Category: Knowledge

A Comprehensive Exploration of Growth Equity

In the intriguing world of investments, growth equity stands as an amalgamation of venture capital and buyout strategies. It primarily targets mature companies that exhibit solid business models, significant revenue streams, yet hover below the profitability threshold.

These companies, often in need of capital to fuel their rapid expansion, look to grow without amassing debt or surrendering substantial control. Over the years, the unique blend of high growth and return potential that growth equity offers has attracted diverse institutional investors and multimanagers.

The attraction towards growth equity has been particularly sparked by the expansion of the investable universe of suitable companies, primarily driven by increased funding for venture capital. However, the investment landscape witnessed a drastic shift in 2022, calling for significant changes in the growth equity narrative.

This article explores the evolving dynamics of growth equity, discussing how investors are adapting to these changes and employing novel strategies to optimize growth and ensure resilience within their investments. In addition, discover how Edda’s software venture capital suite can be a major asset to your firm.

Adapting to the Dynamic Investment Landscape

Significant shifts in the 2022 investment landscape drove growth equity to a critical crossroads. Global challenges necessitated a reevaluation and modification of investors’ engagement models with portfolio companies. Investors developed a prioritization strategy, categorizing portfolio firms based on their vulnerability to market volatility, ensuring efficient resource allocation to those needing support most.

Value creation strategies were then employed, focusing on revenue acceleration, operational cost optimization, and the identification of growth opportunities aligned with long-term market trends. These initiatives helped maintain a positive growth trajectory despite market fluctuations.

A significant engagement model change was the heightened focus on talent development and capability enhancement, with investors investing resources in nurturing talent within portfolio companies and their firms. This strategy enhanced business ecosystem resilience and set the stage for long-term success, marking a new growth equity investment era emphasizing resilience, value creation, and talent development.

The Journey Toward Optimal Growth

The shifting dynamics of the investment climate have led growth equity investors to recalibrate their strategies. The conventional approach of relentlessly pursuing growth has been supplanted by an emphasis on achieving optimal portfolio growth. This renewed perspective emphasizes risk mitigation and enhancing resilience within investments.

One fundamental aspect of this paradigm shift is the focus on attaining profitability earlier. Investors are now keen on guiding portfolio companies towards profitability by suggesting novel strategies such as introducing products into the market ahead of schedule and employing proactive presales activities. This strategic pivot not only accelerates revenue generation but also provides an opportunity for early market feedback that can drive product or service refinement.

In addition to accelerating profitability, maintaining a healthy cost base has become a critical focus area. Regular scrutiny and adjustment of the cost base have enabled portfolio companies to align their operational expenses and workforce with the ever-evolving market conditions. This prudent cost management ensures sustained profitability even amid economic uncertainties.

Building robust financials is another key element of this refined investment approach. Investors are now placing more emphasis on steering portfolio companies toward creating healthier balance sheets. This involves strategies to enhance their financial resilience, such as prolonging cash runways and increasing the time between funding rounds. These initiatives help ensure the company’s financial stability and longevity in a volatile market environment.

Lastly, there has been a renewed focus on maximizing customer lifetime value, particularly in times of economic uncertainty. By concentrating on retaining and engaging customers, despite the prevalent pricing and margin challenges, companies can maintain their revenue streams and create long-term, loyal customer relationships. This customer-centric approach forms a cornerstone of the new growth equity investment paradigm, reinforcing the importance of sustainable and resilient business practices.

Developing a Resilience-Focused Approach in Growth Equity Investing

Gone are the days when the relentless pursuit of growth was the sole strategy. The spotlight is now on resilience, balance, and the long-term viability of portfolio companies. This section highlights the key aspects of this resilience-focused approach, shedding light on the nuanced strategies that growth equity investors need to adopt to ensure optimal growth, risk reduction, and overall resilience in their investments.

Refreshing the Playbook

In a dynamic and volatile market, growth equity investors need to recalibrate their standard practices. The traditional playbook is no longer adequate to manage new challenges. A key part of this transformation includes revamping the venture capital due diligence process. The emphasis has to shift toward risk management and resilience-building.

This would involve conducting comprehensive market-risk assessments, taking into account factors such as economic downturns, market volatility, and geopolitical uncertainties. It would also require a deep dive into understanding customer dependencies of the portfolio companies, including factors like customer concentration, customer satisfaction, and potential customer churn. Moreover, reviewing financial sustainability has become a non-negotiable aspect. Establishing a financial contingency plan to handle unforeseen market upheavals forms a key component of this approach.

Putting the House in Order

Operational efficiency is a key driver of resilience, especially in challenging market environments. Investors can play a crucial role by guiding their portfolio companies to streamline operations and minimize operational costs. This could involve automating repetitive tasks, leveraging advanced technologies for process improvements, and implementing lean management principles.

Furthermore, an exploration of new sales channels, particularly digital, could open up new revenue streams for these companies. A focus on the sales force’s effectiveness could enhance revenue generation, especially when they concentrate their efforts on the most profitable customers. Guiding companies to do regular health checks and adjustments of their sales strategies can be a gamechanger in the pursuit of growth and resilience.

Agile Performance Management

Today’s rapidly changing market conditions necessitate an agile approach to performance management. Traditional quarterly or annual reviews might be too slow to capture and respond to the market’s swift shifts. Instead, growth equity investors should advocate for data-driven decision-making, enabled by near-real-time transparency on key performance indicators.

This approach encourages rapid response and course correction when companies veer off track. Utilizing advanced analytics and business intelligence tools can enable this level of agility, allowing both the investors and portfolio companies to stay ahead of the curve.

Investing in Capabilities

Capability enhancement forms the cornerstone of any resilient business. Growth equity investors need to help their portfolio companies access and develop the right capabilities. This may involve attracting, developing, and retaining talent crucial to the company’s success. In a digital age, this also means supporting companies in building digital capabilities, such as digital marketing, e-commerce, and data analytics.

By assisting portfolio companies in nurturing these capabilities, investors can unlock significant value, thereby making the companies more resilient and better prepared to handle market uncertainties. As the companies mature, these capabilities can provide them with a competitive edge, ensuring sustainable growth and longevity.

The resilience-focused growth equity investing approach is about finding the perfect balance between nurturing growth and mitigating risk. This balance is crucial in building robust companies that can withstand the ever-changing dynamics of today’s global markets.

Revolutionizing Growth Equity Investing with Edda

Edda’s venture capital portfolio management software streamlines the deal flow pipeline and brings a new dimension to growth equity investing. It’s an essential tool for investors looking to make smarter, data-driven decisions.

Data Insights: Edda’s VC portfolio management software analyzes multiple data points across a portfolio, providing valuable insights that enable investors to better understand the overall performance, identify patterns, and anticipate potential risks.

