Starting a VC Fund, Episode 15: VC Firm Operations

All right.

Hi there. I'm Patrick Iwas. I'm the founder and CEO of MindMaven. We focus on helping leaders achieve true greatness by freeing up a whole day in the work week. And here we have.

I'm Charles Hudson, managing partner of Precursor Ventures. We invest in founders at the earliest stage possible.

Super. And now we want to talk about why operations is not just something you can forget about, but that you have to actually make this work really well. So what are your thoughts of that? Why, why, why do you feel that's true?

Yeah, you know, I think operations is an important part of running a venture capital firm. It's probably the least interesting of the three core jobs of being a vc. I think. You know, there's the job of raising capital from limited partners and making sure that you have the investment resources you need. There's the sexy fun part of choosing founding teams to back, trying to win deals and trying to support those companies post investment. And then there's this third piece which I would call operations, which is really the mechanics of keeping your firm running. And the way I think about it is running a venture firm is like running a small professional services firm. You have reporting obligations to your limited partners, you've got vendors you've got to pay, you've got a whole bunch of processes you need to put in place to make sure your firm runs efficiently.

So when you start off, many first time gps probably have a bit of a knee jerk reaction of trying to basically push that away by trying to hire somebody to run it for them. Why is that a bad idea?

I really think ultimately you are responsible for your own fund's operations. And I think before you can hand most of these processes off to someone else, provided you can afford help, I really do think it's important to have felt the pain and understand the process yourself. For example, you're going to have to come up with some mechanism by which you release investments for new wires. I would not recommend that process being you personally logging into your bank account, putting in the wire details and pushing send. You're probably going to want to have some other third party or fund admin or whoever in the loop helping you with that. But designing that process and executing it I think is a necessary part of running a venture capital firm. If you had a portfolio company who said, well, gee, we didn't pay anybody last week because I don't know how to use gusto, you wouldn't accept that. As a result, you would say part of your job as the leader of the firm is to have a base level understanding of how all of your systems and processes work.

So what you're saying is the LPs will basically ask you the same kind of question.

So you can't run this part of the business almost as a black box, even though you feel like, like it feels less important. Right. Why is it actually so important to do this?

Well, I think it's really important to do this well because you, you won't win as a venture capitalist by being world class at internal operations, but you can certainly lose. It's one of those sort of low upside, high downside tasks in life where if you're not above the baseline, you can really damage.

You're standing in the eyes of limited partners and to some extent in the eyes of the founders that you back. One of the things I would say is we didn't invest enough in operations in the early days of precursor. I took too much on myself and we didn't have all the processes in place that we do now. And I think it cost us. We made some mistakes, which is why I'm so sort of religious now about having people put these things in place really early so that you do have a base mechanism. And I think the reason it's easy to not focus on this is unless you have LPs that are close to you and can peek behind the curtain, most of your limited partners won't see the operational things that you're doing.

Okay, fair enough. So what I heard you say, which is I think really important, I cannot stress this actually more, is basically it's one of those really difficult things where you can't, no matter how good you do it, you don't win through it.

It's never going to make you shine per se. But if you don't do it well, it can actually take you massively down. And that's also where probably the impulse comes from most people that they say, hey, this is something I want to outsource because it's not going to make me shine. But that's where you can actually go really wrong. Because in many ways, if you don't do it well, it shows and it seeps through the cracks and it actually can have a very negative impact.

And it's like most jobs, I think, you know, once you've got a wire process in place and you've run through it a few times, you can safely outsource it to someone else because you know how it works. But remember, you're still responsible for the outcome. So if you have a wire process that results in money getting wired to the wrong place or the wrong person, that's still on you. Even if, even if you hired someone, it's still on you. If you issue a notice for a capital call or something like that and it's wrong because the person who prepared it made a mistake, it's still going to reflect on you. So I think there's this. I'm all for beginning to get help on these processes once you've established them and you understand how you how they work. But I think at the beginning establishing them and running them yourself for a little while or with some help from your fund admin is really critical for making sure you understand how everything really works behind the scenes at your firm.

Yes, I think that's absolutely powerful. Okay, so I heard this thing where basically some first time GPS basically start running the entire fund first out of the inbox because it's what the tool they're comfortable with and so on and so forth. But it's a bad idea is I guess what you're saying. Right? So A, why is it a bad idea? And then B, what would you say we should do instead?

I think every particularly solo GP has a tendency to run their firm off their inbox because you have the context. You know where all those emails are. If you ever needed to find something, you know that it's in your inbox and you could retrieve it. The problem is at some point you're probably going to have to pass an audit or you're probably going to have to produce a document or a series of documents around a previous investment, or someone's going to ask you for the most recent cap table. If you keep all that stuff in your inbox and unstructured form, all you can really do is search and hunt and peck. Try to find things. If you have a system that reliably keeps all of your documents in one place and makes them easy to access, it just works better. What I tell everyone is you should assume at some point a prospective limited partner is going to want to see your entire workflow from the day you meet the company until the day you distribute those post IPO shares. And I think if you think about your pipeline, that way you can put processes in place around how you handle inbound deal flow. Where do you put documents after deals close? How do you set up and approve a wire? Who can, who can approve a wire? In what order? There's all these mini steps that go into it that I think are really important to map out. And look, you don't have to be excellent at everything, you just have to be above the baseline.

The point you're making is at one point somebody, some LP will ask you for that and when they do, they want to know everything. And if you then at that point starting to figure it out because you have to have answers for them, you're going to create an environment of stress that will be almost unbearable and you'll probably still fail at passing the bar that that particular LP is actually looking for.

I also just think oftentimes the time your operations process use where the rubber meets the road is if you have a fund that has an annual audit at the end of the year, you're going to have to produce, you know, really high quality documentation around all the investments that you've made, supporting documentation, and that's all having done it myself before, it's a huge lift if all of those files and data lives in your inbox as opposed to well structured set of files in some document management system that you've decided on. It doesn't matter whether you choose Box, Dropbox, Google Drive, whatever you like. Just having a system in a place where you keep everything goes a long way towards making these processes easier to manage.

So what I hear you say is basically look from day one, invest enough time into figuring out your infrastructure. You don't have to have the best systems in place, but you need to understand of how you want to run your processes and you got to start learning because it's an iterative process and the more you do that the better they will run. And so start with that and.

Don'T ignore it.

And I think having ironically having a good process makes it easier to hand it off to someone else. When you can afford help and when you're ready for help, it's a lot harder to say, hey, I've got deal docs for 200 deals in my inbox. Let me forward you a bunch of emails and you can sort of recreate the chain versus hey, we've got a pretty well ordered set of files over here that have all of our deal docs. I'm going to share this with you so you know where everything is.

One thing you once told me that I think is absolutely true. Another benefit of that is right if you start with that in place from the get go and put up some form of discipline around it.

When the time is where you have to figure it out, you don't have to invest all these hours in catching up because that catching up work is never fun. It's always easier to do it in the moment than to have to do it later on.

We've, we've had a few catch up moments in the firm's history and they're, it's a big, it's a big time sink. It takes time away from supporting portfolio companies and doing other work. And it's got to be done, though. It's work that absolutely has to be done.

Fantastic. All right, cool. I think that's all we have on this topic. I appreciate you guys listening and we'll see you guys next time. Bye.