What are the top concerns for private fund managers when they are considering investing in a data management software solution? We recently sat down with Tim Friedman, founder of PE Stack, to find out. Tim has an extensive background helping GPs, LPs, and service providers in the private equity and VC space to identify and select specialized technology for their data management needs. Here’s the process he laid out for us:
Step 1: Assemble your team of stakeholders.
Get the right people involved to understand exactly where the potential is for adding value and gaining efficiencies. One of the biggest problems that we see when we’re assisting with procurement processes has been that halfway through a process, you’ll get someone new coming in and they have different requirements that have not been understood from the outset. So you’ll want to talk with the deals team and the financial analysis team, for example, but don’t leave out the IR team, which might also want to use this solution and gain value from it.
Step 2: Understand the technology options available.
Ten or 15 years ago, there was almost nothing available for private market investors who needed data management solutions – it was just Excel. And now there are a ton of different solutions and lots of different approaches towards solving some of the data management analysis and reporting issues that firms face. It’s important to try and understand what technologies actually exist and not go in with any preconceived notions of what you need. Instead start with the actual issues that you have, the inefficiencies. Ask yourself: “What are the opportunities? What potentially could we actually be achieving?”
Step 3: Quantify the costs of your current data system to determine the value a data management platform can bring to your firm.
You really want to try and understand how much time you are spending on managing your data and pulling together reports. There are a lot of inefficiencies that come from using say Excel-based analytics, there are definitely inefficiencies that come with some of the manual data ingestion processes that we see as far as just getting data into a platform in the first place. Quantify that time to determine what your current system is costing you, as far as resources and personnel. Then you can really think about what kind of time-saving efficiencies can you potentially gain with a platform. It’s not about replacing headcount with technology, it’s really about freeing up people’s time to do more valuable things and frankly just keeping your employees a little bit happier by removing those menial tasks.
Step 4: Understand the pricing structures and your cost of doing nothing.
Today’s LPs are becoming more sophisticated and more demanding. During COVID, we’ve seen a lot more ad hoc requests for additional information, and some IR teams have struggled to deliver that given some of these more old school methods for data management. But beyond that, from the operational due diligence perspective, certain LP investors are now going to be looking at what technology you have in place for data management. And if you don’t have certain technologies in place, you may find it more difficult to raise capital.
As for pricing, if you have gone through the exercise of what your expectations are and what the value would be from a platform, you can judge the cost of buying it based on your return on the investment. To compare prices, you need to understand how the vendor is handling the cost of implementation. And then you need to determine how the pricing may increase in future years as your business grows. It’s not that rare to see that the platform that looks on cheapest on paper can actually turn out being much more expensive over time. It’s always a good idea to think about safeguarding yourself against unexpected price increase in future.
Step 5: Take the driver’s seat during demos.
Don’t go into a demonstration with a blank piece of paper and say, “Okay, show me what you guys can do.” That is going to lead to a few things, the first being confusion. You’re going to forget which platform does what by the time you’ve looked at a bunch of them. You’ll be susceptible to the best salesperson who showcases the best part of their product, not necessarily what you need most.
Instead, you need to really understand what you want to get from the platform and then control those demos to get it out of the salesperson. For instance, for portfolio monitoring, you might ask about their approach towards data ingestion. That’s one of the things that people often overlook, but actually it can be one of the biggest differentiating factors when we’re looking at some of these platforms. Tell them how you currently do it and ask how that process would work with their platform. If the response is, well, you’d have to change your entire data ingestion process and move towards an approach that’s going to align with our platform, which might be a big negative mark for that vendor.
Once you’ve narrowed it down to two or three that really have a good alignment, put them to the test with a workshop. Provide some real examples of actual reports from portfolio companies and have them reproduce them and really just show you what it’s going to be like to live with their platform on a daily basis.
Step 6: Win over your senior management.
Once you’ve done steps one through five, you can produce an audited report for your stakeholders. It should include a list of the platforms you researched, the ones you demoed, the ones that made it through to the final assessment given your key requirements. Quantify the value you think will bring. Make it easy for them to digest. And instead of pushing back on the pricing, they might question some of the variables within the report. They might say, “Wow, can we really get that much efficiency gain,” or “Is this a reasonable assumption to make?” And you can answer with confidence.