ESG – An Introduction

With increasing changes in business needs and businesses tuning onto global trends like climate change and responsible corporate social responsibility, ESG Investing has emerged as one of the hottest trends in corporate parlance and governance. Its imperative then it is considered while making investment decisions aka ESG investing

ESG stands for Environmental, Social, and Governance. It is a non-mandatory part of financial reporting. But as it stands out, to differentiate itself from others as well as the need to project itself as a responsible company with a truly global outlook more and more companies are incorporating them in their financial reports.

Although much needs to be done on this front, there are bodies like the Sustainability Accounting Standards Board (SASB), Taskforce on climate-related Financial Disclosures (TCFD), and Global Reporting Initiative (GRI) that have taken on themselves the onus of setting standards and benchmarks for the companies to follow through. The oldest framework of course is the GRI which has been adopted by more than 13,000 organizations in more than 90 countries.

The market for green bonds has boomed. According to a report by Climate Bond Initiative green bonds are set to reach $400 Bn to $500 Billion in 2021 which is nearly double than that in 2020 when its value was $270 Billion.

According to BAML, 90% of bankruptcies in the S&P 500 during the period 2005-15 were of companies with low ESG scores.

Not only big companies but this is also bound to have an impact on how institutional investors decide on their investment targets.

Emerging Trends in ESG Investing

Global sustainable investment is now more than $30 Trillion which is a tenfold increase in spending since 2004. The coronavirus pandemic has further led to much unrest and the onus is now on the companies to create a resilient, sustainable, and responsible organization.

To illustrate the above factors, let us for instance focus on the trending issue of climate change which is a pressing environmental concern. Climate change is a challenging global problem and it requires us to think in different ways in not only understanding the key problems but also think in different ways in how we can reduce greenhouse emissions. It requires adapting not only new technologies but more importantly a human mindset whenever we try to address this problem.

Similar is the case with social compliance. As the world diversifies into a seemingly single entity where the borders between nations are blurring. So, is the pace of change in organizations where key studies in organizational behavior and strategic human resources management are compelling one to take a different view of how organizations should operate. Since the times of Peter Drucker and his theories on management, it has but become imperative to adopt these management concepts in a manner that not only broadens the viewpoints of the individual but also of the organization at large.

Although there are several ESG frameworks in practice, for simplicity’s sake a sample ESG framework has been given below.

ESG Framework

Companies are benchmarked on these standards although there are more standards to abide by. Each ESG framework allocates a different criterion and scorecard based upon which the companies are rated and then an overall score is provided.

Impact of ESG on Business and Investing

There are a few major points that affect how business functions when it comes to ESG factors influencing them.

1. Company reporting – As discussed above we are still in a working stage when it comes to industry benchmarks set by boards like SASB, TCFD, and GRI. Hence, the companies who comply with their norms are more likely to have the first-mover advantage and consequently be viewed as long-term responsible companies both in the eyes of the clients as well as the shareholders.

2. Impact on investor analysis and decisions – Investors rely on a mix of internal and external data when it comes to making decisions as to investing in a particular company. In fact, there are ratings provided by companies like Magistral consulting which help investors in decision making.

3. Responsible investor reporting – An increased ESG compliance gives companies a key advantage in regions such as Europe which are looking to adhere to the new standards. Besides it is a matter of time before these standards become a norm rather than a guideline

4. Improvements in productivity – Significant cost reductions and operational efficiencies are achieved by companies that have adopted these frameworks.

5. Better resource utilization– ESG frameworks adoption ensure better long-term utilization of resources (eg. plant and machinery) when considered over a long term

6. Increased environmental awareness among consumers– Thanks to climate change becoming a hot topic in the recent decade, consumers have now become more socially aware and more than 65% of them are willing to pay a premium for “green goods”

7. Greater employee productivity – When employees look at a company that is committed to environmental and social causes as well as following good governance practices it has been observed that companies see greater loyalty as well as ownership among its employees simply because the company cares for issues that are over and above itself

A pertinent question to ask is how does it affect sectors like private equity and hedge funds? The answer is that they are more likely to invest in companies with ESG compliance especially after the aftermath of the COVID 19 pandemic. They have started to incorporate ESG factors into their decision making which is why they have invested close to $21 Billion into ESG focused funds in 2019 alone.

According to a survey business ethics, bribery and corruption and occupational health and safety were the top 3 factors when it came to private equity investments with more than 80% of respondents citing it as the top factors. Other factors included waste management, employee development, and talent attraction and retention.

A sample ESG scorecard: A sample ESG scorecard of Magistral consulting is given below to show how ESG is benchmarked and rated.

Magistral’s Sample ESG Scorecard

The best way to incorporate ESG in investing decisions

Though ESG and its impact on investments are growing exponentially, it’s still a relatively new development. Expertise is limited.

If one is interested in incorporating principles of ESG in investment decisions, the best way to go about it is by outsourcing the research and analysis process to an expert service provider like Magistral

Magistral not only brings years of expertise in evaluating investment opportunities from an ESG lens, but it does also so in a very cost-effective way by combining expertise with outsourcing to locations where the assignment could be delivered cost-effectively.

The result is more robust investment decisions with savings in operations costs!!

Why Magistral consulting?

Magistral consulting offers solutions in the following categories –

ESG policy and frameworks- Magistral consulting ensures that appropriate ESG policy and frameworks are applied to the company as would best fit their requirements.

Target company due diligence (financial, operational, and ESG)- Performing adequate due diligence not only in terms of financial but also ESG compliance standards.

ESG scoring, rating, and benchmarking—A value-added service where companies are rated and scored as well as benchmarked as per the standards laid out in the ESG framework.

ESG compliance monitoring- Magistral consulting also ensures that not only are companies benchmarked as per the standards laid out in the ESG framework but they are also following the norms once it comes to the day-to-day running of activities in the organization. This is what is called ESG compliance monitoring.

About Magistral consulting

Magistral Consulting has helped multiple funds and companies in outsourcing operations activities. It has service offerings for Private Equity, Venture Capital, Family Offices, Investment Banks, Asset Managers, Hedge Funds, Financial Consultants, Real Estate, REITs, RE funds, Corporates and Portfolio companies. Its functional expertise is around Deal origination, Deal Execution, Due Diligence, Financial Modeling, Portfolio Management and Equity Research.

