While many U.S. companies (especially larger businesses) believe that outsourcing helps them generate profit, cut down costs, and improve cash flow, some say outsourcing can negatively affect the work being done. This poses two questions in the VC world: What can GPs delegate in their fund management workflow? What can absolutely not be outsourced?
During our latest DiffuseTap session, we had the chance to tackle these two long-standing questions with Abilash Jaikumar, co-founder and managing director of TresVista, a leading support services firm for financial services companies.
Doing the Heavy Lifting
The goal of outsourcing is to leave the heavy lifting to other people so that you as a fund manager, can focus on the heady parts of running a business. When asked how much of the leg-work work is shouldered by TresVista, Abi says it’s most of it.
“I would say we can support them on the bottom 80% of the work, which is where the volume of activity is. The top 20% is where the value is: the thinking, the strategy, etc. But that’s where our clients step in to take over.”
With regards to that 80%, Abi says a lot of those processes include the investor relations side. Getting data in order, producing the private placement memorandums (PPMs), marketing materials, and most of the other day-to-day tasks. The same goes for emerging managers, which make up a third of TresVista’s clients.
Another important part of TresVista’s work is in high-priority deal execution for emerging managers, where Abi’s team lightens the client’s load end to end.
“Most of the time, we’re coming in for a very specific purpose. And usually, for emerging managers, it’s deals. You can appreciate that spending on marketing is important, but maybe marketing has a longer payout, and you say ‘I’m going to live without that,’ but the deal needs to be executed. And so, we often come in there first and help clients with that purpose.”
Knowing What You’re Good at is Key
Just having a support team for your day-to-day work isn’t enough. If you’re thinking about offloading tasks, Abi says, knowing your core expertise and being precise about where exactly to supplement yourself is crucial.
“When you think about core competencies for a VC, it can be one of a couple of things. You could be a machine at raising capital, for instance. If you know that’s true about yourself, then you can focus your energy on fundraising and figure out how you can supplement that through outsourcing and advisors — the rest of the value chain.”
Having a clear picture of your own competencies and shortcomings helps you craft a team to support your ideas and help you execute your plans.
“For example, if I’m a data scientist, then I know I can ramp the revenue growth by using data. If I’m an excellent marketing professional, I’m going to focus on companies that can benefit from brilliant marketing. If I know how to source better and I have a huge network, then I know I can get in deal flow. I just need to supplement that with people who can help do the diligence and raise the capital.”
What Can GPs Delegate and What Should They Not?
Abi says not everything can be outsourced. Neither should all VCs and fund managers do it. Several factors come to play when outsourcing, and the tricky part is knowing in what cases you need to get your hands dirty. One thing you absolutely cannot outsource, Abi says, is relationships.
“You should never outsource the relationships, whether it’s with investors, with deal generators, with management teams, or others. Because for me, relationships are really a big part of the core competency of what a VC firm does.”
The other thing you cannot fully offload, according to Abi, is due diligence. Leverage others to do research and analysis, but the fund manager must stay involved through the process and translate the answers arrived from the diligence process into the ultimate investment decision themselves.
“You don’t want to leave diligence entirely to other people. It’s a tricky one because if you hire a large consulting firm, for instance, you’re basically outsourcing diligence to a certain extent already. But you also want to supervise the process, make sure everything’s in check, so you don’t run into problems later on.”
Niche VCs face another challenge Abi notes, “If what you’re investing in is very niche and very technical, maybe it’s not outsourceable, and you have to be the one to do that because that’s your secret sauce.”
Why do most GPs not think of delegating their tasks externally? They have not realized that a fund is just another form of a small or growing business.
“When you launch an asset management business, you’re an entrepreneur. And just like any other entrepreneur, it means you have to wear many, many hats. And often what ends up happening is the main thing that you want to do, which is invest and advise, gets pushed off.”
This is where task delegation comes in handy. Of course, getting specialized help is no easy feat. Hence companies like TresVista and Diffuse exist to step into the areas where the GP’s core competency doesn’t quite reach. In the end the fund that generates the most alpha wins. Optimizing for focus on the GPs part makes all the difference.
Meet the Speaker
Abilash Jaikumar co-founded TresVista in 2006 as a relatively small business providing high-end financial services, research, and data analytics support for asset managers, investment banks, research firms, and corporates around the world. Due to the strong demand for TresVista’s dedicated per-client teams, the Mumbai-based company has since expanded its global reach, opening offices in New York and London in 2017.