Data collection has become a hair-on-fire problem for investors during this current market cycle.
We’ve written before about how startup investor relations is broken; it’s frustrating for founders, inefficient for investors, and fraught with operational headaches and inaccuracies that erode trust.
Startups are chaotic. While growing their businesses, founders need to communicate progress consistently to maintain strong relationships with their investors and get help from them. Founders spend a lot of time every month and quarter compiling and sharing data, not to mention manually tracking tasks, asks, and engagement from their investor-base.
For investors, tracking data from portfolio companies (often dozens or even hundreds at a time) is even more challenging. Most investors receive data through email instead of a centralized system, which limits their ability to easily track data and follow up with portfolio companies. Compounding this issue, most founders send data that is unstructured, incomplete, and tucked within investor updates in text format, requiring investors to standardize and centralize data manually (if at all).
Now, with the market rapidly shifting, the stakes are getting higher not only for companies, who are suddenly feeling a push to focus on their metrics and business fundamentals, but also for investors, who are feeling valuation methodology pressure from their LPs and regulatory groups.
It’s been common practice for VCs to value a portfolio company based on the preferred share price of their last round of investment. However, companies raised at high valuations over the past couple of years, and with more sober market conditions today and compressed multiples for public tech stocks, those historical valuations are now mostly considered over-priced. Regulators and lobbying groups are also pushing for more transparent, auditable valuations– Cayman Islands Private Funds Law, SEC Fund Valuation Practices Rule 2a-5, ASC 820 in GAAP, IPEV and ILPA guidelines…. the list goes on and is only getting longer over time. Given that the wider industry is moving towards level-headed and auditable valuations fueled by both LPs and regulators, VC firms need to re-evaluate and proactively mark down valuations in a consistent way, as Fred Wilson from USV recently wrote.
Complete and accurate portfolio data is needed to drive this kind of rigorous reporting process. It also helps to power other key internal workflows. For example, investors can leverage proprietary data to make more informed investment decisions and closely support portfolio companies by helping them understand their performance in a broader context. But assembling and updating this portfolio company data set is difficult, especially without technology. We discussed this topic in our Modern CFO Series and came to the conclusion that “most firms that do not aggressively pivot to data-centric, streamlined, and software-driven operations are NGMI — not going to make it.”
How can firms collaborate more closely with their portfolio companies around data and performance?
Believe it or not, most private investors in 2022 don’t use software to track their performance of their portfolio companies. (If you fall into this camp, don’t worry — you aren’t alone.) This is rapidly changing, and we’re in the early days of a digital transformation of the venture space.
But it’s a missed opportunity to not adopt a system that supports both investors and portfolio companies. Simply put: founders today expect more from their investors than a purely extractively process to collect their data. That’s why we believe that portfolio collaboration is the future, and are tacking away from the industry term “portfolio monitoring.”
Here are a couple simple principles firms should consider as they are building out internal data systems:
Make sharing information easy for founders
Founders need to manually compile data from multiple systems when responding to information requests from investors, which is a huge blocker for frequent data sharing. In an ideal world, companies should be able to pull in key metrics through pre-built integrations with banking, accounting, and payroll systems.
Another issue founders and CFOs encounter is the inefficiency around reporting similar data points to multiple investors, and manually re-entering them for each one. We know first-hand how time consuming and annoying it can be to fill out different Excel templates provided by investors, especially when the metrics requested overlap significantly. Data centralization isn’t enough — there needs to be a structured data mapping process that is compatible with both founder and investor systems to avoid re-keying data multiple times.
The problems don’t end there. No matter how efficient, investor relations is a full time job for founders, and tracking a never-ending stream of information requests and relationships is draining. A central platform for founders to track all of their historical stakeholder updates and information request responses for each of their investors is key to alleviating the risk of overlooking key external stakeholders.
Any portfolio data collection system that doesn’t address these key issues is not going to get enthusiastic adoption, severely limiting venture investors’ ability to collect comprehensive data and get value out of the system.
Make data sharing worth it
A better company data sharing experience means a better VC data collection experience, but it doesn’t stop there. Once data is effectively collected and centralized, investors need to analyze it and support their portfolio companies before trends turn into irreversible problems. Understanding “at risk” companies through real-time burn and runway data to better prioritize and offer proactive support is key to running a large portfolio. In the VC world of power laws, not taking proactive action may be a risk too great to take. So many unicorns have stories about almost shutting down… what if your next unicorn is running out of cash and you can actually help them reach their true potential?
Proactive action can sometimes be tough. Founders will always have more visibility into their business compared to their investors, so VCs typically say “Let me know how I can be helpful,” just to make sure they prioritize only the highest-value tasks. Of course, the quote has turned into a running joke in the founder ecosystem. The right platform can potentially provide a solution to this problem, allowing companies to make direct “asks” to their stakeholders as well as to enable conversations around the metrics that matter.
Finally, in a world where investors are tracking their portfolio data efficiently, how can they turn that around and help their portfolio companies to have better insights into their own performance? This is where things start to get really exciting, and we believe that the data-driven investors of the future can help their companies take their growth to the next level.
The common theme so far is that founders and investors need a purpose-built platform that is designed for both sides and covers the relationship between them end-to-end, both quantitatively and qualitatively. The right platform needs to be more than an investor relations tool for companies — it needs to be a stakeholder collaboration platform.
Portfolio management is a collaboration opportunity
Centralized collaboration between venture capital firms and their portfolio companies is exactly why we decided to build Standard Metrics. Instead of re-creating the same portfolio monitoring experience as others, focusing only on the investors, we’ve focused on the underlying problems that make the data collection process clunky. It turns out that the problem starts on the portfolio company side.
Our platform streamlines data centralization through pre-built integrations with company source systems and provides founders with a single-source-of-truth to manage their data. Founders can easily track and respond to information requests from multiple investors by mapping requested metrics to their centralized metrics repository. In addition, founders can group stakeholders such as advisors, existing investors, potential future investors, etc., to proactively push updates with varying levels of information.
By creating both value and efficiency for companies, Standard Metrics significantly improves the data collection and collaboration process for investors. By solving the issues around data collection, accuracy, and completeness, our platform sets the stage for powerful analytics and reporting capabilities for investors, all under a single solution.