For setting up an appointment with a Magistral representative visit www.magistralconsulting.com/contact

The article is an effort of the Marketing function of Magistral Consulting. For any business inquiries, you could reach out to prabahsh.choudhary@magistralconsulting.com

Introduction

Markets are overheated. Funds are being launched. Series A has now touched $50 million to start with for even pre-revenue start-ups!! In these frenzied times, the experts of fundraising are in demand. Magistral’s fundraising support services could be used at a fraction of the fund, to close the fund faster and in full.

Magistral Fundraising Support Services

Magistral fundraising support services help clients reach out to Limited Partners, General Partners, Asset Managers, and Business Decision-makers for business development support.

Types of Investors Reach-out for Fundraising or business

Limited Partners Reach-out

In this, the Magistral team generates the leads for Limited Partners, i.e., Family Offices, Sovereign wealth funds, pension funds, Treasury offices, Universities, etc. This list is then used to set up meetings with our clients who are General Partners like Venture Capital, Private Equity funds, or for service providers like Investment Banks and brokers.

Each lead comprises the name of the individual, their email IDs, firms’ names, links to their profile, their investment expertise, past investments, office address, websites, and board phone number. This information is then used to set up meetings with the client. Once the meeting is set up, Magistral gets out of the way for both parties to negotiate once the meeting is set-up

Once the reach-out for investment in a specific fund is done, further steps like CRM updation, design, and distribution of newsletters are devised to keep the leads warm

General Partners Reach-out

In this scenario, we are hired by Startups and established firms to raise funds from Private Equity or Venture Capital firms. Here the leads are generated for the PE or VC firms that specialize in the given industry. We reach out to investors specializing in SaaS, Healthcare, Tech, and several other industries all the time. The leads carry information like the name of the individual, email IDs, phone numbers, websites, investment specialization, past investments, etc. These leads are used to set up meetings with our clients. There is an efficient online tracker to see the status of each lead and where they are in the fundraising journey like the first meeting, second meeting, NDA signed, LOI signed, etc. The tracker also records the meeting notes and next steps

Reach out for B2B Business Development Support

If investors like Private Equity, Venture Capital, or Family Offices have B2B companies in their portfolio, and they have a board seat or get involved in active management of the firm, it’s imperative to focus on business development. Business development bumps up the revenue and enhances valuation. Magistral has been of help to investors in these situations too. We generate B2B leads in specialist industries. We also go a step further and try to set up the meetings for the business development teams. The support is also offered in design-related services like brochures, introductory materials, and presentations, etc.

Asset Managers’ Reach out

This forms the backbone of our operational support services to LPs like Family Offices or Fund of Funds, and Investment Banks that specialize in managing clients’ money. Here the reach-out is done primarily to collect all the documents for effective due diligence on the performance of funds. So specialized asset managers are reached out, all their performance documents are collected and then analyzed on metrics of risks, returns, volatility, etc. to arrive at a set of recommendations for the client.

Magistral’s Investors’ Database

At the heart of our fundraising efforts is our proprietary database of investors. We hit our database as a first step to raising funds. This database has been prepared and updated with the information that we have acquired from years of experience in fundraising for GPs, start-ups, and other firms. It has currently 25,000 + leads of General Partners and Limited Partners based out of the US, the UK, Europe, and India. This is also offered as a separate product to clients who are interested in fundraising at very competitive prices.

Rather than carrying a plethora of information on investors, most of which is anyway useless, Magistral’s database carries only the information that is useful for fundraising. That information is the leads of investors, their interests, their investments, and how to reach out to them. We keep it that way so that we could provide to our clients, what they need at an affordable pricing point

Here is the demo of our database.

Magistral’s Fundraising Package

Magistral can play a critical role in all stages of fund-raising. It offers its services as a package.

Elements of Magistral’s Fundraising Package

These services are

1. Fundraising Documentation: Whether you are a GP, a start-up, or an established firm looking to raise money, the first step is to finalize the documentation. These are the standard three documents which are Pitch Deck or PPM/CIM, Valuation, and 1 pager teaser. We prepare these documents at a lump sum fixed cost, with all the iterations taken into account. The service also includes polishing of the material, to make sure it is brand consistent and meets the global standards of marketing and design

2. Magistral’s Investor Database: Once the documentation is done, the next step is to reach out to investors and start setting up the meetings. Magistral’s investors’ database is the tool designed for this step. You could get the investors’ coordinates and write to them directly. If you can choose investors from all across the industries and geographies from its record of 25k+ investors. In case you still think you are super-specialized and would need far more niche investors, a customized lead generation of 500+ leads are also offered as a top-up

3. Specialized lead generation: For certain occasions like B2B business development, a specialized lead generation campaign is taken up

4. Analyst Support: For reaching out to investors, or for documentation or for attending meetings, taking notes, and taking care of the next steps from meetings, if you need any analyst support, that could be offered as well, which provides a flexible and cost-effective option to hiring onsite.

Magistral is Not a Broker-Dealer

Whenever we present ourselves as fundraising experts, we get inundated with broker-based assignments. There are several reasons we don’t get into commission-based variable arrangements. These are

1. The upfront investment of efforts: There is an upfront investment of efforts on our part for every assignment that we take up. This is either in the form of understanding the opportunity, refining the documentation to suit the need of investors or simply reaching out to investors. We can’t support any opportunity and put upfront investment specifically in the case where there has been no working history

2. Impartiality of our recommendations: We work with both GPs and LPs. We don’t want to take any opportunity to our GP and LP clients, where we have commercial interests in the form of brokerage fees. We pride ourselves in presenting the best opportunities that are carefully evaluated for fitments and returns for our clients. That is only possible if we analyze the opportunity impartially without any commercial interest.

3. Brokerage Fees: We are paid to bring in the money. Wonderful!! But who pays this money? This is one of our clients, who loses 1-5% of the investment right from the go!! We don’t think that goes well with our values.

4. Too many unreliable players: A brokerage-based arrangement could be offered by anyone in the market. They have no skin in the game. They are just evaluating the options out there. We don’t want to get involved in any deal with any asset manager that has no previous track record and is unreliable. If you yourself are not ready to invest a few thousand dollars in your idea, how do you want us, to get you millions?

