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Broadly speaking, venture capital funds and private equity funds live at the forefront of technological processes. They invest in innovations, move the technology market forward, but at the same time, most of the funds use the same simple programs for their internal work processes that they did at the start of activities. Some switch from Excel to Google cloud products, but with the growth and development of the investment fund, there is a need for a full-fledged specialized IT product. The AIRR project responded to this market request. We talked with its founder and CFO of iTech Capital Natalya Chikina about the market of IT products for investors, how the idea of creating AIRR came up and how it has been transformed in the process.
We talk to startups and investors, you get the value.
I am first and foremost a partner and CFO at iTech Capital, while AIRR was basically born in our internal system. We began to develop it to meet our own needs and only then started selling it to other funds as an independent product. Therefore, first of all, I define myself through my role in iTech, and AIRR helps me to fulfill this role. At the fund, I am responsible for the areas related to the back office: everything to do with investor relations, accounting, reporting, documents — AIRR does everything my colleagues and I need regarding the internal work of the fund.
The CFO experience helps me to better understand the needs of our audience. As a fund, we interact a lot with other companies and projects that are at different stages, and we see them developing. Therefore, my experience at iTech is complementary to that of the founder of any startup. During my time at the fund, I have seen many success and failure stories, and we try to learn from them at AIRR.
Each fund has its own strategy, which implies the choice of industry, investment stage, check, geography, transaction structure, which certainly affects the set of tools that each team uses. For example, we rarely use convertible loans in our business, and many funds, especially those that invest in the early stages, systematically resort to it.
The system of internal work largely depends on how much the fund focuses on working with the pipeline: a fund investing in the early stages keeps records of numerous companies and actively monitors transactions in the market. The fund of later stages works less with the pipeline, it does not require a high level of automation, but the team of such a fund considers each transaction in more detail, and the focus is shifted to tracking metrics for the existing portfolio. A separate time-consuming direction of the fund’s work is communication and regular reporting on the status and transactions of the fund to its LP.
All of these tasks form the demand that AIRR can meet. We have blocks for early stage funds, for PE, for family offices. The service is multifunctional, each investor can use the block of tools they need for a specific request. AIRR quite naturally changes with the arrival of new customers, we are trying to find a solution that will help them save their time, so we are always in the process of developing new functionality.
The first thing young funds face is the pipeline. The quality of the funnel they form determines the further fate of the entire fund due to the level of transactions that they will enter.
We have a separate product, AIRR Leads, which helps such funds form a high-quality pipeline. It combines work with a variety of databases, from global to local, for each specific request. The idea is to turn the process of searching for a project that now looks much like fishing into hunting. We want to build a system where fund analysts can search and find deals instead of waiting for them to fall into their mailbox. AIRR Leads checks the current state of the available databases and, in case of offers that match the search criteria specified by the client, sends a push to your analyst. Thus, the time from the moment information about a potential investment appears until the moment it gets on the fund’s radar is minimized, and the fund starts working closely with it.
The ability to be the first to notice a project and to reach a good deal is extremely important for early stage funds.
When a fund is just being formed, as a rule, there are several investors and two or three transactions in it. Large amounts of data tend not to appear from day one, so Excel can easily handle it. As the fund develops and builds some kind of legacy, the number of investors and transactions is increasing, the team is growing, the tasks get bigger but at this stage they still manage their data with a number of separate systems and programs. Everything happens gradually. Once you notice there are a lot of LPs you add a system for managing investor relations. When you see there are more companies you add standard reporting forms to fill out. And in the end, the fund finds itself using many systems that are poorly integrated, and integrating different market products is a separate IT task.
At this stage, there is a need for an independent IT product, because the situation when you have 10 logins and 10 passwords from different systems is rather sad. I understand this process well, we ourselves came to this some time ago. That’s why we created AIRR to combine all the processes inside, creating a system that synchronizes the work of the fund team, investors and external participants.
Each geographic market has its own characteristics. For example, in different jurisdictions, the workload and responsibilities of a fund administrator differ. In some locations it’s a required position, like in the UK. Fund administrators get a fairly large salary there, being in charge of accounting, legal issues and KYC, enabling funds to outsource these processes. It’s pretty convenient since the people in the team are engaged in deals and monitoring, and the back office is outsourced. Sometimes it works, but often this approach makes everything related to investor relations very difficult. Administrators tend to be slow to respond to requests and even the best ones make mistakes.
In my opinion, accounting should be kept under fund’s control, it should have a CFO responsible for all transactions. If this function is outsourced, it becomes more difficult to react quickly and analyze relevant metrics.
When all the data is collected in one place and is available to all team members, the fund begins to work more efficiently, presents its performance to investors more clearly and becomes easier to manage.
Venture investments are high-risk for good reason, as unpredictability and chaos are integral to this market, the whole venture is about taking risks. We do not know how to predict the future and do not try to. But AIRR can highlight segments that a particular investor is interested to invest in. Let’s say they are interested in AI deals of a certain size in the corresponding geography, because they believe that this industry will grow faster. We do not give advice on the prospects for development in this segment, but we will help to find projects in all connected databases that fit the named criteria, and show them to the investment team, so they are the first to know about them. This eliminates the probability of error as a result of the human factor when someone has not finished, missed or has not checked something. We can help funds find a good deal.
But the final investment decision is always made by the investment team and the investment committee, and their ability to work with information efficiently is key in making a decision. After the transaction, AIRR helps to track key metrics for each company, automating the monitoring process.
The solution itself, in my opinion, cannot be automated. It is always an analysis of many different factors: from the background of the founder and the history of the company’s development to diving deep into market prospects. There is a special subjective factor here, which means this is not about an IT product, but rather about the talent to see unique investment opportunities.
You need to understand that not all funds reach the point when they need to introduce a special IT product: as long as your fund is small, it will successfully make do with Excel. But sooner or later the issue of technologization will arise, this is an evolutionary process, and we advise everyone to think about it in advance.
You won’t be able to painlessly rebuild a fund with a long history using technology, this is a rather long process that requires the involvement of the team and processing large amounts of information. But you have to take this step if you want to grow and develop. We undertake some part of the work on the transition to an automated system when working with funds, because we ourselves went through this at iTech Capital and can advise a lot, carry out integration, transfer part some data, suggest how to best organize it on the platform. But it’s impossible to do without involving the fund’s team as no one knows the specifics of the work better than the employees.
There are several different growth vectors for AIRR. There are relatively few venture funds in the investment market, but the number of family offices and investment holdings is growing. Unlike funds that only work with venture, there are also securities, stocks, bonds, and other asset classes in family offices. Therefore, we are thinking to add tools related to public markets to the product functionality, which will significantly expand our audience. It’s the service where the entire portfolio is collected: direct investments, the public market, investments in funds. It will help the investor to visually assess the return on investment and their current state.
We have not tried to enter the wide market with our product. While doing this is still an open question we are working with Russian-speaking colleagues for now. But there is still a large segment of clients we haven’t reached, namely accelerators and angel investors. Pipeline generation systems and monitoring the current portfolio are also important for them. We are planning to develop one of the AIRR products in the service direction where investors can quickly and conveniently view companies according to the like/dislike principle. We call it “Tinder for funds”.
No matter how much we love IT, not all funds will switch to technological solutions like ours, not everyone needs it. You can even build a successful fund using Excel functionality. What matters is what requirements the fund’s team has, and what the investors require from the team. The development of this area directly depends on the needs of those who pay. The advantage of a product like ours is accessibility and mobility: an investor can look into the phone at any time and find out what is happening with their money in two minutes.