Digital transformation for the Private Equity and Venture Capital industry was well on its way pre-pandemic, and the global health crisis set that trajectory years ahead. With digitization in full effect, what will VC firms look like after this evolution?
What are the characteristics that firms need to adopt to exist in an optimal state?
This is an important question to answer. PE and VC firms must align themselves with this digital transformation or be left on the sidelines. Knowing what to expect from the massive digital shift can help firms set their teams up for success.
There are core criteria for PE and VC firms to employ that will bring them into the modern world and help settle them at an optimal state of operations.
This is what the optimal state firm will look like:
Data is centralized
Firms will leverage a centralized data warehouse to store their most profitable assets – proprietary data, deal-making information, investor relationship management, and capital insights.
Sophisticated SaaS and tech
Speaking of technology, along with a data warehouse, the modern VC and Private Equity firm will use sophisticated tools. To be competitive, firms must invest in top-tier SaaS technologies.
The days of managing everything in Excel are over.
Adoption of today’s platforms for investing is a requirement.
Some of the ideal tools in the modern fundraising tech stack include Preqin to target LPs, Pitchbook for potential investments, and Gartner for research.
Firms often ask the question of whether to build or buy and with today’s SaaS-building boom it’s always smart to explore the tools available before building a custom in-house tool.
Move from manual to automated
In the future state of Private Equity and VC, manual activities will be minimal. Ideally, firms will adapt and leverage tools that enable automation. In today’s modern firms, email exchanges are captured instantly and conversations then set off intelligent automation like reminders to follow up in a set number of weeks.
Expect that highly personalized automated communications can be executed based on specific criteria, and fundraisers only spend time chasing the most engaged investors.
Over time, and with machine learning, engagement patterns help to tune the effectiveness of these campaigns to help conversion rates soar for future investors and funds – all without manual actions like emails, spreadsheets, and data entry.
Measurement is always-on
In the future-state firm, all activities are measured to provide visibility and accountability. Pulling reports is a one-click effort rather than a half-day project for an analyst.
Aggregated data feeds a business intelligence tool, which turns spreadsheets into interactive visualizations that provide real-time interactivity to identify trends, industry abnormalities, and other important business indicators.
Optimal firms improve quickly because they can precisely pinpoint which emails resulted in the best outcomes.
As an example, associates are compensated on investment velocity – like the time from initial contact to investment and rate of improvement across the stages of the fundraising pipeline.
Firms ready for change and open to advancement will arrive at the optimal state when they can master the insights layer.
With a futuristic tech stack, automation firing on all cylinders, and your data fully centralized, your firm is almost at optimal. But it hasn’t arrived quite yet.
The optimal state firm is masterful at taking all of its data and turning it into crisp, compelling, insights. More than a dashboard. Beyond a PowerPoint deck.
A firm that can deliver a message around portfolio value creation that inspires an LP will win.
Here are some examples of how an optimal firm might use insights to make better decisions:
- When we buy a company with X percentage of the Total Addressable Market (TAM) and Y in existing sales pipeline, with a concentration of competitors that looks like Z, we can expect 30% growth in top-line revenue over the first six months of owning that asset.
- When we see communication velocity (i.e., email exchanges / calls in a week) reach eight interactions a week, we have a 30% likelihood of bringing on the investor.
- If we don’t speak with a prospect for 10 days and they open an email fewer than five times, we have a 5% chance of securing an investment.
VC and Private Equity firms must leverage the technology available to maintain and defend their position. It’s no secret that new players with even more revolutionary ideas enter the market every day.
What firms have on their side is a natural sense of healthy competition. Choose to treat this new era as another challenge pushing your firm to a higher level of excellence, and you will thrive.