5. Magistral is not in a position to negotiate: The legal responsibility and the negotiation is dependent on the parties involved. Magistral is just a service provider. Even if we do our best to get you, investors, there is no safety mechanism for us in case you start putting up conditions that spoil the deal. All our efforts are wasted and we would have lost the trust of another valued client

6. Lack of licenses: We don’t have any broker-dealer licenses and we don’t want to get into that business

All our services are retainer-based and after a successful round of fundraising, the fees work out to be a very minuscule part of the fund. We will not sign any success-based fee arrangement with a client, we have no working history with.

About Magistral

Magistral Consulting has helped multiple funds and companies in outsourcing operations activities. It has service offerings for Private Equity, Venture Capital, Family Offices, Investment Banks, Asset Managers, Hedge Funds, Financial Consultants, Real Estate, REITs, RE funds, Corporates and Portfolio companies. Its functional expertise is around Deal origination, Deal Execution, Due Diligence, Financial Modeling, Portfolio Management and Equity Research

For setting up an appointment with a Magistral representative visit www.magistralconsulting.com/contact

About the Author

The Author, Prabhash Choudhary is the CEO of Magistral Consulting and can be reached at Prabhash.choudhary@magistralconsutling.com for any queries or business inquiries.

Introduction

Multi-Family Offices are specialist wealth managers who invest on behalf of their clients that are usually family offices. Due to multiple macro changes in the global economy, the pandemic, in particular, now MFOs are toying with the idea of outsourcing. Multi-Family Office Outsourcing for Operations in itself is an area that is still evolving. The scope of outsourcing is being broadened after the pandemic to save costs and improve the operational quality and reliability

In the article, we talk about the scope of outsourcing possible, without bringing down the quality of your engagement with your clients. We will also talk about the risks of the outsourcing process and how Magistral takes care of it.

Multi-Family Office Outsourcing- What could be outsourced?

There is nothing like “safe” or “unsafe” outsourcing. The scope of outsourcing depends on the capability of the vendor, repeatability, and replicability of the client processes, and the relationship and trust between the vendor and the client. Trust-building is a slow process with incremental value addition from vendors with reliable performance over a while.

Type of jobs that could be outsourced by MFOs

Still, the things that could be outsourced to different extents are following:

Investment Analysis

A major part of the Investment Analysis that is done by Multi-Family Offices could potentially be outsourced. Major ones being:

1. Fund Analysis: If you are investing in a hedge fund specifically long-short equity, that requires regular evaluation, then outsourcing may present a viable opportunity. The experienced vendor has set templates to benchmark a fund with global indices and coming up with all the performance indicators related to Risk, Volatility, Returns, Sharpe Ratio, Sortino Ratio, and a host of other commonly used indicators for the fund evaluation

2. Direct Investments: MFOs do invest directly in companies that they are convinced have a promising future. In this case, outsourcing could help you with Financial Modelling, Due Diligence, and preparation of Investment Memorandums and Pitch Deck

3. Financial Modelling: Financial Modelling, not only related to valuations of the companies that an MFO wants to invest in, but also Real Estate, Sum of Parts Analysis, M&A Analysis, Comps, and several other models are templatized with the vendor and since its being done for other clients too, it could be produced efficiently in terms of costs and time and with reliable quality

4. Private Equity and VC Funds’ Due Diligence: Magistral evaluates multiple PE and VC funds for investments by Single or Multi-Family Offices. We look for the track record of Founders and Partners, their portfolio, unicorns, exits, industry focus, geographic focus, and the reliability of expected returns that the funds promise

5. Fundamental Analysis of Stocks: Equity Analysis is a standard feature that many outsourcing vendors offer. It is analyzing the stocks’ capability to generate positive returns in the future

6. Crypto and Crypto-based Funds: Crypto has grown at an outstanding pace. FOMO is leading to all Family Offices adding this to their portfolio either as direct investments or in the form of a crypto-based fund. Magistral provides the financial model and due diligence for specialized investments like Cryptocurrencies and blockchain-based products and companies

7. Real Estate: Magistral also supports Family offices that specialize in Real Estate investments through services like valuations, comps, tracking and analyzing ETFs, preparing Pitch Decks and PPMs.

Investment Analysis for each client is unique and sometimes complicated. Magistral has helped 30+ family offices in outsourcing their investment analysis process and is well versed with all the operational areas that could be effectively outsourced.

Marketing and Investor Relations

The marketing and Investor Relations processes at multifamily offices are usually repeatable and templatized. These processes along with the research that goes into them, are obvious candidates for outsourcing. The following activities could potentially be outsourced without much loss in terms of quality or time and make for ideal candidates of Multi-Family Outsourcing candidates

1. Newsletters: Newsletters are a common occurrence in the Marketing functions of Multi-Family Offices. These are usually outsourced anyway if they are not too niche or specific

2. Reports: Industry Reports, Geography Reports, or other PoV materials that are prepared in marketing to further the investment thesis and differentiation is better done outsourced

3. MIS: MISs for internal stakeholders and investors are outsourced. These are usually delivered in Excel with or without Macros, PowerPoint, PDFs, and word. Sometimes data is pulled from specific databases like Pitchbook or tools like Addepar to prepare these reports

4. CRM: Management of the whole CRM systems for leads updation, investor reach out and content development is something that is better done outsourced

5. Research: Research is required to fine-tune the investments’ pitch and to prepare the reports. If reports need to carry a knack that’s very specific to a firm and can’t be outsourced, the research for the same is the next viable candidate

6. Portfolio Reporting: Portfolio and its valuations are reported sometimes as frequently as weekly and most of the time monthly. The whole process of preparing the valuation for different instruments in the portfolio like Hedge Funds, Direct Investments, PE and VC Funds, Real Estate, and other specialized investments is first understood by an experienced vendor and then gradually shifted offshore.

Operations

What comprises operations is different for different firms. Mostly lots of data-heavy lifting related to portfolio forms the bulk of operations. Depending on how it is defined, there are multiple activities that could be outsourced. In the Multi-Family office outsourcing scheme of things, these activities take the most time to outsource effectively

These are:

1. Data Collection and Automation: In a heavily invested Multi-Family Office, data is flowing related to multiple direct and fund-based investments. This data needs to be captured and analyzed. Sometimes there are specific strategic initiatives that are proprietary and need data analytics and research like coming up with future successful investments by analyzing the past ones. These initiatives have a good potential for outsourcing. In the past, Magistral has helped its clients automate the data collection process, preparation of reports, and data visualization on tools like Power BI and Tableau

2. Data Updation: Depending on the platform that a firm uses for capturing the data, the data needs to be collected and recorded for analysis and reporting. Sometimes it’s automated tools like Addepar and sometimes it’s just a host of excel sheets talking or not talking to each other. Irrespective of the platform, data needs updation regularly and that is something better outsourced for cost and time efficiencies

3. Data Analysis: Putting all the data collected or recorded through formulas and making sense out of it is the analysis part. Analysis shows whether an investment is right and whether the portfolio is on the expected track to make returns. Data analysis depending on whether there are set templates and their repeatability could be easily outsourced.

