NEW YORK Venture capitalists may be the pioneers of the New Economy, but when it comes to running mission-critical data, they are decidedly Old Economy – using paper-based systems or electronic spreadsheets.
VCs need industry-unique systems for deal-tracking, portfolio management, fund accounting and reporting to limited partners. Most shops handle these functions through a combination of Excel-type spreadsheets, proprietary technologies and vendor software packages.
In May 2000, J.P. Morgan Partners (JPMP) commissioned a survey on the portfolio-administration systems used by 49 private equity firms. They found that 75% used paper-based systems or linked spreadsheets, 25% used proprietary systems and 28% used vendor packages. Some firms obviously used more than one system, but Excel spreadsheets and Access databases carried the majority. Another informal VCJ survey of deal-tracking systems returned similar results.
“Most people are using Excel. It’s our biggest competitor,” said Jose Sinai, chief executive officer of Financial Technologies Inc. (FTI), makers of the Investran program.
Some firms want analytical options that strain or exceed the possibilities of an old-fashioned spreadsheet. They want to review the deals they’ve seen, missed and taken, and they want to compare deal structures, exit strategies and investment niches.
“The problem [with running analysis on a spreadsheet] is that an associate doesn’t want to be a database programmer, he wants to be a deal maker,” said Ray Haarstick, chief executive officer of Relevant Equity Systems Inc., makers of EquityWorks. (Thomson Financial Ventures, a division of VCJ’s parent Thomson Financial, owns a 17% stake in Relevant.)
On the portfolio management side, VCs administer incredibly complex portfolios. Marcia Bateson, managing director and chief administrative officer at JPMP, estimates the firm’s system tracks between 8,000 and 10,000 different active investments between different securities classes and rounds.
Donald Winger, CEO of AnalytX Inc., makers of Venture Complete, said Excel spreadsheets cannot give VCs the functionality of an end-to-end product. Without asking the back office to produce a report, a GP can push a button to produce complex reports with a product like his.
This venture business thrived for years on Excel spreadsheets. The system may still work well for insiders in the clubby industry, but the unsophisticated reporting and analysis may scare off potential investors.
Most commentators expect unsophisticated investors who rushed to invest in VC funds to leave the industry, because they never really understood the marketplace. Other investment sectors offer much more information and better analysis, and the difficulty in understanding VC negates the potentially higher rewards.
However, VCs may be able to keep more investors interested if they produced information comparable with the public markets, or at least that’s what Jamie Cohan, chairman of Round1, thinks.
“With all these other markets, they have a method of assessing risks and rewards because they have transparency,” he said.
When VCs choose to go beyond the spreadsheet, two factors come into play: cost and functionality. Is it worth designing a proprietary system to get all the features the partners want?
“If you can buy it and the functionality suits you, buy it,” said Bateson. “My primary business is investing in start-up companies. My primary business is not running a software development company.”
GTCR Golder Rauner LLC recently developed their own internal system, because they found it “tough to get something universally marketable and flexible,” said Paul Prickett, director of information services.
Bateson said JPMP evaluates each purchase decision individually. For example, JPMP is about to buy a vendor system to track questions from LPs, but in other cases they might bring in a consultancy, like Accenture, to build the system for them. They have even hired a portfolio company to design their deal-tracking system.
Elizabeth Pagan, vice-president of sales at FTI, said in-house systems usually don’t update as well as the vendor systems. In-house systems evolve by patching new functions onto the existing structure. The system is difficult to update, and the pieces don’t often interact well.
Several vendors offered ASP-type platforms for their packages, but none of the firms in JPMP’s or VCJ’s survey used an ASP model. Only Relevant mentioned actually having any clients (a handful out of 133) who chose that option. Haarstick said they were either very small firms with little IT resources or very large operations with strained IT resources.
The participants in the VCJ survey said they weren’t comfortable with their mission-critical data off-site. The very investors who had supported ASP start-ups were unwilling to be ASP customers.
“Maybe that’s why ASPs aren’t doing so hot,” commented one VC. An industry lawyer commented, “This is just another example of VCs not understanding a market.”
Several vendors will be rolling out new products this fall.
The newest player on the block, Round1, has been ambitiously building a chain of products with applications from the portfolio company chief financial officer level to the LP level and added a conference with star-power speakers to complement their software offerings.
Investran recently added a new tool to ease configurations and customization. AnalytX added two front-end add-ons for monitoring general partner and LP functions.
This month, Relevant will replace EquityWorks with EquityEnterprise, a completely redesigned system that allows users to share information with other users outside the firm via XML packages.