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.

A traditional crm was built for general ‘customer’ scenarios

Software platforms have made the world a better place by making work a better place. Indeed the world is better off when people enjoy their jobs even marginally more, and workplace applications on big CRM platforms like Salesforce.com have done that and much more.

But the potential that platforms like these offer presents diminishing returns: once the platform provider has engineered too many industry specific components into its platform, its usefulness for other industries begins to be threatened, and with that so do the usefulness of the component tools built into the platform.

So it is with the CRM category that Salesforce.com has defined: it is generic enough to work for many industries, and yet still offers the potential for others to round off the edges and nail more vertically-oriented and extremely tailored software solutions.

Private capital markets are actually a great demonstration of this dynamic. Where generic CRM platforms simplify — appropriately so — to assume there’s a business, a customer, a sale, and service of that customer, there are a few industry-specific pieces that are missing.

Take for example, that investors become customers by investing through legal entities the GP raises. It’s a subtle but important nuance that just doesn’t make sense at a platform-as-a-service level (because it’s overly complicated for a simple one-time sale that many industries require), but which can easily be added without 10 years or software engineering. Once provided, the rest of the platform’s components become tremendously powerful again and you’re set to take over the world.

As a traditional CRM in our pillars methodology, these nuances must be present to properly account for investors in these legal entities, potential target companies and which are owned by these entities, the context of all interactions with these parties (as well as the appropriate overlap, ie co-investments), and how you’re arriving at finding these opportunities on both sides of the equation, such that you’re able to piece together what’s effective and what’s not. Not just because we say so, but because these are the very relationships and data that are key to the motivation behind a CRM in any industry.

It’s critical, too, that the valuable publicly-available information that helps to enrich CRM systems and save users painful steps of entering it themselves is fully-integrated at the platform level.

Again, look no further than the 3,000+ pre-built integrations that Salesforce.com — the creator of the CRM platform concept — has at a platform level to do so, and which only exists by way of holding just short of overly-specifying certain industry workflows that would present challenges to properly integrate.

Stakeholder reporting and communication (investor relations) draws on a range of datasets

The traditional “customer service” model of CRM systems once again makes overly-simplified assumptions about the customer relationship when applied to private capital markets.

In fifteen years I personally have yet to hear the terms “warranty” or “service call” in this market because it’s just not the same. But make no mistake, as uncomfortable as it may be to say aloud, customer service is more important now than ever and it’s constantly happening; the industry is, after all, considered to be a financial “service”.

As it turns out, that service is primarily information-based — it’s driven by data and takes the form of reports and analysis that drive decisions, and then end up again in investor-facing reports and analysis.

The foundational elements of a private capital markets CRM must be built such that they accommodate this data (like we discussed above), but so too that it can accommodate additional supporting data that investors (customers!) need in the context of service.

Oftentimes this supporting data — financial metrics and time-based values, for example — is believed not to meet the traditional definition of CRM and the natural thought is “well, better do this in Excel!”.

While I happen to believe Excel is still the greatest software application ever built, its introduction to this value chain we’ve discussed herein actually creates the problem many firms suffer from: key data needed to provide customer service (again: effectively the entirety of a firm’s reports and analysis) is now in disparate systems and detached.

Both of those dynamics are important and distinct: not only is this supplemental data disparate, but when brought together there is no logical association that can be made between the two data sets.

Allow me, then, to make the point very simply: not only can this financial and time-based value data (you may be thinking about is as “portfolio monitoring” or “accounting”) be a part of a CRM, it is arguably the most important part of a CRM because it’s at the core of what providing service to the customer entails — information that comes out of data!

Firms need a digital method to engage stakeholders (ie investor portals)

Investor portals are not new; in fact, for many of us — including myself — they conjure up horrifying nightmares in which we’re aimlessly guessing at folders to find the newest document we need.

So in lies the opportunity: not only have the portals we’ve come to hate not simplified the process of acquiring information, they’ve failed to create an entirely new experience that is “customer service” driven.

To be fair, this is not a B2C market where you’d be long out of business for not having focused on customer service and thus the customer’s technology-driven experience. But don’t expect to be around too much longer if you aren’t thinking about this shift.

Today’s institutional investors increasingly expect this same consumer-like experience, and a massive opportunity is being missed by not providing it. It’s not about providing them the experience they desire; it’s more about the ability to measure engagement that is had in return.

Put simply: what’s keeping the market from providing this experience is the availability of the information that’s required to create the service that provides the experience.

If you’ve hung in this long, you know that by focusing on your CRM, you have the data that’s required to manage the customer relationship and the technology-driven experience through which that information is shared to create a differentiated and opportunistic customer experience.