Risks associated with outsourcing

Everything is not hunky-dory when it comes to outsourcing MFO operations. There are multiple risks that clients face while outsourcing. These are:

1. Not enough savings: Global firms that offer outsourcing at scale are more reliable than small or medium-sized outsourcing players, but their price quotations come very close to the onsite hiring and there are not enough savings to warrant the risk.

2. Attrition in the FTE model: Most outsourcing companies operate on an FTE-based model, where you hire offshore a virtual employee to save costs. The client puts in time and efforts to train a particular resource, just to realize that the employee decides to leave to pursue a career elsewhere, taking with him months of efforts

3. Lack of skills: There are many outsourcing vendors out there in the market but there are very few who understand the multifamily office business and its challenges. It will be difficult to scale your outsourcing with such vendors

4. Operations disruption: While outsourcing, if the whole step backfires, there may be irreparable damage to the operational continuity and the firm’s reputation.

Magistral counters all these risks with its well-laid out Multi-family office outsourcing process with proper checks and balances. This process has been tested out with more than 30 Single and Multi-Family Offices across the globe.

Magistral’s Proprietary Process of Multi-Family Office Outsourcing

Multi-Family Office Outsourcing at Magistral is a 4 step process that minimizes the vendor performance risk for the clients. Here are the details

Magistral’s Outsourcing Process counters all the traditional drawbacks of outsourcing

Pilot process

Before deciding on whether the whole process needs to move offshore, the client starts with a small pilot project. We are also not in a hurry to push the big-ticket purchase, it’s because we are confident that clients will eventually find value in our performance and stick with us. So a Pilot project starts, quotes of which are very competitive as it’s quoted on “No profit-No loss” basis by us. The client gives us a small project and tests the various aspects of offshoring firsthand. These aspects are quality, communication, engagement, connection, technical expertise, billing, and other softer aspects of the engagement.

Proposal and Engagement Model

Once the pilot is successful, the client journey moves to decide on the overall broad contours of the engagement. Magistral submits a proposal with commercials, project plans, CVs of resources, the scope of work, methodology, etc. Once that gets signed the wheels finally start to roll. The engagement models offered by Magistral suit multi-billion dollar asset managers as much as it does to a one partner company.

Standard Operating Procedure

Magistral after the signing of Proposal or Letter of Intent gets down to the knowledge transfer process. It comprises detailed interviews with client stakeholders. All the information received from clients’ stakeholders is put in a standard document called SOP. SOP is helpful while training a new team. It’s equally helpful while a team member leaves and a new one joins for a quick knowledge transfer. It is updated regularly and is the bible of all the operational details and know-how.

Knowledge Transfer, Project Stabilization and SLA Reporting

Once the project goes live, it doesn’t do so in a big bang, all once at a time way. Workstreams are offshored gradually. Easier, repeatable processes are offshored first, before the complicated ones requiring complicated decision making. Once the team is stable, we start reporting MIS that carries our Service Level Agreements compliance. A few examples of our SLAs, 100% adherence to the promised timelines, more than 95% availability of the analysts, and several others depending on the scope of the project.

Magistral is a specialist when it comes to Multi-Family Office outsourcing, across the globe in outsourcing various aspects of their operations. Its costs are competitive as it’s small enough not to have overheads that don’t add any value to clients and still big enough to have the capability of servicing a global MFO well. To schedule a conversation with a Magistral representative drop in a line here

About Magistral

Magistral Consulting has helped multiple funds and companies in outsourcing operations activities. It has service offerings for Private Equity, Venture Capital, Family Offices, Investment Banks, Asset Managers, Hedge Funds, Financial Consultants, Real Estate, REITs, RE funds, Corporates and Portfolio companies. Its functional expertise is around Deal origination, Deal Execution, Due Diligence, Financial Modeling, Portfolio Management and Equity Research

For setting up an appointment with a Magistral representative visit www.magistralconsulting.com/contact

About the Author

The Author, Prabhash Choudhary is the CEO of Magistral Consulting and can be reached at Prabhash.choudhary@magistralconsutling.com for any queries or business inquiries.

Introduction

The business of Venture Capital funds depends on the targets it invests in. The more the chances of its portfolio companies hitting a moonshot, the more successful the fund is in general. Venture Capital Due Diligence is a process that ensures the appropriate targets are locked in at the seed or early stage to ensure 50-1000X returns in a 5 to 10-year horizon.

The way a VC fund looks at a target is fundamentally different from how a Private Equity or a lender would look at it. A VC fund looks for that one silver lining that can make a portfolio company a roaring success. PE firms mostly weigh pros and cons and generally invest if the Pros outweigh the cons. A lender analyzes if anything at all could go wrong with the company and may jeopardize its investments. Different objectives of investment require different lenses for analysis.

Challenges regarding Venture Capital Due Diligence

VC firms invest in small firms, primarily start-ups, often only at the idea stage. The biggest challenge for due diligence, in this case, is the availability of data. When the idea has not shown any traction, the research needs to be more outside-in. That is finding out the market information and if any customers may be willing to pay for such services of the potential portfolio company. If there is any traction, then the analysis needs to be both outside-in and inside-out. An inside-out investigation is more towards getting into the details related to the operations and finance of the company along with the opportunity that the market offers.

Another challenge is to keep the deal pipeline active for multiple due diligence exercises to happen. Due diligence can throw numerous red flags. If there are various deals in the pipeline, a VC fund can walk away from the opportunity till they get into the company that justifies investment in terms of money and time. Many VC funds park small amounts with the companies they know or are from their circle of friends and family. That biased approach would result in sub-optimal results in the long run. Deals found from networks or events are usually the hot deals that others are also evaluating. That leads to FOMO (Fear of Missing Out) on the part of VCs and hence the overvalued assets.