Performance Tracking: By effectively monitoring performance and changes in portfolio companies, investors can gauge the progress of their investments and identify areas that require intervention. This can be a key factor in determining the optimal path to profitability for each investment.

Risk Management: Edda’s venture capital software allows investors to quantify and manage risk better. It offers a predictive analysis capability that can provide early warning signs of potential problems, allowing investors to take proactive steps and minimize exposure.

Resource Allocation: The software offers a data-backed method of deciding where resources can be best allocated. It analyzes factors such as market trends, company performance, and historical data to determine where additional resources could drive the most growth.

Value Maximization: Edda allows investors to make strategic decisions that maximize the value of their portfolio. By using its predictive analytics capabilities, investors can anticipate market trends, identify opportunities, and make informed decisions that maximize return on investment.

Investing in growth equity requires an in-depth understanding, strategic acumen, and a strong toolkit. In a field teeming with potential, it also demands meticulous navigation. Edda, formerly Kushim, with its data-driven insights and predictive capabilities, is an invaluable tool for those navigating this exciting investment landscape. Its use can revolutionize the way investors approach growth equity, making the process more efficient, informed, and successful.

December 12, 2023
Navigating the Evolving Dynamics of LP-GP Relationships

In the private equity industry, Limited Partner-General Partner (LP-GP) relationships play a pivotal role in driving investment opportunities and achieving success. As the industry continues to evolve, it becomes crucial to understand and adapt to the changing dynamics within LP-GP relationships.

This article explores the significance of LP-GP relationships, how they’ve changed over time, and how to address the challenges and opportunities that arise with the help of software venture capital tools.

The Importance of LP-GP Relationships

LP-GP relationships form the backbone of the private equity industry, facilitating capital deployment and investment strategies. Collaborating effectively, LPs and GPs bring together resources, expertise, and networks necessary for successful investments. In 2022 alone, LP-GP relationships accounted for approximately $1.4 trillion of private equity assets under management globally, highlighting their importance for sustained growth and success.

Traditional LP-GP Dynamics

In the traditional LP-GP model, LPs provide the capital while GPs serve as fund managers responsible for investment decisions. LPs commit capital for a defined period, while GPs manage the fund’s investments and seek to generate returns. Alignment of interests is crucial in the LP-GP relationship, ensuring shared goals and incentives. Transparent reporting, communication, and consistent fund performance evaluation foster trust and strengthen the relationship.

Evolution of LP-GP Dynamics: LPs Influencing Business Practices

LPs are no longer satisfied with passive investments. They seek active collaboration and influence over the investment process. Increasingly, LPs are voicing their desire to align investments with sustainable practices, such as environmental, social, and governance (ESG) considerations and the United Nations’ Sustainable Development Goals (SDGs). LPs are strategically influencing business practices to promote responsible and ethical investments.

To address these changing expectations, General Partners (GPs) are embracing compliance-oriented policies and systems that can report on ESG requirements. Some GPs are even hiring consultants to assist in building these frameworks. By proactively integrating ESG considerations and embracing sustainable practices, GPs can strengthen their relationships with LPs while achieving strong financial results.

Co-Investing Trends: LPs Seeking Increased Return on Investment

LPs are increasingly interested in co-investing alongside GPs, allowing them to directly invest in promising companies at an early stage. Co-investing offers LPs greater control, enhanced diversification, and potentially higher returns. A study by McKinsey revealed that the value of co-investing deals more than doubled from 2012 to 2018, reaching an impressive $104 billion.

According to a Preqin study, 80% of LPs found that their co-investments outperformed private equity fund investments, with 46% of those outperforming by a margin of more than 5%. This trend highlights the growing importance of effectively tracking potential deals to efficiently capitalize on co-investment opportunities. By leveraging dealflow management tools and processes, GPs can ensure they close co-investment opportunities while strengthening their partnership with LPs.

Active Participation: The Rise of Multiplayer Finance

A significant shift is occurring in LP-GP relationships, as LPs increasingly recognize the value they bring beyond capital injection. LPs are hungry for intellectual engagement and actively seek to contribute their expertise, networks, and perspectives to enhance the success of a business. This shift is leading to the emergence of multiplayer finance, where LPs actively participate and collaborate with GPs in decision-making processes.

Venture capitalists are now exploring new ways to compete by embracing the capabilities and insights of intellectually curious LPs. LPs are no longer “limited” partners but rather valued contributors to the success of investments. This shift calls for GPs to appreciate and nurture ongoing, productive relationships with LPs by leveraging their expertise and actively involving them in the investment process.

Evolving LP-GP Partnership Models

New partnership models and approaches are emerging to meet the changing needs of LPs and GPs. These models focus on collaboration, flexibility, and customization. Co-investment opportunities and direct investing trends have gained traction as LPs seek greater control, enhanced diversification, and potential cost savings.

GP-led secondary transactions provide liquidity options for LPs, and LP advisory committees play a crucial role in ensuring fairness and representing LP interests. Customized solutions and tailored approaches are key to meeting the diverse needs of LPs and fostering stronger relationships.

To succeed in the evolving LP-GP landscape, GPs should focus on strategies that build trust and foster long-term partnerships. This includes promoting transparency, actively engaging with LPs through regular communication and meetings, and establishing mechanisms for feedback and input. Prioritizing ESG considerations, implementing robust governance practices, and demonstrating a commitment to responsible and sustainable investing is also crucial. GPs that proactively engage with LPs will be well-positioned for success in the ever-changing private equity industry.

Challenges and Opportunities

As LP-GP relationships evolve, navigating the landscape presents both opportunities and challenges. GPs must adapt to increasing demands for transparency, implement robust governance frameworks, and invest in advanced technological infrastructure to support effective communication and streamlined reporting. Embracing technological solutions, such as data analytics and a venture capital CRM like Edda (formerly Kushim), can enhance operational efficiency and improve LP-GP engagement.

However, with the changing dynamics, there are also significant opportunities for GPs to strengthen relationships and deliver value to LPs. By fostering open communication channels, providing comprehensive reporting on fund performance, and demonstrating alignment with LPs’ goals and values, GPs can gain a competitive advantage. Building trust and transparency are key strategies for nurturing long-term partnerships.

To succeed in the evolving LP-GP landscape, GPs should prioritize the following:

Proactive Engagement: Actively engage with LPs through regular communication, meetings, and collaborative sessions. Seek their input and feedback to foster a sense of partnership and inclusion in the decision-making process.

Transparency and Reporting: Provide comprehensive and transparent reporting on fund performance, investment strategies, and risk management. LPs expect accurate and timely information to make informed decisions.

Alignment with ESG Objectives: Incorporate environmental, social, and governance considerations into investment strategies. Demonstrating a commitment to responsible and sustainable investing aligns with the evolving expectations of LPs.

