As the new year gets rolling, it’s time for our annual technical predictions in Private Equity and Venture Capital for 2022. From GP labels to the fabric of firms, we’re predicting a common theme of tech-fueled initiatives and overhauls across firms.
Here Are Our Top Three #RiskyBets for 2022
1. Technical labels and categories will make their way into Privates
We’ve said it before—to stay relevant and gain a competitive edge in the 21st Century, firms need to take action and leverage common technology/data strategies to stay relevant.
In more tech-enabled/mature sectors of financial services, like hedge funds, labels like “quant shop” and “high-frequency trading” are quite common. As data/tech increasingly becomes the source of a GPs differentiation in privates, expect naming conventions to follow suit – think: “data-driven sourcing” or “algo diligence” and perhaps “ML Venture.” Firms will be grouped into cohorts, based on the tech-driven elements of their strategy, to help LPs quickly ascertain differentiation and allocate capital accordingly.
2. ‘Tech stack’ becomes an essential operational diligence item for institutional LPs
It’s largely agreed that elements of the tech stack that touch LPs will play a powerful role in a firm’s differentiation and ability to court / retain sophisticated LPs in 2022. Simply put, providing a consumer-grade technology experience to LPs (analytics vs static documents, on-demand vs quarterly) infers other processes and data management methods are in order.
For GP diligence, most investors follow some variation of ILPA’s standards (i.e. Investment Process, Firm Governance/Risk/Compliance, and Fees). Increasingly, LPs are fixating on a GP’s tech stack, process/workflow, and data hygiene. Indeed, these items have a direct impact on operational efficiency and objective decisioning, which impacts thesis execution and returns. Expect these items to become diligence mainstays, soon to be included in broadly adopted standards.
3. Emerging private fund managers make headlines for returns and outperformance
This prediction will be driven by two cohorts rapidly entering the private capital sector: 1) seasoned execs / recently minted founders from tech, or 2) hedge fund veterans
Headline 1: Operational Leverage is Not a Function of Headcount
The first half of this prediction surrounds orientation and focus, specifically around (surprise!) tech stacks and data. As more and more firms tap into tech stack efficiency, we expect to quickly see proof that operational leverage is not a function of headcount. A good data point to observe is the reduction in the number of entry-level/associate roles and hires, where automation replaces monotonous and manual workstreams.
Headline 2: A Shift to ‘Design Thinking’
The second half of this prediction suggests we’ll see headlines surrounding a shift in methodology toward design thinking, common concepts in technology product design, and business model validation.
As Mind the Product states, “Design Thinking is how we explore and solve problems; Lean is our framework for testing our beliefs and learning our way to the right outcomes, and Agile is how we adapt to changing conditions.”
Expect to see GPs take a fresh look at how they approach the problems and outcomes they are solving for using first principles, as opposed to conventional wisdom. Firms will merge operational processes and people with data to objectively frame a situation, they’ll then establish a thesis for an optimal approach and test / validate their way to what’s best, as determined by the customers and market they serve.
In this vein, we are already seeing big-time headlines: Why Sequoia is blowing up a 50-year-old financing model (Pitchbook)
Gain Your Competitive Edge in 2022
There you have it—our top three predictions and #RiskyBets for Private Equity and Venture Capital in 2022. If you’re ready to stay ahead of the curve and want to benefit from digital transformation/modernization, our team is standing by or you can take the Tech Adoption Survey (3min) below.