Advantages of Outsourcing Venture Capital Due Diligence

The advantages the outsourcing brings are numerous like it saves costs, resources are available on-demand and there is a certain specialization with the vendor who works with multiple VC firms, which raises your own investing game.

However, when it comes to outsourcing, there is always a lingering threat in the minds of asset managers. Will the quality be any good? Or what if the deal gets outed due to many individuals knowing about it? Or do they even understand it, ours is anyway a specialized investing or a niche industry?

Challenges around Venture Capital Due Diligence Outsourcing

It is easy to make a business case for outsourcing on an excel sheet, where it can produce 30-70% cost savings while in most cases improving the quality of due diligence. However, concluding everything is hunky-dory with outsourcing is far-fetched. Here are the top challenges with outsourcing venture capital due diligence

There are way too many generalist research and outsourcing players out there, who offer to do research, list generation, and make company profiles, but most of them lack a deep understanding of how VC investing works. There are very few specialist VC research players. Magistral is one of them

VC itself is a new and upcoming industry. In the US alone in the first 8 months of 2021, the number of unicorns created has crossed the number of unicorns ever created in the history of VC investing. That is the acceleration. Though outsourcing provides the access to talent that can deliver, you can be assured the talent itself is half baked, purely due to the massive acceleration that this industry is witnessing

Even the outsourcing home country is witnessing the talent crunch. For example, India itself lacks VC talent and there is a huge demand for trained resources. In a typical FTE-based outsourcing model, it is very possible that you train someone offshore in your diligence processes and he is poached by the competition, leading you to train offsite resources again and again and again. It’s a massive headache

VC investing is more of an art than an exact science and some of the DNA of VC investing is very difficult to outsource.

Magistral’s proprietary process aims to do away with the shortcomings related to Venture Capital due diligence research outsourcing.

Before we dive into the Magistral’s process, here is how we evaluate targets. The things that we analyze closely to ensure the target you invest in has the best chance of becoming your next moonshot and increasing the profile of your fund

Magistral’s Process to Outsource Venture Capital Due Diligence

Venture Capital Due Diligence: Key Components

Venture capital due diligence involves looking specifically around the following aspects of a potential portfolio company before committing to investing:

The opportunity size

Assessing the opportunity size carefully gives an idea of whether there is a possibility of a moonshot with the investment. If the total addressable market (TAM) runs into billions and the company solves an acute pain or saves cost or saves time, or makes the process easier, then there is a massive chance that the company will scale up faster. Sometimes the addressable market is at the conjunction of two or more big markets, and there the TAM needs to be arrived at, with careful triangulation and estimates. Calculation of TAM carefully gives an idea of the upside possible if the strategy and team are right.

Strategy

The opportunity size almost always coincides with the Go to Market (GTM) strategy. This is where lots of VCs add value with their network and connections along with the domain experience. The company suggests a GTM, which experts in the due diligence phase verify. A well-presented GTM has level 2 and level 3 steps, along with the timelines and business outcomes. There is also the requirement of funds laid out clearly for every stage.

The size of the opportunity and how the company plans to seize that opportunity is almost a make-or-break part of the due diligence process.

Competition

Competition sometimes is assuring and occasionally threatening. Competitive intelligence in itself throws light on multiple possibilities. If it’s a product or service promised to be one of its kind, it will be challenging to find an exact competition. The task is not to find the competition per se but carefully checking if the market makes sense, to begin with. Is it just too tricky a market to crack, or is there no market at all, or it’s a service or product no one wants to pay for? Competition or absence of it here is a great pointer. In moderately accepted business models, the company is expected to face competition, big or small. The competition is studied for traction. If all the competition out there is growing at a healthy pace, it shows that the industry may have a place for someone who could do the job better. If competition is shutting shops or taking too long to be profitable, then also it’s a pointer towards the choppy waters ahead.

This also needs to be seen in the light whether the target can be number 1 or 2 in a vast market as it all works on the “winner takes it all” philosophy with VC investing

In any scenario, a careful evaluation of the competition throws a guiding light and is an essential step in the due diligence process

ESG

ESG has picked up in the recent past and for a reason. ESG stands for Environmental, Social, and Governance aspects of an investment that indicates sustainable investing. Though it’s far more critical towards the later stage funding rounds, planning yields rewards in the earlier rounds too. It is estimated that the majority of the deals in the future will be impact or sustainable investments, which will fulfill the criteria of ESG maturity. Some studies show almost all investments would be impact investments a few decades down the line. A VC not only plans for an exit from the portfolio but to raise following funding rounds too. Chances of raising rounds at higher valuation increase if the company is primed to be an ESG investment right from the seed or early-stage rounds.

Financials

If the company has been around for a few years and has seen some traction, financial analysis becomes crucial as any other factor in the due diligence process. Financials feed into the valuation of the company. Financials are also essential to forecast future revenues, profitability, and cash flows. In the due diligence process, reasonable estimates are made to project the company’s financial statements for the next five years. That drives the valuation of the company on which the funds are to be raised. In the due diligence process, sometimes, the assumptions made during the preparation of financial models are tested thoroughly. If there is an assumption that may not stand the scrutiny of the financial analyst, it is flagged. If there is a massive impact of an erroneous assumption, this exercise alone could save millions of dollars for the VC investor.

The team

The founding team in a smaller company is the driving force. Suppose the team is experienced, has relevant skills, produced returns for investors in the past, and is motivated to make a difference. In that case, it can be the difference between an investment that reaches out for a moonshot and another one that proves to be a dud. Checking the team’s credentials, experience, qualifications, and connections is an essential aspect of the due diligence process.

Red Flags

Apart from significant aspects discussed earlier, the due diligence team also looks for red flags in the documents submitted by the company seeking investment. It could either be a legal hurdle, financial irregularities, or any other problems with the documentation. Discussing these red flags with the company may well turn out to be fruitful.

Magistral’s proprietary process for Venture Capital Due Diligence

Magistral’s unmatched advantages in VC Due Diligence

Magistral works with multiple VC firms, some one-man companies, and others running a portfolio of hundreds of companies or start-ups with a few unicorns and soonicorns. After performing hundreds of due diligence exercises across industries like SaaS, healthcare, Tech, Industrials, Services, Real Estate, and others, Magistral has developed a proprietary due diligence service delivery method that counters almost all the drawbacks of outsourcing.