Technology Adoption: Embrace technological solutions that streamline communication, reporting, and data management. Utilize advanced analytics tools to gain insights, track dealflow, and identify investment opportunities that align with LPs’ preferences.

Customized Approaches: Recognize the diverse needs of LPs and offer tailored solutions that cater to their specific preferences and risk profiles. Emphasize flexibility and customization in investment strategies.

By implementing these strategies, GPs can navigate the evolving landscape of LP-GP relationships and position themselves for success in the private equity industry. Adapting to the changing dynamics, embracing collaboration, and leveraging the expertise and contributions of LPs can lead to fruitful partnerships and mutually beneficial outcomes.

June 22, 2023
Insightful Strategies to Increase Venture Capital Dealflow
The process of building a strong dealflow is of paramount importance for these professionals as it assists in choosing the best possible investment opportunities. Having a large pool to select from amplifies the chances of encountering high-quality potential investments.

Venture Capital firms operate within a highly competitive landscape, wherein a dynamic dealflow is vital to their success. Of the thousands of opportunities they evaluate each year, nearly half originate from their network, consisting of ex-colleagues, acquaintances, or other trusted sources. The effectiveness of referrals is evident from the fact that VC firms invest in fewer than 1% of opportunities they come across, signifying the weightage of these trusted introductions.

Strategies for Enhancing Dealflow: A Deeper Perspective

Improving dealflow is a complex process that requires strategic planning, relationship building, and effective utilization of technology. Here’s an in-depth look at the various strategies for enhancing dealflow:

Leveraging Network Referrals

Network referrals are often the golden keys that unlock access to premium, quality dealflow. A Kauffman Foundation study affirms their importance, indicating that approximately 10% of all VC investments find their genesis in these referrals.

Venture capitalists tend to trust deals that come through their network as the referring entity has a good understanding of the firm’s investment thesis and can send deals that are more likely to align with their portfolio. More importantly, it’s not just about the volume of the deals; network referrals often bring in opportunities that might otherwise stay under the radar, offering VC firms access to unique deals that may not be broadly marketed.

To effectively leverage network referrals, there are a few key strategies that VC firms can employ:
- Active Relationship Management: It’s crucial for VC firms to nurture relationships within their networks continually. This extends beyond merely keeping in touch, but also providing value to those in the network.
- Clear Investor Value Proposition: Clearly communicating the firm’s unique value proposition increases the chance of receiving more relevant and high-quality referrals.
- Expanding the Network: A wider network often leads to a larger pool of potential referrals. Expanding the network can involve attending industry events, participating in online communities, or simply meeting new people in the ecosystem.
- Reciprocity: By also providing referrals and valuable leads to their network, VC firms create a mutually beneficial relationship that encourages more referral exchanges.
Effectively leveraging network referrals involves more than just waiting for opportunities to come in. By employing these strategies, VC firms can significantly enhance the quality and quantity of their dealflow, leading to more lucrative investment opportunities.

Utilizing Portfolio Companies for Recommendations

The quest for lucrative investment opportunities often overlooks a readily available and highly valuable resource – portfolio companies. These entities possess a wealth of industry knowledge, extensive networks, and a firsthand understanding of the startup landscape.

To make the most of these resources, VC firms can employ strategies similar to those used in leveraging network referrals. In addition, there are a few strategies specific to portfolio companies:
- Portfolio Networking Events: Hosting events that bring together founders and key players from all portfolio companies can lead to the sharing of insights, introductions, and collaborative opportunities.
- Utilizing Advisory Boards: Portfolio companies often have advisory boards composed of industry experts, experienced entrepreneurs, and other knowledgeable figures. These individuals can provide valuable perspectives on potential investments.
As highlighted by David Tisch, founder of BoxGroup, “Our portfolio companies are a goldmine of valuable referrals”. By cultivating relationships with portfolio companies, VC firms not only enhance the success of their existing investments but also position themselves favorably for future deal sourcing.

Tapping Into Service Providers

Professional service providers, encompassing lawyers, accountants, and sector-specific consultants, can be a reservoir of untapped dealflow for venture capital firms. Their diverse clientele and in-depth industry understanding often equip them with unique insights into emerging startups and businesses ripe for growth.

Leveraging these insights requires a proactive and reciprocal approach, similar to those used in managing relationships with network referrals and portfolio companies. In addition, VC firms should leverage service providers’ expertise. They are not only potential deal sources but also reservoirs of expertise that can assist in evaluating potential investments, from due diligence support to negotiating deal terms and offering post-investment advice.

By treating service providers as partners rather than mere service providers, VC firms can not only widen their deal sourcing but also acquire crucial support in deal assessment and execution.

Expanding Professional Networks Through Events

Industry events, pitch nights, and demo days are valuable opportunities for venture capitalists to engage with a diverse array of potential investments. These gatherings offer a fertile ground for discovering exciting startups, understanding new trends, and establishing meaningful connections with entrepreneurs and fellow investors.

Maximizing the benefits of industry events involves several strategic steps. Firstly, venture capitalists should go beyond mere attendance, proactively participating in discussions, debates, and even leading panel discussions or workshops. This active engagement positions them as thought leaders and a magnet for potential investments.

Networking should center on building authentic relationships, understanding entrepreneurs’ needs, and offering beneficial advice. After an event, timely, personalized follow-ups and ongoing engagement like regular check-ins and sharing pertinent resources are vital for nurturing these connections. Additionally, utilizing event technology to pre-connect with suitable attendees enhances networking efficiency.

Ultimately, the emphasis should be on building relationships rather than just increasing contacts, as solid relationships form the bedrock of fruitful deal sourcing in venture capital.

Increasing Online Presence and Engagement

For venture capital firms, establishing an engaging online presence is crucial for driving dealflow. A firm’s website needs to clearly communicate the firm’s investment philosophy, sectors of interest, portfolio, and team. It can be further enriched by a regularly updated blog featuring industry insights, investment trends, and company news.

Alongside the website, social media platforms serve as powerful channels for firms to share insights, engage in discussions, and monitor industry trends. Another effective approach involves generating thought leadership content, such as white papers, podcasts, or webinars. By contributing valuable information to the ecosystem, firms can carve a niche for themselves as thought leaders in the VC space.

To enhance the visibility of the firm’s online content, implementing SEO best practices is necessary. These practices include using relevant keywords, optimizing images, and regularly updating content.

Periodic newsletters are also beneficial as they can keep the firm top-of-mind for subscribers and can also serve as platforms for sharing opportunities and collaborations.

Lastly, firms can leverage online networking platforms, like AngelList and Crunchbase, to discover startups, engage with entrepreneurs, and track industry trends, further diversifying their deal-sourcing channels.

Leaning on Data for Informed Decision-Making

In an environment where firms are inundated with potential investments, the ability to filter through opportunities and identify those with the greatest potential is crucial. Data-driven decision-making and software venture capital tools play a vital role in this context.

