The Digital Future of Data-Driven Firms

I love dinosaurs, and because it may come off as weird to say that I also “love” analogies, I’ll simply say that I find analogies to be very helpful and I use them a lot. It comes as no surprise to me, then, that dinosaurs are often the source of important analogies; don’t let it surprise you either — this is not the first time I’ve suggested that private capital markets are analogous in some form to dinosaurs. It turned out to be the perfect analogy for describing where data-driven venture-backed IPOs have gone.

Based on what we know, Dinosaurs are the most prolific creatures to have ever inhabited the earth — the success they had in evolving is the ultimate case study in adaptation. Our track record as humans, when comparing the time we’ve been here, doesn’t even register as significant. It’s no wonder, then, that their seemingly sudden disappearance is a marvel that sets up as analogous for wondrous, and yet catastrophic events. Even kids seem to be born with a fascination for these legendary creatures well before they know anything about their amazing story or their sudden demise.

A few weeks back my colleague and friend Kjael Skaalerud penned an amazing piece about the digital collision coming for VC/PE. Equal parts prophetic and doomsday, I simply can’t help but wonder how one could read this piece and see any analogy other than the proliferation and subsequent downfall of the dinosaurs. It doesn’t stop there, though; reading it causes me to wonder things like “how did this happen?”, “what was it like before this?”, etc. Let’s be archaeologists and see if we can find out!

First allow me to set the proper context by summarizing Kjael’s piece, in which Kjael warns us that digital transformation is happening everywhere as software eats the world. There is no hiding; the conveniences afforded by top-tier firms that weren’t as digitally-focused and which allowed them to remain at the top are simply no match for the opportunities that technology-focused firms will take advantage of in the future. It’s a compelling argument and if that’s what the future looks like, I’m here for it.

I don’t inherently believe that anybody at the top should fall, quite the contrary really — I’m a capitalist at my core and believe in survival of the fittest above all things. I have no agenda when it comes to which VC/PE firms survive and/or thrive; I simply believe it’s undeniable that what has differentiated top-tier firms is no longer the best evolutionary predictor. Still today, but certainly up to this point, the most successful PE/VC firms — as measured by historical quartile-based performance of funds — was largely self-fulfilling.  LPs want access to top-quartile managers, and the best way to predict that, but without any guarantee, is by finding those that have generated top-quartile returns in the past. To be sure: there is no flawed logic in this; it’s simply the best predictor because there isn’t yet one that is better. 

That is why I subscribe wholeheartedly to Kjael’s prediction. It suggests there’s a future for data-driven firms in which technology offers a better predictor of this, and in the simplest explanation possible, that is: data-driven stories that prove differentiated access to investment opportunities, differentiated ways to add value, etc. and on top of it all, the compounding effect of data proving the repeatability of the same story that the data began by uncovering. Turns out that just this week, early support — according to the way I interpret it — for this thesis has emerged by way of a Pitchbook story about Hedge funds being quicker to move and paying premiums over traditional venture capital firms to back high-profile venture-stage companies.

While historical performance is at the core of these PE/VC market dynamics up to this point, it’s not the only archaeological evidence that is interesting. Perhaps at the core of the entirety of the existence of this market is what I’ll describe as a sexy opacity. It has always been known that this market moves quickly, efficiently, is relatively exclusive, generates outsized returns, and yet very little is known about it within the general public. To me that seems — if I were to channel an analogy — a bit like that famous item at the world-renowned restaurant you’ve heard somebody gush about. Nobody actually knows how that thing is made, and there are legitimate concerns it will stay that way when the only person that does know dies. That’s sort of intriguing and sets up nicely for something we become enamored by, perhaps even if the story itself helps to compensate for the mediocre quality of the item itself. While I personally happen to appreciate the mysterious, slightly opaque dynamics of private markets, it feels like it’s fair to wonder whether there is a recipe at all for reliable and repeatable success in this market. If there is, I’m led to wonder whether it will be able to hold up against the impending technology-led transformation that will bring data and speed to the forefront.

Predicting the future of data-driven firms is a tricky business; oftentimes changes happen so gradually that we feel — at any given point along the evolution — that the future isn’t quite as futuristic as we imagined it. These evolutions happen slowly and gradually, but if we are to stop for a moment, I think it’s fair to suggest that we already see evidence that the collision is coming: we’re starting to see technology- and data-driven firms move faster, with greater conviction, and it’s only just beginning. It only feels appropriate to use a phrase Kjael uses often if you spent time around him, “let’s put our mouth guards in and get ready”.

Digital Collision

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 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 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 — 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.