Magistral’s financial analysts take control of the data room. The VC or the company populates all the documents in the data room. We comb through the records with an eagle eye to spot opportunities or red flags. We have developed a standardized checklist to evaluate all types of documents. All our observations and questions are collected by the VC and discussed with the company. We also prepare a detailed report on the business. The information on the company comes from secondary research, discussions with the industry experts, and our in-house expertise in the area. Finally, Investment Memo or pitch deck crystallizes all the insights. These pitch decks are designed consistently with the global marketing standards of the financial industry.

All FTE-based engagements of Magistral have an ever-evolving Standard Operating Procedure (SOP) document. This helps in standardizing the process irrespective of the personal capability of the analyst working on the project. It also ensures a smooth transitioning in case the trained analyst leaves. There is also a shadow analyst always ready to take on in case the analyst leaves permanently or takes off or holidays. It’s so much like the cockpit of Boeing 747, planned for all eventualities.

Our experience has made us more knowledgeable about VC investing than some of our clients. That helps our clients improve their investing game too. Templates, Systems, and our experience and DNA of VC investing ensure due diligence that meets the global standards of investing at competitive valuations. If it sounds interesting, for a conversation with, drop an inquiry here

About Magistral

Magistral Consulting has helped multiple funds and companies in outsourcing operations activities. It has service offerings for Private Equity, Venture Capital, Family Offices, Investment Banks, Asset Managers, Hedge Funds, Financial Consultants, Real Estate, REITs, RE funds, Corporates and Portfolio companies. Its functional expertise is around Deal origination, Deal Execution, Due Diligence, Financial Modeling, Portfolio Management and Equity Research

For setting up an appointment with a Magistral representative visit www.magistralconsulting.com/contact

About the Author

The Author, Prabhash Choudhary is the CEO of Magistral Consulting and can be reached at Prabhash.choudhary@magistralconsutling.com for any queries or business inquiries.

Introduction

Are you thinking about operations outsourcing?

So, you are a Private Equity or a Venture Capital firm that invested in a portfolio company? Or you are the owner of a small or family business and want to change the culture? Or you are an advisor to firms that are looking to reduce operations cost? This article may help you.

The company has been in existence for decades and has had a decent run in terms of profitability and growth over the years.

Or, it’s a tech or SaaS startup and has the potential to see explosive growth in a short time.

Whatever is the case, assessing the potential of operations outsourcing should be the first step for any investor, owner, or advisor who can call shots when it comes to the strategy of the portfolio company

We will detail out the challenges of a new investor in the portfolio company and then go onto make a business case for outsourcing. We will also let you know the required process to outsource the chunks of operations for the newly acquired company.

Challenges of a new investor in the portfolio company

Here are the challenges that investors face after investing in a portfolio company

-Quick and Profitable Exit: The portfolio company is at a promising stage. It is either giving consistent returns from the past or has the potential for explosive growth. The investor needs to improve the revenue and profitability dramatically for a juicy exit in 5 to 10 years.

-Change Management: If the company has been around for some time and is generating decent returns, the next step would require shaking the complacency of family or small businesses, so that they are ready for the next stage of growth

-Focus: If the company is comparatively new, the focus should be laser sharp on a few key metrics like subscribers’ growth, conversions, clicks, etc. Though the focus is on a few key metrics, still management needs to keep an eye on the other operational metrics too.

– Non-controlling stake: Not all the time investors may have a hold on the management and decision making. Even without being in control, the investor needs to add value with effective advisory with the minority stake

A few quick wins in these situations go a long way in assuring Limited Partners and the management of the newly acquired company about the investor’s ability to turn around the situation.

How does operations outsourcing help?

Here is how outsourcing helps in multiple ways in the situations explained above:

–Reducing the operations cost quickly: There are lots of apprehensions about what could be outsourced. Smaller companies think outsourcing produces impact only for the headcount of hundreds of thousands. That is far from reality. Any job that could be performed away from the office could effectively be outsourced. Outsourcing reduced the cost of operations anywhere from 20% to 70% depending on the location and the operating model of the business

–Brings in critical skills without much risk: When investors identify priorities, they quickly need to bring the critical skills onboard. Outsourcing could help in bringing those niche skills without any performance risks.

-Improves the pace of implementation: As there is an extended partner, sitting out in a different jurisdiction, that ensures critical skills are available as soon as possible, there is a remarkable improvement in the pace of implementation of strategic initiatives.

What could be outsourced?

Outsourcing has a low-cost low-quality connotation. Outsourcing as an industry has come a long way since its beginning as low-cost low-quality jobs. Currently, there will not be any Fortune 500 company on the planet that may not be outsourcing any of its jobs. That does show the indispensability of outsourcing but does nothing to quell fears related to quality. Currently, the jobs that could be outsourced, not only belong to the low-end customer care jobs, but high end as well like Investment Banking. Magistral has helped dozens of its clients in outsourcing operations to low-cost countries like India.

Here are the examples of jobs that were successfully outsourced

-Design engineering for an interior designing firm, including kitchens and bathrooms

-Bill of Material preparation for a civil contractor

-Digital Marketing for a SaaS-based investment platform

-Handling high-end B2B accounts related inquiries

-Preparing legal agreements for a BFSI player

-Managing procurement function of a steel company

Well, this may be a small piece of the universe, but you get an idea. If you need an operational element outsourced, but are not sure if it could be outsourced, visit here, for a free assessment. If you are still not convinced, read further to understand the safest way of doing this for your portfolio company

How to go about operations outsourcing?

Here are the stages involved in an effective operations’ outsourcing

Business Analysis: An outsourcing potential assessment starts with a detailed business analysis of the current operations. All operational elements are evaluated on the potential for outsourcing, risks related to outsourcing, and the criticality of the job for the operations. Depending on the business analysis, the recommendations are suggested for either complete, part, or no outsourcing for all operational jobs. The business analysis could be done over online meetings or onsite visits depending on the scope of the outsourcing project

Knowledge Transfer: Knowledge transfer from onsite to offshore is done effectively in conjunction with the client. SOPs, KT plans, RACI, SLAs, and other tools are used to make sure knowledge transfer is effective, accountable, and rapid. At the end of the knowledge transfer exercise, all the knowledge in people’s heads is transferred to standard operating process documents. The client signs off the documents for further steps

Dry Run: Once the KT is completed, a dry run is undertaken for a small part of operations, being performed from offshore. Service Level Agreements and Operational KPIs are monitored closely. Some initial hiccups are expected in this stage of the process. All hiccups are slowly ironed out. Once all KPIs and SLAs stabilize, the process moves to a wet run.