Firms can significantly benefit from data analytics in identifying and managing investments. With the aid of machine learning and artificial intelligence tools, firms can identify startups aligning with their investment thesis and predict potential high-growth opportunities. These tools can also help in understanding market trends, enabling firms to spot emerging industries, assess competition, and forecast market growth for more informed decision-making.

Moreover, data analytics can streamline the evaluation of potential investments, providing objective insights into a startup’s financial performance, market size, competitive positioning, and team experience. The same data-driven approach is applicable in monitoring portfolio performance, allowing VC firms to track key metrics, identify potential issues early, and assess strategy effectiveness for proactive portfolio management. Through predictive analytics, firms can further enhance their ability to foresee future trends and make data-informed investment decisions.

The use of data represents a significant competitive advantage, enabling VC firms to be proactive rather than reactive in their investment approach.

Optimize Your Dealflow with Edda

Edda, a fintech company offering a comprehensive software suite for investment firms, is equipped to help navigate these challenges. Its platform allows firms to efficiently manage dealflow, support portfolio companies, track performance in real-time, and facilitate the raising of their next fund.

Edda’s dealflow CRM, Edda Contacts, provides a comprehensive view of interactions with each contact. It allows users to track the frequency of meetings and interactions with a specific contact, along with the ability to view all email exchanges with that person across their team. This robust feature enhances the overall visibility of each relationship, enabling effective and efficient relationship management.

With Edda’s comprehensive features and integrations, firms can not only streamline their deal-making processes but also gain a competitive advantage in managing and understanding their relationships, essential for success in the dynamic landscape of venture capital.

With Edda’s venture capital portfolio management software, VC firms can efficiently navigate the competitive landscape, maximize their deal flow, and ultimately, make smarter, more successful investments.
June 21, 2023
Best Practices to Revolutionize Private Equity Dealflow

Private equity dealflow refers to the rate at which business proposals, including investment opportunities, are presented to investment firms. It can be thought of as the heartbeat of private equity, as it reflects the general health and vitality of the sector.

The private equity industry has shown a remarkable ability to bounce back from economic upheavals. According to a recent report by McKinsey & Company, private markets raised $989 billion in 2022, indicating a robust recovery almost to pre-pandemic levels. This upward trajectory underscores the significance of cultivating a high-quality dealflow pipeline, one that ensures a steady stream of lucrative investment opportunities.

In the competitive world of private equity, the dynamics of deal sourcing are constantly evolving. This environment demands innovative solutions to keep firms ahead of the curve. Identifying and capitalizing on opportunities requires more than just a keen eye for potential investments. The nature of private equity deal sourcing has become increasingly relationship-driven, with a strong emphasis on building and nurturing connections that can open doors to high-value deals.

In this article, we explore the emphasis on relationship building in deal sourcing, delving into the critical role that technology and data play in streamlining and enhancing this process. Discover how Edda’s private equity and venture capital software can help.

Relationships as the Bedrock of Effective Deal Sourcing

In private equity, the significance of relationship building cannot be overstated. It’s not just about crunching numbers and conducting due diligence; it’s about cultivating relationships, forging trust, and understanding that warm connections often pave the way to the most strategic and profitable deals.

Furthermore, it’s important to constantly assess the firm’s existing network, as it may harbor untapped prospects. A report by PWC corroborates this, revealing that 89% of CEOs believe their existing networks are indispensable to the growth of their businesses.

Nurturing significant relationships—through regular, meaningful interactions—is key to keeping the dealflow pipeline healthy. This consistent engagement cultivates a sense of trust and loyalty that can unlock further opportunities down the line.

Enhancing Private Equity Dealflow: Best Practices

Let’s delve into four vital strategies to augment PE dealflow in today’s swiftly evolving market environment:

Refine Your Investment Principles and Methodology

The foremost action in elevating the quality of your deal flow hinges on ensuring that your team maintains a unified understanding of your investment strategy.

What are the bedrock elements of your fund’s investment ideology? What categories of deals spark enthusiasm within your firm for investment?

Reflect on the stage of the business (startup or mature), the geographical scope, the industry, or cash flow. In addition, examine the unique expertise your firm and LPs provide, and identify the types of companies you could most effectively assist in value creation.

When it comes to boundaries, what are the parameters within which you operate? Are there any particular sectors or segments that your firm deliberately bypasses?

Explore Your Existing Network for Untapped Potential

Exploring the untapped potential in your existing network is a valuable approach often overlooked when seeking new opportunities. Your pre-established relationships might offer a rich mine of prospects and dealflow.

Reevaluate past referrals and opportunities from your current portfolio companies. Previously declined proposals may now present a valuable opportunity aligning with your firm’s strategy. To keep track of these records effectively, top private equity firms use intelligent CRM platforms, which record activities in real time and facilitate future recall and review.

Further, initiate a review of your current network for new referrals. Identify relationships that could connect you to new, advantageous deals. Possible sources of these referrals can range from service providers, such as lawyers, insurance brokers, accountants, and consultants, to other investors at private equity funds, venture capital firms, and investment banks. Domain experts and transaction intermediaries, including M&A advisors, investment bankers, and business brokers, can also offer valuable connections.

Using a unified data repository for these relationships can enable you to understand more clearly who knows who. A CRM equipped with relationship intelligence can take this a step further by providing relationship-scoring technology. This evaluates not only the existence of a connection but the strength of the relationship, further enhancing your strategic networking capabilities. This consolidated and comprehensive approach can lead to more efficient and effective network utilization and ultimately higher-quality deal flow.

Cultivate Your Critical Relationships

Cultivating and nurturing strong relationships goes beyond superficial interactions. Rather than rushing into strategic, deal-focused discussions, it’s crucial to foster genuine connections that are grounded in respect, trust, and open communication.

An effective approach to fostering relationships includes actively connecting people within your network who might benefit from knowing each other. Sharing engaging content, such as news articles and recent research, can provide value while promoting their content within your network can help them broaden their reach and demonstrate your personal appreciation of their work.

Personal engagement is also important, extending beyond professional topics to include inquiries about their family, hobbies, or responses to events affecting their lives. If you’re attending a nearby event, consider inviting them for a meal or, if appropriate, offering them a ticket to join you at the event.

Make relationship building and maintenance a regular part of your routine, dedicating time each week to meaningfully connect with several contacts. Utilize tools with reminder systems to ensure no one falls off your radar. Respect and active listening are crucial in these interactions, as they foster understanding and trust, which are fundamental in strong relationships.

Implement Technology and Automation for Deal Management

While many private equity firms adhere to traditional deal-making procedures, progressive ones are embracing the changing market through cutting-edge investment strategies and technologies.

