How much software budget do you need for an early stage fund?

Hey all! Welcome back to The VC Corner.

I’m happy to have Silvan Cloud Rath as a guest writer today!

Silvan is the founder of StackGenius, a consulting company specialized in creating Alpha with technology for both GPs and LPs. He has co-founded multiple Machine Learning companies including parktag.mobi, predict.io and twinner.com and worked for Silicon Valley corporates including Cisco, Comscore and eBay.

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In a nutshell

• The Prologue makes a case for using productivity tech

• The Blueprint shows you an example configuration including prices

• tl;dr - basic productivity $1.2K seat / year + Productivity Add-Ons $0.6K seat/year + Data Sources $3.8K seat/year + once $10K for API integrations regardless of seats. 

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Prologue

Early stage funds have a notoriously tough job. Very high deal flow volume, weak signals, high risk and heavy power law.  And to make matters worse, often tiny teams with razor thin management fee. This game is not for the faint hearted. But it's exciting, right?

What's not so exciting are the many "monkey tasks". You'd rather maximize time budget for high impact tasks. That's where a coherent tech stack can unlock operational Alpha for you. Arguably your top funnel formula (defined as everything until Term Sheet) hinges upon a few main multiplicators. Visibility, Throughput, Access and Analysis. Let's dissect together.

Visibility determines how many new companies you can identify. Either through inbound leads, network syndication or active outbound sourcing. Technology can help with this a lot.

Throughput defines how many companies can give you a qualified look given your resources. Clearly this is also a function of how many other tasks the same resource needs to fulfill. Technology can help with this, too.

Access often is a function of your brand, network and thesis. Technology can help with this a little.

Analysis is your ability to quickly assess a market, a team and triangulate chances. Technology can help with parts of this.

Technology is not a fertilizer; it is a force multiplier. It makes you faster.

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Blueprint

High performance stacks for Pre-Seed and Seed typically have the following components.

1. People Data (e.g. Compass)

2. Company Data (e.g. Crunchbase)

3. CRM (e.g. Folk)

4. No-Code Workflows (e.g. Make)

5. Portfolio Monitoring (e.g. Incued)

6. LP Reporting (e.g. TotemVC)

7. Knowledge Management (e.g. Notion)

8. Document Storage (e.g. Dropbox)

9. Office Suite (e.g. Google or Microsoft)

10. Communication (e.g. Slack)

11. Productivity Hacks (e.g. tl;dv)

12. Single-Sign On

You don’t need a stand-alone tool for each purpose. But you’d want the functionality in your stack.

Major factors for defining the right tech stack for you;

1. Living in a Google or Microsoft world is important baseline

2. Your Geography and Thesis massively influence best data sources

3. Technical aptitude of administrator determines tool choice 

A low cost stack productivity for many users in the Western Hemisphere can look like this.

• Google Workspace “Business Plus”, $18 per seat per month, Mail + Videoconferencing + Document Storage + (Knowledge Management)

• Airtable “Business”, $45 per seat per month, CRM + No-Code Workflows + (Portfolio Management)

• ChatGPT “Team”, $25 per seat per month, ETL + Authoring

• Fireflies “Pro”, $10 per seat per month, Automatic Meeting Notes

Total baseline cost would hence sum up to $98 per seat per month($1.2K seat / p.a.).

Optionally, some teams prefer to use overlapping solutions for some features that are already included in above subscriptions.

• Notion “Business”, $14 per seat per month, users love the knowledge and project management features, despite some overlap with Airtable’s database features and Google documents, this can be worth it

• Slack, $14 per seat per month, many teams dislike Google Chat and prefer the stronger Search and External User features of Slack

• Superhuman, $25 per seat per month, while ChatGPT can be used for similar features some teams prefer the ready-to-go mail productivity suite of Superhuman

The optional solutions would add another $53 per seat per month to the $98 for the base set. That you make a total of $151 per month equaling $1.8K per year.

For comparison. Top quartile funds spent 10-20% of their management fee on tooling. Let’s assume you manage $20M AUM with 5 FTE and go for the lower benchmark.

With 2% management fee your total budget would be $400K p.a. 10% of your management fee would be $40K.

The above tools would cost you $9K p.a. for 5 FTE. Hence you still have a budget of $31K p.a.

If you outsource the integration of above systems, you will have a one-time cost of $10K and yearly maintenance cost of $2K. You can do it yourself, but it will take you 4x as long as an expert. And your time is scarce.

Even if you outsource, you still have the budget for more advanced tools. We would invest into two data sources. Examples:

• Inven.ai,  $170 per seat per month (tiered pricing), Company Signals

• Linkedin Sales Navigator “Advanced”, $149 per seat per month, People Database

Why did we pick these two over Crunchbase or Apollo? We like Inven for a number of reasons. Great UX. Very good coverage of companies. Major difference - Crunchbase essentially covers the startup world. Inven also covers the possible B2B clients of your companies. With it you can quickly estimate TAM/SAM/SOM including client revenues. You also have financial data for private companies from the trade registry next to hiring trends. And you can even unlock phone numbers and mail for credits. It does cost ca. 3x of Crunchbase ($49 seat / month). So, if your case does not warrant the extra spend you can save some money.

We picked Linkedin because most users are native in the UI and the ability to reach out via InMails. Arguably the Apollo “Organization” subscription for $119 seat/month could work as well in combination with Crunchbase.

Now back to budgeting. If you stick with Inven and Linkedin for 5 seats this would add another $319 per seat per month or $3.8K annually. Previously we had $29K left annually. The 5 users will eat away $19K, leaving you with a $10K budget. And arguably you might not need subscriptions for all 5 FTE.

Hence even if you outsource integration for $10K you are within budget already in year one. A system diagram of a coherent stack connected via APIs would look like this.

What you don’t yet have at this point are automated portfolio monitoring and reporting, advanced automations, a proper data lake and custom machine learning algorithms. These would only become feasible, if you spent on par with top decile funds (20% of 2% Management Fee). You need to plan half an FTE for that. Depending on your labor cost this might be $50K per year. If you have a solid pipeline and want to compound knowledge internally, it makes sense to hire internally. If you are looking for speed and cost efficiency, outsourcing is more prudent.

Budget Overview

Basic Productivity Stack Cost Calculation