This excerpt from “How VCs Can Approach Fund Administration” originally appeared on Carta’s blog and has been reposted here with the author’s permission. Carta is a software provider of cap table management and valuation solutions.
You need proper support structures in place to get your firm off the ground, starting with an approach to how you’ll administer your fund. A fund administrator can help you address the financial and regulatory obligations of your fund. For example, you’ll need to develop a system for providing periodic financial reports and informal touchpoints with your LPs to provide up-to-date information on the performance of the fund.
Funds have specific needs that need dedicated support. How you tackle your fund accounting and administration depends on:
There is a lot that’s broken in fund admin. A lack of automation and transparency exists in most funds, but this is starting to change. Your options for how to tackle fund administration include:
Pros | Cons | |
---|---|---|
Hire a CFO or have an in-house back office | A person on your team that’s accountable and thinking through the fund’s goals. | It’s another person (or people) to hire, manage, and pay. The team is static, so there will be more work when it’s audit season. |
Go with a fund admin service provider | Cost of service is lower compared to a direct-hire like a CFO, and cost can be passed on as a line-item to LPs. You have an expert team or platform that will help you get information for reports and analysis, whenever you want. Fund admins will help you optimize your tax responsibilities and when to take carry (and how much). |
External partners might not know your firm as well if you had an internal team, however, this is not true with service providers that partner with you more closely, like Carta. You can also hire a fund admin provider in addition to hiring a financial leader. |
Do it yourself | This by far the cheapest route for partners to go. | Yet it’s also the one that will take the most time and effort, especially if you want to do regular analysis and reporting. |
Keep in mind, some firms have a small in-house team and use a fund admin provider to get the best of both worlds. Outsourcing fund administration not only frees up your time to focus on investment work but also helps ensure your overall risk profile is minimized. When choosing a fund administrator, you’ll want to weigh your needs and their reputation.
If you decide to go with a fund admin provider, you have to know how to pick them: