I recently wrote about the need for a new digital tech stack for the Alternatives fund industry. The human and paper-based workflows of venture capital, private equity, and private credit create a generational opportunity for entrepreneurs to a) digitize investor onboarding, b) modernize the back office, and c) generate an unprecedented layer of analytics-ready private fund data.
Many talented founders are building businesses to address the first two opportunities. It is still early in product execution and adoption, but startups like Flow, Entrilia, Juniper Square, +Subscribe, LemonEdge, PassThrough, Sydecar, Asset Class, and Canopy are building the future of private fund infrastructure.
The Data Problem
The data layer, however, is another matter. Fund managers almost exclusively rely on PDFs to share data with their limited partners (LPs), and there is little sign of this changing soon. We estimate that well over 100 million PDFs are sent annually, with most recipients manually entering the data into their accounting, reporting, and analytics systems.
That is too much redundant data entry, and ultimately leaves a lot of valuable data unextracted and under analyzed. Until fund managers digitize their fund operations and add APIs for data distribution, LPs are going to suffer. Players like Cambridge Associates will retain well-paid analysts to speak with fund managers, gather their data manually, and distribute benchmarks (and yes, really) through more .pdfs.
A Better Future
Now imagine a world where all private equity performance and holdings data is digital, where investors can download historical performance, review investment history, and create their own benchmarks and reporting. It is not hard to imagine because it would look like the public markets, where even Yahoo Finance has decades of analytics-ready data on nearly every equity and debt security in the world.
I anticipate three phases to this transformation. First, startups must meet the Alternatives industry where it is today – flat files like PDFs and spreadsheets. Domain-specific machine learning (ML) models can automate data extraction, classification, and normalization. While some worry that open-source ML models threaten these businesses, I see startups building defensible businesses across many industries through the thoughtful integration of open-sourced ML-models, proprietary domain-specific AI, and humans. Over time, their focus on one industry also yields a data advantage and network effect – multiple investors in the same fund using the same quarterly report, for example. Ocrolus in SMB lending, Snapdocs in mortgages, and BenchSci in pharma R&D are all good precedents.
Eventually, fund managers will modernize their accounting and fund admin, and some will distribute data digitally. This will be a great step forward. As an early investor in Quovo, I recall the initial reaction when banks did the same thing. They published APIs and told aggregators like Plaid and Quovo to use them. At first that was concerning, but aggregators quickly realized their data aggregation costs would actually decrease – while their real value-add remained. In Alternatives data, startups that have built strong customer relationships will also benefit; LPs/investors in private funds are really paying them to distribute clean, normalized data from thousands of private funds that lack common data definitions and categorizations.
And that leads to the third phase, where the leaders have the chance to become the Bloomberg of Alts data. It’s hard to believe, but there is no official “security master” for private funds, like we have for stocks and bonds. There isn’t even a common taxonomy for fund returns – I say MOIC; you say CoC. And, of course, not all funds report all metrics. With access to years of fund performance data from a broad universe of private funds, startups will have a remarkable opportunity to help investors analyze fund performance better and faster. Another exciting implication is that easily accessible alts data and analytics will lower the barrier for financial advisors and accredited investors to participate. Ultimately this is great for advisors who need to explain their recommendation to clients, and for private funds who are working to expand their investor bases.
Partnering With Canoe Intelligence to Build that Future
Abdul and I, and everyone at F-Prime Capital, are thrilled to partner with Canoe Intelligence in their pursuit of this goal. Together with Alston Zecha and Jens Neisius from our European fund Eight Roads Ventures, we led their recent Series B and are impressed with everything Canoe has accomplished already. They have a great ground game, stellar customer list, top-quartile SaaS metrics and a leading tech platform that is only getting better with scale and network effects. We have wanted to be a part of the solution in Alternatives data for many years, and we’re excited to see Canoe lead the industry. Paddle on Jason, Mike, Vishal, Michelle, Josh, Seth, Tim, and everyone on the Canoe team!
They have a great ground game, stellar customer list, top-quartile SaaS metrics and a leading tech platform that is only getting better with scale and network effects.