ABOUT THE EPISODE
SVP, Industry Solutions & Strategy
Investor onboarding is all the rage right now — the manual, time-consuming process by which limited partners subscribe to private funds is moving in haste to become yet another part of the digital transformation of private markets. We’re thrilled to be joined by Tim Flannery, a co-founder of Passthrough — one company taking an interesting approach to solving this problem. We discuss the basic mechanics of digitizing the subscription process, who the constituents and beneficiaries are of doing so, and the opportunity to provide identity resolution to private market investors.
[00:05:43] Tim Flannery: Yeah, the primary customer is the fund manager. And the thing that I am selling to those fund managers isn’t that I’m necessarily going to reduce their fees.
[00:05:52] I’m not going to create an antagonistic relationship with their law firm partner. The thing that I’m selling them is that I’m going to make this experience significantly easier for you and significantly easier for your investors, so that you can just get off and go do the work that you want to do, which is to deploy capital, right? Just move onto the next thing after the raise is done. And we’re going to just make sure that that process is seamless. So law firms, traditionally, aren’t our customers, but they’re really important parts of the ecosystem as you’ve pointed out. And so while they might not be paying us. We need to make sure that they have a really good experience.
[00:06:27] And so a lot of the things that we designed in terms of how the exports work is, okay well, you have this manual tracker, you have all these other things. How can we actually make you operate better from your fund information practice? And so even though they’re not paying customers, we need to make sure that their experience is seamless because like they, and the administrator on the backend, everybody’s participating in collaborating on this one thing.
[00:06:48] And so it’s a coordination challenge.
[00:06:50] Jeff Williams: Tell us a little bit about your experience at the company is, what, just 18 months or so, or not even old, but was the sort of identification of this problem, largely the result of, you know, people talking about it and having a lack of solution, like what has been like, I have to imagine based on what we’ve seen, that people were sort of lined up, you know, at the door.
[00:07:13] When you open, I mean, it’s sort of this problem that there’s more awareness about, and seemingly a lack of a good solution for a long time. I mean, what’s been the experience thus far as the company?
[00:07:27] Tim Flannery: So the very beginning, the company started in the early days of COVID.
[00:07:32] And so that was at first, like markets froze up, right. And then markets accelerated quickly. And so everything that meant for fundraising, but it also needed a broader trend towards why do I need to do things in the same analog way? And so we thought everything was going to consolidate in this market.
[00:07:54] Obviously these things should be online. Obviously they should be simple for people not to have to go print something out, sign it, scan it, go upload it again. So COVID ended up accelerating things quicker than we thought and driving people towards this trend. When we started the company last year, when my partner started it, we focused basically on getting the product ready.
[00:08:19] We had spent a lot of our careers working at Carta. We understood a lot about what the experience was like for investors there and investors that we’d seen on other platforms. And so we wanted to design an experience that was as frictionless as possible for investors to step through. So we had our first beta customer back in May of last year and then a couple more customers in the fall and then a couple more in the winter.
[00:08:41] And then ever since then, it’s kind of snowballed and really picked up. And to date we haven’t spent any time doing nany outbound, this is a pretty tight network, right? Like every law firm works with a ton of different people. Every LP is in a number of different funds. And so our experience today has just been, let’s create the best experience for everybody else that’s out there.
[00:09:02] So that the next time that they go raise a fund and they call their lawyers, they say it’s just easier for you to be on Passthrough, and for those LPs as well, hey, my information’s on Passthrough. I’ve run through this before or whatever it is, it’s just simpler if you guys do this than anything else. And so that’s really what our focus has been.
[00:09:20] Jeff Williams: Yeah. So many people I’m realizing that are interested in this, the data that comes through this process, right? So you talked about the structured data. I mean, One thing that we bump into, or the reason I suppose that we bumped into people asking about this quite a bit is because we’re interested in this data, to then begin the lifecycle of sort of customer service and communication.
[00:09:45] Right? I mean, like, if you think only about the contacts that will be receiving information and what types of information they’ll be receiving and stuff, a function or an outcome of the subscription back. Super interesting. That’s just part of it, right? I mean, there’s a whole bunch of stuff going on, you had said something to the effect of the fund admin.
