What VCs need in a fund administrator

This article summarizes an episode of VC10x’s video series featuring Shalin Madan, Co-Founder of Formidium.

Image credit: Timmy Loen

Formidium is a global fund administration platform supporting venture capital, private equity, hedge funds, and alternative asset managers with over US$33 billion in assets under administration. Co-founder Shalin Madan recently shared a framework that shifts due diligence from checking features to evaluating a partner’s long-term stability.

It achieves stability by focusing on the core business. Madan believes that thoroughly vetting partners gives a clear advantage. By checking a provider’s financial health, a fund’s team can focus on generating returns and growing the business.

The cost of ignoring business models

Evaluating partners only by features and price is risky. Ignoring their financial health can tie funds to unstable technology that may not last

“[A manager] asked a question. He said, ‘How do I have assurance that you will be around in the future?’” Madan says. “So the business model is something that’s quite overlooked. Is the company that you’re doing business with going to be around even in five or 10 years?”

Relying on empty promises leaves a fund exposed. Managers must stop worrying about flashy tools and start asking specific questions to find out if a partner is truly sustainable.

“Are they cash flow positive?” suggests Madan. “If they’re VC-funded, is their pricing stable and realistic, or are they just trying to get market share? Have they really been through a down market? What would happen if fundraising dries up?”

Accelerating internal discipline

While vetting a partner’s finances helps make the fund more secure, looking at their technology creates an X-ray of their operations. A company’s software stack shows how organized it is and if it is ready for a close look.

“The tech reflects an internal discipline,” Madan explains. “You want to look for integrated workflows. Things like automated financials are a key tell when doing due diligence on a fund administrator. How audit-ready and tax-ready is the technology stack?”

Depending on a disorganized system guarantees larger problems down the line. Madan argues that integrated, automated software beats relying on outdated, error-prone methods.

While some accept the status quo of manual data entry, he dismisses this approach entirely. Since the biggest source of mistakes sits on every computer, he sees an immediate need for strict operational bans.

“At Formidium, we’re banning Excel. We want to ban Excel,” he points out. “You know how much Microsoft Excel, how much spreadsheet work is being used? The more spreadsheet work, the more chance of process risk. That’s what technology is there to solve.”

Navigating in-house operations

A fund’s decision to manage internal tasks in-house usually means wasting time and money. To survive, managers have to forget the urge to control everything and look at the facts of their own performance.

Rethinking market survival