One crucial approach is automated data capture, significantly reducing time spent on laborious data entry and freeing up resources for relationship building, enhancing deal flow. The diversity of data managed by PE firms, such as contact details, meeting notes, phone records, email correspondences, company updates, and industry notes, can be overwhelming. By leveraging automation, these firms save time that can be refocused towards productive activities like networking and fostering relationships.

A unified data source is essential to avoid communication gaps and loss of critical information that could result in missed investment opportunities. The solution is a relationship intelligence CRM, which centralizes deal and relationship data in an intuitive system, thereby enabling smooth management of deal flow and informed decision-making.

The focus for modern firms lies in two key areas: automating data capture and establishing a single, reliable source of truth. Automated data capture liberates teams from manual labor, with relationship intelligence CRMs standing out for their ability to automatically populate data from various sources like emails, calendar events, and external data partners. A centralized data repository streamlines deal flow processes by consolidating data in a user-friendly system, enhancing your firm’s ability to operate swiftly and confidently.

Data hygiene is crucial for the effectiveness of the CRM system, impacting targeting precision and overall functioning. Automated CRM solutions guarantee clean data, leading to better insights, quicker decision-making, and reliable analytics.

Finally, the deal flow CRM system should offer connections to various data sources, facilitating data unification, analysis, and activation to create personalized experiences. The ability to integrate multiple data sources, including data lakes and analytics platforms, makes it a powerful tool for managing customer relationships. With the adoption of such advanced technologies and strategies, firms can stay competitive and responsive to rapid market changes.

The Power of Edda in Enhancing Private Equity Dealflow

Automating the process of data capture and management is crucial. Here, Edda emerges as a pivotal tool in the private equity toolkit. This cutting-edge platform eliminates the manual burdens of deal sourcing and relationship management by automating the data capture process, delivering real-time insights and centralizing all information within a unified platform.

This centralization offers several advantages. For one, it enhances visibility, enabling firms to keep their fingers on the pulse of their deal flow and relationship metrics. Additionally, it accelerates the decision-making process and removes the obstacle of data silos, enabling firms to better manage their relationships and source deals more effectively.

Another key advantage of Edda is its superior business intelligence capabilities. Edda’s platform can provide valuable insights into market trends and investment opportunities, thereby empowering firms to stay one step ahead of the competition. This ability to make data-driven decisions helps firms optimize their operations, maximize their returns, and maintain a strong, robust deal flow pipeline.

Achieving optimization in private equity involves a delicate balance. While relationship-building is critical, leveraging technology—such as Edda—can make this process more streamlined and efficient. By automating routine tasks, Edda allows teams to focus their efforts on strategic initiatives and personal interactions, which can have a significant impact on deal sourcing.

If you’re looking to revolutionize your deal-sourcing process, look no further than Edda’s deal flow management software. Reach out to an Edda team member today and discover how this innovative fintech solution can elevate your firm’s private equity operations to new heights.

June 21, 2023
How To Become a VC (Venture Capitalist)

In this article we will discuss the often posed question of “How to become a VC“. And let’s be honest from the start, becoming a VC is not an easy task.

First of all, there is no “official education“ for future Venture Capitalists. Even the experiences of today’s VC investors, founders and partners tell us that sometimes “climbing through the window” is the only way into the VC world. For instance, the case of Jan Garfinke who had over 20 years of experience in successful med-startups, taught us that founding your own VC firm may be an easier task than landing a high-position job within an existing one.

As a matter of fact, most VC professionals would agree that there is no straight path into the VC business. However, we could set up some general prerequisites or steps, if you are thinking of pursuing the VC career.

How To Become a VC: The Potential Steps

Knowledge of VC Operations

The in-depth knowledge of the VCs main processes, activities, goals, structures, problems etc. is crucial. Simply, knowing the VC business would definitely help you in gaining and shaping experiences matching their activities and processes. And having such development path prior to your first attempt of entering the VC industry could actually land you the first VC job.

Business School Background

Naturally, having a top university and business school background (i.e. Ivy League), majoring in Economics, Finance, Business Management etc, is always a good start. It will equip you with both general knowledge and more specific business set of skills through highly reputed internships. And if those internships are done in VC firms, you know you are definitely on the right track.

The Startup Apprenticeship

A well shaped experience in startups is extremely important. Being a part of a successful startup or two will bring you in close connection with your investors- VC funds. Hence, through this close-cooperation you would not only gain invaluable insight into the VC operations in terms of deal sourcing and investing (your startup is going through this exact process), but you will also build relationships which could help you enter the next VC firm.

There are two levels at which we can see the startup step as beneficial and invaluable. On the one side, the aspiring VCs who shape their experience by being a part of several industry-diverse, successful startups will acquire knowledge and develop expertise in various fields. As a result, these VCs often turn out to be great investors since they have a wide range of industry expertise and are very analytical.

On the other side, if you are the founder of a successful startup, you will have the advantage of strong established networks (former employees and investors). In addition, you will be able to easily bond and “groom” the young entrepreneurs as you already walked their path. And finally, you will be considered an “expert“ in your industry field and therefore seen as a valuable addition to the VC team.

To conclude, both options have their strong points and there is no right or wrong choice here. However, one thing is certain, the step in a startup direction will definitely lead you a step closer to entering a VC firm.

Gain Experience In Consultancy Firms

Having experience in business consultancy firms as business developers, financial analysts or similar could also come in handy. For instance, here you would definitely gain experience in regards to assessing the business plans from various perspectives. This could prove very useful when aspiring to land a job as analyst/associate or even principal in a VC firm.

Alternative way to become a VC: Raise Your Own Fund

As we elaborated above, there are various steps you could take in order to enter the VC business. And depending on your development path, you could land an entry or higher level position job. However, this is not a given.

Even if you go through all of the hard steps, polish your CV and look like an ideal candidate for a VC position, you still may not get it. Sometimes, the only way to become a part of this world is to raise/start your own fund. And here, a whole new level of challenges await you.

First of all, without a proven record, gaining trust of LPs in raising your fund is going to be difficult. You have to think long and hard on the approach, the investment thesis and how you will “package and sell” your VC product, as VC fund is a product after all. Furthermore, you will have to prepare for substantial investment yourself, and have much more “skin in the game” in terms of the % of the total capital invested. Finally, with all the enthusiasm and knowledge you may possess, you will need to arm yourself with plenty of patience. Simply, finding and recognizing the unicorn in the startup environment is close to finding a needle in a haystack…

What is the right path to become a VC?

The answer is simple, there isn’t one. There is no right, set and paved road to entering the VC world, but rather a wide variety of approaches you could consider.

Although we cannot help you further with schooling and startup/consultancy firms’ experience, we can definitely help with the first step. A place where you can get a great insight into the VC business operations, requirements, and necessary software venture capital tools, whether you want to land a job or start your own fund is our e-book: VC Journey Explained. And it can definitely shed some light on how to become a VC.