[00:10:08] Right. That’s kind of a little bit, I guess the same thing, but there’s all sorts of stuff in this process, right? I mean, there’s compliance dynamics. I mean, I guess what I’m realizing is we’re talking about this in real time. There are a ton of consumers of this information. I guess I’ve used the analogy of GPS and LPs coming together as somewhat of a marriage.
[00:10:34] I guess you could sort of use that. And like, you know, there’s a lot of sort of very important things that, you know, are artifacts of the marriage ceremony itself. It’s just the beginning of a long relationship, hopefully. What am I not thinking about in terms of other people? I mean, there’s no shortage of a desire for this information, and you guys probably make it super easy on all those folks to acquire it.
[00:11:01] Tim Flannery: I think you hit on it. So, fund closing by itself is an annoying problem, and it very much deserves to be solved. What’s fund closing actually doing though? Fund closing is verifying the identity of these investors. And so somebody goes through this whole process of filling out this long subscription agreement for a lawyer to ultimately say, this person’s qualified to invest in your fund.
[00:11:27] You can accept their commitment. And then everybody goes on and the relationship continues with the fund manager, but that identity verification piece extends beyond just the subscription document, to your point. And so, long-term that’s what we’re moving towards is where should this identity once it’s been captured, be repurposed?
[00:11:47] Jeff Williams: Well, tell me a little bit about that. I know very little, but my understanding is that on KYC, AML, even if rudimentary, are there databases where you can check these entities against? What is it that a lawyer does? I mean, do they sort of Google the formal legal name on the subscription doc?
[00:12:08] Probably not. There’s gotta be even if not the vision you guys have of sort of centralizing identity. I mean, there’s gotta be something.
[00:12:16] Tim Flannery: Yeah, they can. So what most people have done around KYC in the past, is they’ve used service providers like LexisNexis and World-Check to go take the individuals to go take those entities, and screen them against sanctions list, politically exposed persons list so that people know who and what is coming into their fund.
[00:12:37] And one of the good things for us, and one of the troubling things for fund managers is that there’s just increasingly more regulation. And so, we’re working towards abstracting, a lot of that complexity away. So that really it’s just like collecting that information. And then it just goes where it needs to go.
[00:12:55] I forget what OFAC stands for, but OFAC is essentially a variety of different sanctions lists, put together. You could go on their website right now and you could go search up somebody’s name, and you could see any possible matches, right?
[00:13:13] So that’s just a simple repurposing of that. And then obviously you need to make sure that it’s not just the name, what’s the license, what’s the passport, what’s the proof of address. You know, whatever the standard is. It’s a pretty complex topic. But I have seen it from a couple of different angles in my career, but yeah there’s all sorts of different ways that people are doing it right now.
[00:13:35] I guess one of the challenges is the way that they’re doing it is they’re just taking these executed PDFs and everybody’s just shuffling them back and forth between everybody who needs to access that same information.
[00:13:45] Jeff Williams: Yeah. Office of Foreign Assets Control, a new federal agency I’d never heard of. Sort of a daily occurrence perhaps, founded in December of 1950, 200 employees.
[00:14:02] So, you know, That’s the sort of visual that I have. My screen right now is just like screams for disruption and privatization.
[00:14:15] Are you comfortable talking about just kind of high-level vision? I’m able to plan for… I’m interested in exploring… Like, I think you talked about. Are you comfortable talking about sort of what you guys are planning to do there? Are you planning to partner, integrate, stuff like that?
[00:14:44] Tim Flannery: Yeah, from a product strategy standpoint, the big thing that we’re really running at right now, and the whole thing is how do we just make this frictionless for investors? Right. So their identity can just transfer along where it needs to go.
[00:14:58] And so the big thing that we’re running at is first you have to do that across subscription agreements. And so if it’s, you know, let’s say that they’re using the Goodwin docs, right now, and they go from one fund on Goodwin to the next fund on Goodwin. It’s the same structure.
[00:15:16] It’s simple enough to run a script, to move all the information back and forth and so on and so forth. The thing that we really need to do is that when that investor goes into a fund, that’s using Kirkland and Ellis stocks, that information needs to flow seamlessly. And it sounds like it’s kind of a trivial problem.