Wet Run: In the wet run, the process is scaled up for multiple areas, but still a small portion of each area at a time is taken to be delivered from offshore.

Scale Up: Once KPIs and SLAs stabilize after initial hiccups of dry run and wet run, the offshoring is scaled up for the complete process. Effective governance and quality control measures ensure the process stability throughout the engagement

The multiple stages of offshoring protect the investor and the portfolio companies from shocks related to performance and job quality. At every stage, there is a mechanism to see if things are working out as planned. Corrective measures could be taken as soon as the deviation occurs.

Magistral has assisted multiple investors in outsourcing operations of portfolio companies through this process. Magistral has also helped multiple small and medium-sized businesses in the United States, United Kingdom, and Europe in taking advantage of Operations’ Outsourcing.

To commission a business analysis for a portfolio company visit here. To know more about our capabilities, visit here

About Magistral

Magistral Consulting has helped multiple funds and companies in outsourcing operations activities. It has service offerings for Private Equity, Venture Capital, Family Offices, Investment Banks, Asset Managers, Hedge Funds, Financial Consultants, Real Estate, REITs, RE funds, Corporates and Portfolio companies. Its functional expertise is around Deal origination, Deal Execution, Due Diligence, Financial Modeling, Portfolio Management and Equity Research

For setting up an appointment with a Magistral representative visit www.magistralconsulting.com/contact

About the Author

The Author, Prabhash Choudhary is the CEO of Magistral Consulting and can be reached at Prabhash.choudhary@magistralconsutling.com for any queries or business inquiries.

Marketing at Venture Capital and Private Equity firms is a trend that is still shaping up. It was in year 2001 that Marry Meeker published her first internet report, which could be tentatively marked as the beginning of Marketing as a function in Private Equity and Venture Capital echelons. Marry Meeker’s influence today can be gauged from the fact that Alibaba’s stock dropped 6.25% on the day of its latest report release.

A lot has happened since 2001, industry grew and contracted at-least twice, first during the dot com bubble crash of 99-01 and then Lehman Brothers aftermath of 07-09. But application of science and art of Marketing at Venture Capital firms is more resounding than ever before. Here are the pillars of a Private Equity and Venture Capital firms’ brand building efforts:

Reputation: Reputation takes years to build. So does that mean a GP which has not seen even a single cycle of fund-raising, investing and harvesting, which typically takes a decade, can’t do anything for years regarding this? Yes, it takes years to build but with emergence of connectivity across the globe, that cycle of years can be short-circuited with Marketing hyper activity at the start. A reputation can be created online in a relatively shorter span and the good news is that online reputation matters as much; and greatly influences the offline reputation too. What is online reputation? It’s the content that is available against your firms name on the net. Its combination of industry reports, PR, blogs, partners’ speaking gigs and any events that you may have conducted in the past.

Communication: Your brand of communication defines how you are seen in investor and investee communities. Communication plays a vital role in your positioning with LPs and entrepreneurs. Great firms focus in multiple aspects of their communication with both of these communities in terms of frequency, quality, availability and relevance. David Skok’s blog ‘For entrepreneurs’ is a fine example of a great communication strategy aimed at investee companies in terms of frequency, quality, availability and relevance. Twitter has also come to rescue the communication efforts of Private Equity and Venture Capital firms. Smart firms are using it to communicate what they stand for

Experience: Nothing speaks louder than an impressive delivered IRR figures from the past. If you have completed a cycle and have returned 5-10X to investors, you are in an exclusive club of a few who can be proud of being there and done that. Softbank’s growth is miraculous for a firm that came into existence in 2004. It’s simply on the back of impressive returns that it has generated for its investors and its Marketing blitzkrieg that follows all its activities. No wonder its 100 billion dollar vision fund closed in record 7 months’ time. So then, is it all over for fund managers starting now? The other alternative is to sell the expertise of partners through a smart content management strategy. Better still is to chose a niche technology that itself is new and there are not many fund managers who can boast of harvesting profitably. Almost all good emerging managers focus on emerging technologies; and who is perceived good there? One who has the most relevant content that can be found online and offline.

Specialization: Branding and communication strategy revolves around pedalling the specialization of a Private Equity or Venture Capital firm. A marketing strategy is weaved around a specialization and would go haywire in case there is no specialization. Specializations that firms chose can be a specific technology like AI, Blockchain, Crypto or a specific industry like logistics or Real Estate. Specializations are also on the cross-sections of a specific industry and a specific tech like AI in healthcare. Investing strategy itself forms specialization in many cases. New strategies like “second seed”, “very late stage funding”, “Pre-Series A” amongst others still have space to accommodate new fund managers. Here it’s imperative to chose a specialization and follow it up with an immaculate Marketing strategy

Methodology: Methodology is what differentiates boys from men in the VC game. A process oriented firm is stable in turbulent times and can beat returns expectations of the investors. A firm that is cut above the rest will have a well documented process for fund-raising, investor relations, investee relations, deal origination and sourcing, portfolio management and an excellent and well timed exit strategy. All VCs claim they have processes but most of the time it just stays just in their heads and is not documented. These processes give a leg up to your marketing effort. Once processes are established, focus can move to reduce the costs of operations, which means more dry-powder for investments and better returns for investors.

….but my fund is small, I may not need marketing!!

An economic cycle bubble bursts every decade or so. With geopolitical tensions in biggest economies, we may be on the cusp of another one. If your fund is small and you don’t invest in Marketing, you may not survive the next bubble burst. Maiden fund is small and second fund may just never come, pretty much wrapping up the business. Also when subsequent fund is 10X size of your last closed fund, without any change in your strategy for fund-raising, it’s bound to fail. Your marketing effort needs to match your ambitions and show you as a serious long-term player in the game.

…..I am into angel investing and I have ears on the ground, I may not need marketing!!

In Angel investing your brand to help entrepreneurs is as important as your wallet size. A well researched report carrying opinions of all entrepreneurs on challenges that they face and how you help is a typical stunt that will tilt the scale in your favor when entrepreneurs sit and chose the best VCs for them

….I am in a very local business, I may not need marketing!!