March 2, 2020
Advanced Fund Performance Methods: PME & Direct Alpha
Welcome back to Edda’s deep dive of fund performance analysis. In previous articles, we have discussed fundamental fund performance metrics such as IRR, TVPI, DPI and RVPI ratios. This article, however, will explore public market equivalents including the direct alpha method of assessing a fund’s performance.

The Foundation of Public Market Equivalent (PME)

Imagine you were investing in a particular stock market index such as S&P 500 for a period of ten years. Whenever you sell, you get a return. And now imagine that whenever a VC fund makes a capital call, it is exactly like investing in a stock market index and when the VC fund makes a distribution to its partners it is similar to selling the stock market index shares.

This is exactly the concept of PME. There are many different forms of PME such as Long Nickels PME, Kaplan and Schoar PME (KS PME), PME+ developed by Capital Dynamics, and mPME developed by Cambridge Associates. In addition, we will discuss the Direct Alpha method.

First, we must understand the foundation of PME.

The basic premise of PME is to calculate the future value of each cash flow as if they were invested in a stock market index. The formula to calculate future value is given below:

Let’s illustrate this with an example:

Assume on Dec 31, 2007 a VC fund made a capital call of $100 million and currently the date is Dec 31, 2017. The value of S&P 500 on Dec 31, 2007 was 1411.63 and the value of S&P 500 on Dec 31,2017 was 2743.15. Therefore, the future value of this cash flow is:

Long Nickels Index Comparison Method (ICM/PME)

The Long Nickels index comparison method was proposed by Austin M. Long III and Craig J. Nickels in 1996. It is considered to be the oldest and first PME method of assessing the performance of a VC fund. The basic idea of Long Nickels method is that the cash flows of a VC fund i.e. contributions and distributions are invested in a stock market index and to generate a net asset value (NAV) at the end of each period. The last NAV is used to calculate the IRR and this IRR is the Long Nickels PME.

For comparison, two IRRs are calculated, one is the fund IRR and the other is Long Nickels IRR. If the fund IRR is greater than Long Nickels IRR then the fund provided excess returns compared to the stock index and vice versa. Let’s illustrate Long Nickels PME with an example.

The data below shows the contributions and distributions of a VC fund along with the S&P 500 index value. The “index value change” column shows the percentage increase or decrease in the S&P 500 value

Net Asset Value (NAV)

At this point, we will calculate the Net Asset Value (NAV) at the end of each period. Here we will regard the contributions as positive cash flow and distributions as negative cash flow. The logic behind this assumption is that contributions are considered the amount that is invested in the hypothetical stock market index and this determines the net asset value. On the other hand, distributions is the amount paid back during the sale of stock index fund which decreases the NAV. For the purpose of calculation, only the last NAV will be taken into the final calculation of LN PME.

Lastly, we will calculate the net cash flow and find the IRR of Net cash flows. The NAV for the last period i.e. Jan 1, 2014 will be the NAV (ICM) we calculated above is 30.

Here, the fund IRR is 15% and the Long Nickels IRR is 12%. Hence the fund gave 3% excess returns compared to S&P 500 index.

Limitations of Long Nickels PME

The biggest drawback of LN PME is that a strong out-performance or under-performance can affect the IRR and it can produce a null value. For instance, this can be seen in the below table where a strong out-performance has reduced the ICM IRR to zero.

PME+ Value In Fund Performance Estimation

In the 2003 paper, ‘Private equity benchmarking with PME+’, Christoph Rouvinez introduced a new way of benchmarking the performance of a PE fund by using a coefficient lambda (λ) or a scaling factor to discount the value of distributions so that the NAV of the index matches the NAV of the fund. The PME+ returns an IRR value of discounted distributions. After that the discounted distributions are used to calculate Net Cash Flow and PME+ IRR calculated. If the PME+ IRR is less than that of the fund’s IRR then the fund has outperformed the stock index and vice versa.

The formula used to calculate new distribution is: Distribution x λ

Let’s illustrate PME+ with an example. First, we will calculate λ, which is found by using trial and error. The NAV of PME+ calculations must be equal to the fund’s NAV. In our example the PME+ NAV must be equal to 70.

The calculations to determine lambda and the subsequent steps make PME+ more complicated compared to LN PME method. For our data set, the lambda is found to be 0.9273. Now we will use the value of lambda to calculate the adjusted value of distributions.

The PME+ IRR is 12% while the fund IRR is 15%. Hence the fund has outperformed the stock market index.

Limitations of PME+

One of the challenges with computing PME+ is that the calculations are not simple. Secondly the usage of a single scaling factor λ is also sensitive to strong outperformance or underperformance. PME+ suffers from the common limitations associated with IRR calculations.

Kaplan Schoar (KS PME)

Nine years after the Long Nickels PME was introduced, Steven N. Kaplan and Antoinette Schoar introduced the KS PME method in 2005. The objective of KS PME method was to address the shortcomings of Long Nickels PME. Instead of choosing an IRR measure, the KS PME represents a market adjusted equivalent of the Total Value to Paid-In-Capital (TVPI). KS PME is calculated by finding the future value of each contribution and distribution using the stock market index returns. The formula for KS PME is given below.

A KS PME multiplier equal to 1.0 means that the VC fund has delivered a performance equal to the stock market index. Therefore, a KS PME multiplier of more than 1.0 means that the VC fund performed better than the stock market index and a multiplier of less than 1.0 means that the VC fund provided returns lower than that of the stock market index. Currently, the KS PME is considered most superior and widely used PME.

Example: Let’s illustrate the KS PME method with an example. The future values will be calculated using the future value formula discussed at the beginning of this post.

The KS PME multiplier of 1.068 suggests that the VC fund performed marginally better than the public index. Higher the KS PME multiplier, higher or more substantial is the fund performance as compared to a stock market index.

Limitations of KS PME

The KS PME removes the IRR sensitivity problem of Long Nickels PME. However, it ignores the timing of cash flows.

Modified PME (mPME)

The modified PME or mPME was introduced by Cambridge associates in 2013. mPME is similar to PME+ in the sense that it uses a scaling factor. However, mPME uses different scaling factors for cash flows at different time intervals. Thus, it attempts to improve the limitations of PME+ where a single coefficient λ is used to scale all distributions. The steps to calculate mPME are the following:

1. Calculate the Distribution weight for each distribution using the formula:

2. Calculate a hypothetical NAV called NAV_PME using the formula:

3. Calculate the weighted distribution using the formula:

4. Finally, the net cash flow is calculated using the adjusted distribution and the IRR of this net cash flow gives us the mPME IRR.