[00:15:31] Seems like it should be because it’s all the same answers that are essentially being reapplied. But it’s actually a more complicated mapping exercise than that. And so that’s the thing that we’re really working on solving right now. And then, you know, once we solved that, then it kind of forces us to have a complex understanding of who these investors are and where they want to go.
[00:15:50] And then we’re just kind of allow them to take their identity with them. So really right now, it’s just, how do we make fund closing? You know, I don’t want to say turn it into a buy now in the private markets, but how do we turn it into a, almost one click for people to just step through, make sure that their information is as accurate and then they can just go on and do anything else in their life that’s better than filling out a subscription agreement.
[00:16:12] Jeff Williams: I’m interested in your thoughts. But it seems like generally in the private markets, the idea of open data and sort of data exchange is one that many companies have sort of salivated over, but which the sort of market dynamics is frowned upon.
[00:16:39] And it just is too challenging. I mean, is this an area where there’s very little for people to be concerned about this? Their sort of identity related information specifically. Cause I mean, as you talk about fund performance, totally different thing, right, it’s more understandable, but there’s one area it seems where there’s not really too much caginess if you will.
[00:17:02] Tim Flannery: So the way that we generally think about an investor and their identity is that it’s not our information. It’s that investor’s information. And so, what I want to do is give that investor the ability to do whatever it is they’d like with their own identity, because right now their identity is floating around in PDFs and emails everywhere.
[00:17:20] And I want to allow them to just kind of centrally control it. But the point is that I want them to control it. I don’t want to have a say in it, ultimately the service provider that they give access to the application that they plug their data into, that’s on them. I want nothing to do with that. It’s their own data.
[00:17:39] Jeff Williams: Yeah. Well, and that’s a good point because really what you’re doing here is making everyone’s lives easier, but only it really starts at the sort of institutional or that being a kind of limited partner entity owning their own data and saying that you have first off, this would be much easier if I could just say yes, we populate that all like I did the last time.
[00:18:00] It makes me think, and where I’m kind of unpacking the question ultimately to you is just generally your thoughts on like kind of more open data. I mean, so like let’s pop over to fund performance data, right? I mean, that is also GP owned. Like it’s a different entity now, a different side of the equation.
[00:18:23] But like I’ve always wondered why it is or, or wondered about the opportunity, I suppose, not getting too hung up on why GPs won’t do this. Cause I get why they won’t just openly share fund performance with anybody. They do want to control it. But the lack of standardization of how it’s captured, how it’s reported, how it’s structured, all those sorts of things are kind of similar related issues here.
[00:18:49] And I’ve had conversations with some of the largest venture and private equity firms and everybody sort of feels like, yeah it’d be kind of interesting, but what is it that’s missing? I mean, standardization is a simple word you could use to answer that question, but standardization is pretty straight forward.
[00:19:13] I mean, is it really just the sort of paranoia still, or like, what are your thoughts on this, open data, open identity type stuff in this market? You guys are playing in, even if tangential, slightly related portion of it.
[00:19:28] Tim Flannery: So it’s been a really bespoke market.
[00:19:32] If a large endowment comes in, there’s a good chance that they might even come in and redline a subscription agreement, so that it fits exactly what it is they do, and don’t want to respond even to the subscription agreement. And so right now there’s no standard. Every law firm, sometimes even each partner within a law firm might have their own view of how they should collect this information.
[00:19:52] And so we had a choice. What we could do is we could just partially from our own strategy, from what we’re doing as a business, and how that just relates to the future is we could say, all right, maybe there is a standard. And what we need to do is we need to build that standard and we need to get people on board with it.
[00:20:08] But to our earlier point about what law firms are doing, I’d rather go meet a lawyer where they are. And what I want to do is create an answer that’s flexible to the 20 different ways that you can ask this question. That’s ultimately what I want is I don’t want to force people into a standard anywhere.
[00:20:26] I want to just be able to handle all of that complexity within our application so that it doesn’t matter how somebody asks. It doesn’t matter what layer we’re using. It doesn’t matter how, whatever it is. And so, then at the end of it, sure, like it forces us to have to structure the data in some ways.
