The excesses of the covid era and the highest interest rates in 20 years have exposed the venture capital industry. With an uncertain market ahead and high-profile frauds like FTX and Theranos making front-page news, LPs have reason to be cautious with their capital.
We've seen a massive amount of companies coming to market where their financials aren't sound, where the governance isn't sound, where there is fraud, and we have to protect ourselves from that. It's our job and our responsibility to protect our LP's capital. And when we do put that money at risk, we want the full confidence that we've done all of our homework - Mark Muñoz
Vectr Fintech Partners was looking for software that could help them make better investment decisions, give their LPs confidence, and provide more value and service to their portfolio companies, improving the chances of their success.
Due diligence is a costly and time-consuming process. Before gini, due diligence was one of the most considerable costs Vectr incurred on a new deal. Transaction expenses spent on due diligence can easily cost 5-10% of a transaction. Still, if you consider all the time and effort your team puts into the deal, the actual true cost of a transaction can be significantly higher. Moreover, the price of a bad investment or financial fraud can be catastrophic to a fund's portfolio or reputation.
Ongoing due diligence, usually facilitated by regular reporting, was also a pain point. Requesting financial information and data from portfolio companies was a complex and manual process involving emails and spreadsheets. With the correct information available at the right time, Vectr would be better positioned to provide helpful advice, introductions, capital, or other assistance to their portfolio companies.
I think the expectation for our LPs is that, if we're not using these kinds of tools, then we're not doing our job - Mark Muñoz
Venture Capital investors have little selection when it comes to software supporting financial due diligence. Most of the tools on the market were founder-focused apps that relied on portfolio companies to manually input data into a website and initiate a report to investors.
1. Data provided by other solutions are high-level financial snapshots of the company. They need more granularity and adequate context for investors to analyze appropriately, making it difficult to compare across different companies.
2. Ongoing due diligence from portfolio companies would still be at the discretion and availability of startup management teams which would share data when requested and available. This makes other solutions on the market comparable to sending a spreadsheet over email.
Going forward, we've mandated that every one of our portfolio companies gets connected to gini, and every one of the deals that we're looking for, as part of our due diligence process, must connect to gini. It's not a question of if; it's a question of when and how and how fast. If they want us to invest in their company, they must use this tool - Mark Muñoz
Vectr mandates all potential portfolio companies to connect to gini as part of the deal underwriting process. With gini's data-driven approach, Vectr can instantly create financial models and reports that help them understand the business and decide whether to invest. Analysts use the reports to assist in drafting investment memos and use the pre-built models to assess the company's runway and capital needs.
Gini also generates formal due diligence reports that can be used in an investment committee or shared with LPs. These due diligence reports can be up to 30 pages long and provide an in-depth analysis of the business's revenue, expenses, valuation, and runway. In situations requiring in-depth investigation, gini's team of financial professionals can assist VCs in reviewing the company's accounts and identifying areas for a deep dive.
Ultimately, that makes the entire company much stronger - when you can discuss with the founder and have them go through the same information we are seeing to get a better result - Mark Muñoz
Vectr's subscription also gave portfolio companies access to gini and facilitated greater collaboration through a set shared of financial tools; Vectr was also able to play a significant role in preparing portfolio companies for their next funding rounds. In one instance, a portfolio company had what appeared to be unexplained anomalies in its revenue. With the help of gini, Vectr worked with the founders to clean up their books and increase the chances that they passed financial due diligence at their next funding stage. Gini's cash flow forecasting tool also helps companies calculate a new runway based on cuts to specific cost line items. It was easy for the portfolio company to understand where they stood financially, but it also helped them realize what changes they could make and the impact on their runway. Munoz added, "It's a win-win situation. We make better investment decisions, and our portfolio companies benefit from gini's powerful tools."
Vectr Fintech Partners is an early-stage venture capital company based in San Francisco and Hong Kong. Mark Munoz and Jason Best, its GPs, have made dozens of investments across multiple funds and invest in financial technology companies worldwide.