Let’s simplify the complicated mPME calculation with an example: The NAV in light grey shade is market determined NAV. First, we will determine the D_weight

After that, we will find the NAV_PME, the column I_t/I_(t-1)refers to index values, this will simplify the calculations:

Now we will calculate the adjusted value of distribution:

Finally, we will use the adjusted distribution to calculate the net cash flow and compute the mPME IRR.:

The mPME IRR is 13.91% whereas the fund’s IRR is 15%. Hence mPME IRR indicates that the fund performed marginally better than the stock market index.

Limitations of mPME

The mPME measure seeks to improve the Long Nickels PME just like the PME+ method. However, it again uses a scaling factor to adjust the distributions, hence it is prone to manipulation and sensitive to under or outperformance. It also doesn’t take the future value into account and as evident from our calculations, mPME is much difficult to compute.

Direct Alpha As A Fund Performance Method

The direct alpha method is the most recent one and it was introduced in 2014 by Oleg Gredil, Barry E Griffiths and Rudiger Strucke. In 2009, Grifiths had talked about the concept of alpha which basically refers to the excess return a VC/PE fund makes as compared to a public market index and also points to fund managers superior performance.

The concept of direct alpha is closely related to the KS PME as it uses the same method to calculate an IRR which is then compared to the fund’s IRR. However, the difference between KS PME and direct alpha method is that in direct alpha the under or out performance is quantified by calculating the compounded cash flows plus the fund’s NAV.

Let’s illustrate direct alpha with an example. The future value of both contributions and distributions is found by using the future value formula discussed at the beginning of this post.

The Direct Alpha IRR is calculated to be 3% while the fund IRR is 15%. Since the direct alpha IRR is lesser than that of the fund IRR, this means that the fund outperformed the market index. In conclusion, of all the PME methods, direct alpha is the only method that tries to overcome the limitations and provide an exact number of outperformances rather than giving an approximate value of outperformance.

References
- Long, A.M. III & Nickels, C.J. (1996). A Private Investment Benchmark. The University of Texas System, AIMR Conference on Venture Capital Investing.
- Rouvinez, C. (2003). Private equity benchmarking with PME+. Private Equity International, August, 34–38.
- Kaplan, S. & Schoar, A. (2005). Private Equity Performance: Returns, Persistence, and Capital Flows. Journal of Finance, 60, 1791–1823.
- Griffiths, B. (2009). Estimating Alpha in Private Equity, in Oliver Gottschalg (ed.), Private Equity Mathematics. 2009, PEI Media.
- Cambridge Associates (2013). New Method for Comparing Performance of Private Investments with Public Investments Introduced by Cambridge Associates.
- Gredil, Oleg and Griffiths, Barry E and Stucke, Rüdiger, (2014). Benchmarking Private Equity: The Direct Alpha Method.
- Capital Dynamics. (2015). Public benchmarking of private equity Quantifying the shortness issue of PME.
November 29, 2019
3 Considerations for Effective Monitoring of Portfolio Value

Shakespeare said, “If you can look into the seeds of time, and say which grain will grow and which will not, speak then unto me”. In this quote, replace grain with startups and you get the basic thought that envelops the mind of VCs. In this post, I am going to talk about the importance of monitoring portfolio value as well as how to do it effectively.

After VCs make the first investment in a company, they are thinking about the additional capital requirement for future rounds and ultimately a successful exit. Therefore, having a dynamic portfolio monitoring system built into software venture capital tools can enhance the decision-making power of VCs.

1. Keeping track of valuation of your investments

Valuation of an investment is one of the significant indicators of how the company is performing. Subsequent changes in valuation signal where the company is heading. VCs continually ask portfolio companies to update their metrics. Using excel in such cases requires a lot of manual work (data entry and modelling) where VCs lose their valuable time. And this time can definitely be better spent on sourcing deals or managing the portfolio companies.

The Edda suite provides a platform where VCs can send an email to the representatives of the portfolio company (through the platform) to come to the platform and update the metrics. VCs can then monitor portfolio value of their investments in the portfolio value section, which gets updated with new information.

2. Forecasting the effect of future financing or exit

When you have all historical information in one place, easily accessible in a user-friendly way, the analysis becomes much easier. In order to make the right decisions, It is important to continually speculate future performance of portfolio company. This allows the VC to effectively plan for either additional capital in next rounds of financing to keep fueling the growth or not participate in the next round. In order to do speculation easily, it is essential to again have all information in one place and an option to quickly execute speculative scenarios.

One way to speculate in the Edda suite is to add data for probable future funding/exit directly from the Portfolio Value section. Then you can see how it changes the metrics (such as realized and unrealized IRR, proceeds) of the portfolio company. In fact, you can see the change in metrics for the entire portfolio. You can always delete such speculative funding decisions by clicking on the cross against the funding record from the funding table.

3. Performance comparison of portfolio companies

It is essential to compare the valuation of portfolio companies to see how different companies are evolving. Different portfolio companies operating in the same industry can show different valuations. For example, one is declining or stagnant while the other is growing. Such comparisons can assist the VCs in better allocating their time to manage the portfolio companies. Furthermore, it also empowers them to dig deeper and uncover new information about how successful/unsuccessful companies perform. As a result, they can use that knowledge to better manage new portfolio companies in the future.

The Portfolio Value section of Edda’s venture capital portfolio management software provides an easy to compare tool. Here with one click you can select the portfolio companies and compare their valuation over time. You can either compare companies separately or make groups of companies and compare them. You can always export all portfolio value data to Excel.

We are continually adding new features to our Edda suite to empower investors to better manage their investments. If you want to know more about measuring the performance of your VC fund click here.

October 14, 2019
VC Monday Meetings reshaped by tech

Monday, besides being the least appreciated and most hectic day of the week, it is actually quite an exciting day for VCs. The VC Monday meetings are attended by the General Partners along with the investment team. The main purpose is for VCs to make decisions regarding new as well as existing companies in the dealflow.

The duration of the morning VC Monday meetings depends on the number of companies pitching to VCs. Usually, startups have to present a 40-45 slide deck under 45-50 minutes to VCs. Overall, the duration of Monday morning meetings can range from 3 hours to as long as 6.5 hours.

Admin Work – the mood killer

Now there is one character that acts like the adrenaline killer for VC Monday morning meetings. This character is none other than the Administrative Work. Namely, Analysts and Associates have to spend countless hours putting the data from the companies under consideration into powerpoint. This data consists of a brief introduction about the company, its business, industry and the associated metrics.

The pain doesn’t end here as they have to take notes about the minutes of the meeting for auditory purposes as well as make a note of the next tasks. Therefore, there is a lot of admin work which has to be done before, during and after the VC Monday meetings. There are numerous tools out there to make the life of VCs easier with regards to optimization of their internal business process. However, before making a decision, VCs should think about the level of integration, these tools can provide.

There is so much valuable time that can be spent elsewhere is wasted on the admin work. So, after addressing the boring elephant in the room, let’s talk about how you can redefine your Monday morning meetings. The dealflow section of Kushim Suite for VCs features an interactive and customizable dashboard that includes a special feature built in specifically to optimize Monday morning meetings.