[00:20:41] And then the way that that data can be reapplied or even the way that we can one day, perhaps go back to an attorney and say, hey, we took a look at this question. And we noticed that when you ask about qualified client representations, that 20% of the time people get it wrong, the standard is around 5% of the time.
[00:20:57] Here’s what we’ve seen as a better way to ask this question. But the thing that we also recognize is that there’s constantly going to be more regulation. There’s constantly going to be something that is unique to this fund. There’s constantly going to be whatever. And so now standardization on the document request side, I don’t think ever happens.
[00:21:16] I think what happens is you just get to have a more complete picture of who this investor is overtime and how that data plugs into what somebody is asking it.
[00:21:24] Jeff Williams: Yeah. That’s a really interesting point. I mean, I think that part of the challenge that we have in doing what we do, which is at the end of the day, I think a lot of our customers view as sort of they’re special sauce.
[00:21:35] So in terms of internal CRM type stuff, right. We just did a webinar this morning. My colleague Kjael loves to use this phrase, which I love, and he used it this morning. It is something to the effect of like 20% improvement of how you do fund admin or like accounting, for example, right, is only going to create so much more value, right?
[00:21:59] You cannot mess this function up, but really the ability to find LPs, provide them with service, the ability to find investment opportunities that are differentiated, and when, that’s sort of stuff that drive people. And so in where we sort of play in CRM, a lot of people, I think sort of inherently say like, oh, well we need to do this and that and the other.
[00:22:25] And so one of the things that you just mentioned is that you create an opportunity to share best practices, if you will. Flip that conversation from, I know that’s how you do it, but one thing we’ve seen work in other places is that… and then all of a sudden they’re like, oh yeah.
[00:22:43] And so maybe that’s one way, I mean, it was sort of implied through your answer, even if indirectly, but maybe just the move from containing, this super wide spectrum of possibility of what a subscription document could contain or how you would be tracking intermediaries and potential deals.
[00:23:01] What if it just was skinny down a little bit. Almost sort of the implication of the word standardization is this sort of perfectly vertical line right down the middle. And maybe, we ought not to be chasing perfection, but embrace improvement and skinning that down a little bit so that there is room for nuance.
[00:23:22] These are complicated vehicles, complicated investment strategies. You can’t sort of move the market with standardization. It will just move away from it. But maybe there is an opportunity to kind of skinny things down a little bit share best practices. And that’s been our experience. It sounds like it’s been yours too.
[00:23:40] Tim Flannery: I think that’s right. There are also two other forces at play here that maybe you’re seeing something similar. First, there are more participants in the private markets now than there ever have been. And so all these pipes, all these different ways that we have been collecting data, organizing data… It’s not exactly the most robust pipes historically.
[00:24:04] And so it was fine when it was like this alternative asset class, but alternatives are less alternative every day. Something that we solved first hand at Carta, something that we see now is just this maturation of the private markets. And they tend to look more and more like the public markets.
[00:24:20] And so there’s a whole lot of room to catch up. And so, everything that was built to handle what alternatives looked like 20 years ago, doesn’t work today. And so the pressure from that is, it’s part of the reason why we’re out there. It’s part of the reason why we’re solving fund closing.
[00:24:37] Um, But it’s also part of, what’s going to force people to do something that’s more scalable on their end too? And so if you want to go buy an ETF and you don’t have a brokerage account, it’s up on Robinhood in two minutes. You want to go invest in a private equity fund.
[00:24:54] Okay. Call your lawyer and start collaborating on the document. And so eventually it just has to get to a place where, whether it’s the way you’re investing in funds, whether it’s the way that all the things are going to look more and more like the public markets every day. And so you just have to try to enable it.
[00:25:12] Jeff Williams: Yeah. Love that. So on that note, I’m interested in your thoughts too, because I love the way you’re looking at this stuff and light bulbs go off when you see some of these inefficient things. We’ve talked about this on the podcast a couple of times, and I have to say, I didn’t originally coin this phrase, but I’ve been thinking about it for a long time.
[00:25:32] And then somebody mentioned this phrase, which is Tinder for PE. But there’s sort of like, ah, dang, right? That’s the sort of thing I’ve been thinking about, you know?