With the advent of internet, there is nothing that is absolutely local. Highly targeted marketing campaigns for a locality can do wonders for your business.

In conclusion, marketing is the only differentiator between the VCs who crop up in a boom cycle just to go down with the next bust and the ones who are in the game for long term. A sincere Marketing effort shows knowledge, commitment and capability of the VC, all of which go a long way in attracting investors and investees.

I represent Magistral Consulting that helps Private Equity, Venture Capital and Asset Management firms across the globe offshore their marketing activities for better effectiveness and lower costs. For more information, please write to me at prabhash.choudhary@magistralconsulting.com

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Softbank achieved fund-close of its latest Vision Fund of 100 billion dollars in record 8 months. This fund is dedicated towards late stage funding of tech companies. To keep things in right perspective, the amount raised by Softbank is more than the total amount invested by all of American VCs in 2017. This success comes on the back of past record of returns generated by earlier Softbank’s funds, which is in the range of 25-30% IRR.

While likes of Softbank are able to achieve fund closes of eye popping amounts with amazing alacrity, emerging managers find themselves struggling to close even their maiden funds.

We at Magistral, have been working with some of the global funds in assisting them with the fund raising efforts; and here is what we think can help emerging managers close their funds quickly:

1. Specialized Content: If you claim to be an expert in real estate related to cannabis, and your fund aims to invest in this and generate superior returns, how much content regarding this area do you carry in your opening meetings? Is there a credible content available with Investor relations, business development and fund-raising teams? What are the legal-social aspects of investing in this? Compelling content establishes your authority right away and places you favorably with investors. Get the content and strategy regarding your fund right.
2. Exhaustive Reach-out: Achievement of fund-close with target amount is a function of number of LP meetings a fund is able to achieve. At the same time, number of meetings is a function of LP reach-out efforts. LPs can be reached through calling, emails, references and social media. An exhaustive reach-out program ensures there is no door left to knock.
3. Past Performance: Past performance in individual capacity of partners goes a long way in convincing investors to put their money in a GP. Pitch deck should clearly talk about realized paid up returns delivered by partners in the past. It establishes credibility of the GP.
4. Capability to park funds: LPs not only see the capability of GP to provide handsome returns, but also the experience to handle and deploy large amount of funds. A GP capable of parking bigger checks means less hassle for LPs. In this scenario, smaller niche funds tend to miss out
5. Events: There are hundreds of LP and GP events that take place across the globe throughout the year. Finding out the relevant event for your fund, and participating in the same has the potential of opening flood gates of investors for your fund. A slot for keynote speaker ensures some more mileage
6. Social Media and SEO: Social Media and SEO still remains a black box for majority of GPs. These channels may not directly bring in funds, but are crucial for setting up opening meetings, getting references, supporting information and distributing content. A credible online presence helps LPs in its due diligence of GPs
7. Over-dependence of Private Placement players: In our experience, we came across GPs who before giving out any details about their investing philosophy started talking about the brokerage; they are willing to give out for introductions. This is short-sighted. A Placement guy who will be attracted to such schemes would be short-sighted and will not benefit both the LP and GP. Even if the broker is well connected, it’s not possible for him to work with all type of GPs. It’s better to take responsibility of reaching out to LPs organically rather than depending on brokers and enticing them with ‘cuts’, which of-course would be paid from the fund that should have ideally contributed to returns to LPs. A situation where everyone is a loser.

I hope all the experience shared by us here is helpful and helps you close your maiden fund as soon as possible.

I represent Magistral Consulting, that has helped Emerging Managers in the areas of Private Equity, venture Capital, Real Estate and Infrastructure and Hedge Funds  raising their maiden funds. We have assisted GPs in all the above mentioned areas. For more information, please drop a query at prabhash.choudhary@magistralconsulting.com

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Rules of the game for online content marketing have undergone a sea change in last few years. It’s established even for B2B marketers, that their target customers are spending most of their time on internet either hooked on laptop, mobile or tablets. If you need to reach your customers, going online is the only imperative.

Though it’s obvious that internet presence and compelling content is of paramount importance for B2B marketers, reaching the top decision makers is still an Achilles’ heel for most. People at CXO levels are extremely busy and getting their attention for content requires some serious homework. Putting in some content in hope of getting top management’s eyeballs, is spray and prey technique, that in today’s world of incessant barrage of irrelevant content, is a ploy of diminishing returns.

Here are few rules that in my experience have worked wonders and have helped clients in engaging top deck in meaningful conversations:

Topic of content: Generalized content gathered from other sources of information is passé.  A report on an industry say as big as Management Consulting, is expected to draw a blank. What helps here is coming up with topics that are of immediate interest to the decision makers in the industry that you are targeting. Targeting a very specific sub-market helps.  Rather than report on ‘Management Consulting’, a report on executive search market for CXO level recruitments in a defined geographical space is far more appropriate. Ofcourse, executive search is also a subset of management consulting industry like dozens others. It helps to know your exact market and in as much details as possible.

Data, data and more data: “In god we trust, everyone else brings data”. A piece of statistic communicates in thousand ways. It establishes the credibility of the content. A top management professional would rather prefer a neat data table that tells him what he needs to do, rather than an elaborate piece of report with recommendations that gathers dust. Let him draw his own conclusions

Understand the challenges of your target: It’s a ground rule and probably oft repeated, but it’s appalling to see so many B2B marketers failing at this. The board of a family business being run in India would not be concerned about IoT interventions on assembly line, but about the ways to manage a non family member CXO, that they hired recently for salary more than they ever paid themselves. It’s important to understand what keeps a board member awake at night, before you decide to make content for them. Next obvious step is to weave content around it and dovetail your products and solutions into it.

Infographics: A texty report is still in vogue. Marketers feel more text means more information. Sadly nothing gets read. Even if it gets read, there is no chance a busy executive will read it in the details that marketer would have envisaged.  Cutting down on text, as ruthlessly as you can helps. Building on infographics to convey the same information is time consuming but well worth the effort. Any report or content that can’t be skimmed in 5 minutes is out of the window.

Once you are done with finalizing a crisp, data and infographics loaded, relevant report for your target, its distribution through online channels is the next hoop. About that in some other blog, some other time!!

Author is CEO of Magistral Consulting which has helped multiple B2B corporations in creating winning content for top management. He can be reached at prabhash.choudhary@magistralconsulting.com

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