowerBI, Qlik, Docusign — more than 15 integrations are available at the moment.

“Venture investors are always looking for new projects; the question is how they find them,” said Gleb Davidyuk, managing partner at iTech Capital. “They market themselves and wait for a response, or they are the first to contact, searching for candidates by a variety of methods. By robotically automating the process, we have significantly reduced our investment team's labour costs while improving quality.”

Portfolio monitoring

The system of internal work largely depends on how much the fund focuses on working with the pipeline: a fund investing in the early stages keeps records of numerous companies and actively monitors transactions in the market. The fund of later stages works less with the pipeline, it does not require a high level of automation, but the team of such a fund considers each transaction in more detail, and the focus is shifted to tracking metrics for the existing portfolio.

A separate time-consuming direction of the fund’s work is communication and regular reporting on the status and transactions of the fund to its LP. This type of LP reporting is the most time consuming for investment analysts, and very few PE/VC firms do it properly. Usually firms tend to provide a brief summary of revenue and EBITDA trends, without any further disclosure. To do it well with a small team in a timely manner, one should introduce some degree of automation in metrics collection and storage, otherwise it is easy to get stuck in a back-and-forth communication frenzy with the management of the portfolio companies and end up with missed deadlines.

M13 uses Carta, a startup that helps private companies manage equity, in order to enable better LP communication.

“The most interesting thing about Carta is both its professional services and software. It is about the relationships you form with your account team. Their ability to be responsive and support us is super important.”

Pipeline generation

Using the example of the world’s largest venture capital market — the United States — it’s clear that the percentage of startups that find their investors hasn’t changed much in the past five years. Some 1,200 startups out of 600,000 that appear annually find venture funding. But where do you find them? In the most popular databases , there are some 8.5 million companies and 550,000 investors. It is impossible to manually sift through large volumes of information at a speed sufficient for a timely generation of the fund’s pipeline. This is a huge amount of work — and that’s why you search for lead generation tools.

MMC Ventures uses Fundwave’s new innovative project, Dealflow that incorporates CRM tools into the sales pipeline, in order to effectively visualise the entire investment workflow and manage the investment process, by having better visibility into how deals are moving through the process with key information available immediately. Dealflow is designed to help track progress easier and provide a sufficient data for an investment decision. By building in stable processes that help eliminate bottlenecks, Dealflow makes the investment process more efficient and predictable.

Investor relations

When it comes to live data, static PDF reports are becoming irrelevant as a means of providing information. New standards of communication with investors are emerging. Investors are used to the dynamic exchange trading and consider private equity as another investment instrument requiring a modern real time approach. The ability to understand the value of your portfolio at any given moment allows you to rationally estimate the value of a share in a fund and offer it for sale on the secondary market. The opportunity to view the pipeline of future deals allows you to take part in co-investment projects, and the ability to view records and data of portfolio companies allows you to make a retrospective analysis of the efficiency of the management team. Transparency of the process as a whole removes the risk of manipulation and makes the work of the fund manager more open. When the filter is formalised in accordance with the fund’s investment policy, the initial selection is based on objective criteria. The process is fair at the very start.

Target Global, an international VC firm focusing on fast-growing tech companies, uses QPLIX — a web-based software-as-a-service (SaaS) solution for venture capital firms and other customer segments from the financial sector — in order to manage a multitude of asset classes and to map complex wealth structures. Investors, together with their advisor, have access to further information at any time and from almost any device, which supports them in their selection and investment process.

Reporting

Every investor wants to know how much money they have spent and how much money they have received. This is the simplest question any GP can answer. All investment management platforms provide this functionality called capital accounts and allow fund managers to track their distributions and drawdowns for every investor. The other big issue is that working with administrators tends to be slow to respond to requests and even the best ones make mistakes; it becomes more difficult to react quickly 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.

eFront PEO/VC offers solutions to venture capital firms to excel in investor reporting, optimize reporting activities and delight their investors. It is a complete software solution for managing the processes from deal flow management and fund administration to investor relations, with detailed information on funds, investors and portfolio companies. Orion Capital has used eFront since December 2016 to automate and optimize their investment life cycle.

Cognitive biases in decision making

For early stage investment decision making, it has been well documented that cognitive biases — meaning systematic deviations from rational behaviour — lead to inferior investment performance. There are five most common biases:

1. Local bias, which describes tendency to make investments that are in close geographic proximity.
2. Loss aversion, meaning tendency to be more sensitive to potential losses than to potential gain.
3. Overconfidence, when investors “overcommitted” and spent significantly more money on one startup that they usually would.
4. Gender bias.
5. Racial bias.

Because cognitive biases cause investors to make irrational investment decisions, it is not surprising that investment algorithms outperform the human average.

Venture investments are high-risk for a good reason, as unpredictability and chaos are integral to this market, the whole venture is about taking risks. We do not know how to predict the future and do not try to. But technology can highlight segments that a particular investor is interested to invest in. It can help funds find a good deal. But the final investment decision is always made by the investment team and the investment committee, and their ability to work with information efficiently is key in making a decision.

Motherbrain is a project of EQT Ventures that the company uses for its own investment management needs, which crunches, finds and analyses digital footprints and patterns in enormous amounts of company/people/market/consumer data from multiple sources. Some of the recent investments made through Motherbrain include but are not limited to Amazon Go competitor Standard Cognition, augmented reality gaming studio WarDucks, college student career network Handshake,  and remote desktop company AnyDesk.

Image credit: Fotis Fotopoulos on Unsplash