[00:25:45] Closing is the end of the dating period, the beginning of the sort of marriage. I’ve always struggled to understand how we’re not already there, to this Tinder thing, which is, it seems like right now this market is very old school, right?
[00:26:08] Like you need to go out to the bar, need to be here all night, all the bars you can, come loaded with a bunch of pickup lines and be ready to answer unexpected questions. And then all of a sudden it’s this world where like, here’s what I’m interested in and, at a basic sort of level.
[00:26:30] And certainly those algorithms are no longer basic. There’s other people looking for you and what you’re interested in, and now it just becomes a matter of sort of saying, okay well, here are these people.
[00:26:41] I mean, what are your thoughts on this? We play in data room and then the same data room becomes used as the portal.
[00:26:51] It’s amazing to me that I’ve always been obsessed with this idea of open up your data room. One of the features of our data room is like, nope, you can’t just sign up, but putting in preferences as an institutional LP and saying, okay here are the sort of types of strategies I’m interested in on the flip side.
[00:27:11] If there are GPs using our data room that meet those characteristics of saying like, oh yeah, like here’s an invitation to come in and see if you’d like anything, I mean, it’s sort of interesting as it relates to you guys, it might be a stretch, but immediately validating the identity of, of one and making sure that it’s like a real person on the other end of the app, and that’s some sort of bot, what are your thoughts on that sort of thing?
[00:27:37] Are we ever going to get there? I mean, I think we will. I just wonder whether I’m still going to be alive or not. Sort of emulating the public markets. It’s like choosing the friction of not having to go find those people, but just letting them come find you a little bit.
[00:27:49] Tim Flannery: Yeah. I hope there’s 50 of those things that get built and they’re all built on top of Passthrough, and I’m agnostic who wins. But I agree. I think things are gonna move in that direction. The stuff that I always get concerned about whenever there’s something like that is the difference between.
[00:28:05] First, second, third and fourth core tile fund manager. Right. And then you get some selection bias at play and availability bias. And so how do those things work? I’m very interested in how it goes. I know a couple of other folks that are building stuff like that right now. And they are good people that I think are really qualified to go build it.
[00:28:26] I think that something like this will come along. It’s a hard business to build, but I’m excited to see it happen, and I agree it will happen.
[00:28:33] Jeff Williams: Yeah. The identity I hadn’t given that much thought, but the identity stuff is, is really quite interesting. You know, it’s an appropriate level.
[00:28:41] Relative to a consumer dating application and appropriate level of verification, right. Which you have to do in the C to C type dating thing, is make sure that you’re real and the best candidates sort of make sure those are actually pictures of you and stuff like that.
[00:28:57] But in this case immediately, that’s sort of immediate friction. And perhaps not the sort of explicit and direct problem you guys set out to solve, but perhaps so, and whether it is or not, it may end up being a by-product of that.
[00:29:13] Tim Flannery: Yeah. It could be. It’s going to be interesting to see where just like this broader thing goes, ultimately you kind of suppose that people are going to want to control their information and as few places as possible, and there’s just this kind of movement towards it.
[00:29:26] And I hope that’s something that we get to play a part in. But I can tell you the one thing that I really want to do is just make it really simple to close your fund. That’s it. Let me solve that first, then I can figure out what we’re going to do next with it.
[00:29:38] Jeff Williams: I love the focus though. Because they’re, to your point, I mean, there are, so there are so many opportunities and you know, that capitalism is still alive and well, when you start hearing about a problem and then all of a sudden you see a bunch of companies spin up to solve it.
[00:29:52] And, perhaps what doesn’t always happen is maniacal focus on solving a problem that enough people have in which they’re willing to pay off. And so I love that you guys are that focused. What is the competition like? I mean, I’ve bumped into a couple of companies.
[00:30:11] I must say from what I’ve seen, which is very little, seems like, the way you guys have gone about it, certainly one thing that stands out right away is the flexibility. You know, A lot of these solutions that we’ve seen, none of which seems to be sort of clearly winning, right. It’s still early days here. It seems like there is a fair amount of competition now.