Meet Dealflow Review

The dealflow review is a feature that eliminates the need to spend hours making powerpoint presentations while switching countless times between powerpoint and excel. All data about different companies in each stage of investment cycle along with the metrics is already present, so the dealflow review automatically takes all the data and creates a presentation. With just a click you can select the appropriate stages you want to review- watchlist, new, first meeting or due diligence and commence the presentation.

Real Time Response

Not only does the dealflow review simplify the admin work related to presentation, it also provides comment and task feature. You can make a decision whether to take the company to the next stage of investment or reject it during the presentation. As a result, the change will be reflected in your dealflow once you finish the review process.

What is more is the ability to assign the company to one of your team members and also assign a task which can be to ask the company for more metrics or data about new contracts they have procured. Additionally, you can also put in some comments for internal references using the “Add a comment” section.

Automatic Post Meeting Report Generation

When you click on the stop button to stop the review, you get the option to save the presentation. All saved meetings can be accessed from the “Committee” tab where you get two files saved per meeting. Both can be exported to PDF. The first report contains the slides of all companies that were reviewed along with their metrics and comments that were made during the review. The second one is the task list of your team members specifying which companies they are assigned to and their task.

Unlimited Storage

The dealflow review makes sure that you don’t have to waste your precious time. Neither for creating presentation nor for worrying about anything you might miss to jot down during the Monday meeting review. The unlimited storage ensures that you don’t have to worry about running out of space. All your Monday meeting reports are stored under the committee section which you can download any time.

If you want to know how you can build a better dealflow you can click here. Ready to start improving your dealflow now? Contact us and schedule your free trial of Edda’s venture capital software.

October 9, 2019
Fundraising: 3 Key Considerations for GPs
The objective of this article is to provide insights related to fundraising process for VC professionals. 2018 was a record year for the VC industry, in terms of investment $254 billion was invested globally. By the end of third quarter of 2018, VCs in US and Europe had raised more than $ 40 billion. The median fund size in 2018 was $83.7 million which is phenomenal as the median fund size in 2014 was $34.7 million. Keeping in mind the growing numbers of VCs fundraising, I am going to focus on three key considerations a general partner or an aspiring general partner should have in mind before raising the next or the first fund.

When Fundraising – Prioritize LP selection based on your decision criteria

Typically, the LPs of VC funds consist of pension funds, endowment and foundations, insurance companies, family offices, high net worth individuals, fund of funds and corporate funds. However, each LP has different risk profile and liquidity needs. For instance, insurance companies always have an uncertainty associated with their cash outflows. Hence they tend to invest a major portion of their money into risk-less assets such as bonds. In contrast, private foundations typically allocate more than 40% of their assets into alternative asset classes (i.e. PE and VC). Since their short term cash requirements are not high.

Elizabeth Yin, former Partner at 500 startups suggests that you must talk to a lot of fund managers to get advice about LPs rather than devoting your time and energy to approach institutional investors. While establishing her own VC fund, she focused on closing the fund as fast as possible and qualifying investors with smaller check sizes ($25K then going beyond $300K). The reason she prioritized on speed was because SEC in US mandates that you cannot market your fund while raising it.

Hence, relationship building and transparency are important factors while talking to LPs and especially institutional LPs. For new fund managers, closing an institutional LP can take more efforts and time. Therefore, they have to spend more time building relationships with institutional LPs.

Edda tip: Use a clear process to track the progress of your partnership with LPs. Here’s one of the best practices to setup a process:

New opportunities
Initial allocation
Legal/AML
Final allocation
Standby

Differentiate yourself by selecting a unique dealflow strategy or industry expertise

There is a gigantic gamut of VC funds out there. So, when fundraising, you have to think about what is the unique value proposition you can provide. Your UVP needs to separate you from the rest. Do you already have a network with ecosystem builders or a network with established founders to source startups? Does your team have a unique industry expertise that is going to help you find the next unicorns? These are some questions you must think about deeply before you start putting together your fundraising investment strategy.

The figure below illustrates the common categories of expertise of GPs.

Source: Concept adopted from The Business of Venture Capital 2nd Edition

Harvard professor Paul Gompers in his 2007 study on specialist vs generalist approach of VCs concluded that specialists performed better than generalists in VC firms that focused on a particular domain. On the other hand, if a specialist is put to manage a generalist role, the performance of the specialist weakens.

Thomas Meyer and Pierre Yves Mathonet, in their book, Beyond the J curve state the factors LPs consider on qualitative basis while conducting fund due diligence. Overall the management team’s skills, motivation and stability account for 50% of the qualitative factors LPs consider.

Edda tip: Get help from key industry players that can provide you with quality dealflow. In order to make this kind of partnership work, you need to standardize this process. At Edda we develop specific submission forms in our dealflow management software that populate your dealflow automatically.

Design an infallible investment strategy with your LPs

Chris Douvos, Managing Partner at Venture Investment Associates, who is also an LP, had interesting insights regarding GPs pitching. Namely, he states that oftentimes GPs make a pitch to LPs saying that they have designed a new investment strategy. However, they are unaware of the fact that ten or more such strategies have already been pitched to them. So how do you go about designing your investment strategy? Besides the competency and expertise of GPs there are some set factors that contribute to investment strategy.

Factors that contribute to investment strategy
- The market size and growth opportunities– GPs must assess how big is the market they are going to target and the growth opportunities associated with it. Furthermore, what are the current trends and how will you be able to source the companies you want to invest in.
- Capital requirement and investment returns- Key aspects to note here is whether you will have enough capital to meet the demands of your investment as well as have funds for follow on investment. Secondly, how long will the investment cycle be and most importantly will your approach actually aid you in getting the expected returns?
- Risk Management- Just including a typical bunch of risks such as an act of God, currency risk, regulatory risk is not enough. As a GP you must think about the risks associated with your team and specific risks associated with your investment strategy. For example, if you are going with an investment strategy to invest in energy companies especially operating in emerging economies, then is there a regulatory or political risk that can prevent you from investing or that can tie your investment for a long time?
Edda tip: Involve your LPs in the investing process and share your dealflow with them. This is the most effective way to leverage their network, build transparency and engagement. Because we know how valuable this is for VC firms, we built a Portal into our deal flow management software where LPs can access dealflow companies. To make this process even more engaging, the LPs receive a monthly fully automated newsletter that redirects them to the Portal.

These are three broad factors that a GP must consider before raising a fund or going into the fundraising. In the upcoming articles, I will delve deeper into asset allocation strategies of different LPs. In addition, I will talk more about how different LPs conduct their fund due diligence.

If you are interested in knowing more about measuring the performance of a VC fund then click here or schedule a demo of our venture capital portfolio management software today.
September 5, 2019