[00:30:34] Tim Flannery: Yeah. Well, I think what’s winning right now is Adobe and DocuSign and pen and paper. That’s the biggest competition right now is people not having a solution in place. So it’s a fun opportunity.
[00:30:47] Yeah, a couple other kinds of providers here. You have, again, most people are using pen and paper or something similar, but you have the vertically integrated providers, the people who are attaching this to a back office and the way that they think about it is how do I gain all of this internal operational efficiency.
[00:31:07] And you can go by fund closing software, plus my fund administration and plus my like everything else that I’m doing on top of it. And it’s really convenient to bundle things together. And there’s a number of different solutions like that. I have heard good things regularly about them, but you’re forcing somebody to adopt multiple pieces of a platform.
[00:31:28] And our goal is let’s be a little bit more provider agnostic. I don’t care who your law firm is. I don’t care who your fund administrator is. I don’t care. All that I care about is that your documents are in English. That’s the only thing that I care about. Then you have other sets of providers that are taking the approach that’s similar to ours.
[00:31:48] Where you want to be a little flexible. You want to go and meet people where they are. I think a little bit of the differences in our focus, right, is like we’re doing fund closing. And that’s the thing that we really care about. If we get fund closing, right. If we make sure that this information is interoperable across subscription agreements, then we’ve done our job and we go figure out the rest of it.
[00:32:08] Some of them have taken the approach of like, what’s a broader solution for investor relations teams. Some of them have taken the approach of maybe there needs to be a data room. Maybe there needs to be a CRM and those are all totally valid approaches. But ultimately we think the thing that makes this interesting is that that investor needs to port their information back and forth.
[00:32:28] And so if that’s the case, then I want to go build that. And so it’s a little bit of a difference in philosophy. That’s kind of the big thing.
[00:32:36] Jeff Williams: Yeah. Well, I think it’s an important one. Maybe one thing we set out to do when we built the portal and data room was kind of throw out everything that was sort of assumed up until that point.
[00:32:53] And so much of it was about building for the customer. And we looked at it as we’re building for the customers. Like in a way, right? I mean, this ought to be like something that they’re thrilled with. And if that means that they spend 30 seconds in there versus dragging them through 30 minutes, you know, it’s like all of the traditional sort of software metrics, perhaps aren’t necessarily valid anymore.
[00:33:22] I like to think that, to your point earlier about just sort of how organic the by-product of pleasing, you know, LPs is right? I mean, they start talking, Hey, this is like, great. We’re really thrilled at how easy this was. And, you have to solve a problem for the payer as well. And that’s efficiency in, in your case.
[00:33:47] It is in ours as well. And so it’s really about serving the customer’s customer and making it easy on them. And, to your point there at the end of that answer, just focusing on that. Right? I hear you say, vertically integrated providers can probably struggle with that a little bit more so.
[00:34:06] And, I love that philosophy because that’s one that we’ve built around too. What’s going to happen in the future, man? You’re a visionary. It could be in this market. I mean, we talked a little bit about that, it could be outside of this market. Tell us a little bit about the future, you’re a future forward looking individual. I can tell.
[00:34:24] Tim Flannery: I think that our approach on this is, where does identity verification happen for these investors kind of across the private markets? It happens at this moment in which they sign up for funds, but it happens in a bunch of other places too. And everybody’s having to solve it.
[00:34:37] And sometimes you’re solving in your own software. Sometimes you’re solving it just by coordinating. And I don’t know, it feels like this strange infrastructure problem that I don’t understand why everybody has to go build their own unique solution to it. And so I guess the fun thing could be, if you were to allow people to build on top of it, what would they build?
[00:34:59] And so I hope somebody builds 20 Tinders, and we get to go just be the backbone of it.
[00:35:05] Jeff Williams: Yeah. Love it.
[00:35:07] Well, Thanks man. This was a fascinating conversation. I think what you guys are doing is amazing. I’m glad to see, not only that somebody who’s being this thoughtful, but just the philosophy and sharing in spirit some of the same principles that we’ve used.
[00:35:22] So, thanks for sharing the story with us, and wish you guys best of luck, man. I hope that that’s the case too. And, I’m just going to kind of sit back and watch. Now I’m certain that it will be.