Starting fresh

John Haag, having recently joined San Francisco venture capital firm CMEA Ventures as CFO and COO, has the enviable opportunity to build from scratch a fund administration and finance function based on the lessons he has drawn from years of experience at other investment firms. Haag was most recently the CFO and COO of San Francisco biotech venture capital and merchant banking firm Burrill & Company. PEM recently spoke with Haag about his preferences in building a system to serve his chief clients - LPs and GPs.

CMEA is a lean organization. How does that affect your thinking on outsourcing?
Let's use IT as an example. People at venture firms travel a lot, they are very mobile, they need access to a variety of different types of information fairly quickly. That's a lot for any one individual to handle. If you're trying to keep the exchange server up and you're trying to do desktop support and you're working with somebody's Blackberry and somebody else wants a Treo – that usually stretches the IT people pretty thin. The idea behind IT outsourcing is to take something that is not core to your function and give it to people who can bring to bear a wealth of resources.

What are you looking for in a fund administration system?
It comes down to servicing your clients, which in this industry means making sure that your GPs and your LPs are happy. So whatever it takes, that's what you need to do.

The finance side and the fundraising side of fund administration actually overlap quite a bit. One of the things that you have to be focused on is whether or not you're going to be able to keep the books and records of the funds effectively, while at the same time generating the kinds of reporting that you need. A lot of that comes down to whether or not you have the right staff and systems.

LP relations is going to be critical not only for doing capital calls and distributions, but also because you are constantly managing relationships around fundraising, whether it's a legacy relationship or it's a gatekeeper or it's somebody that you're just targeting for the next round.

It's a make or buy decision. If you already have the staff internally, you don't really have to consider outsourcing. If you don't have a staff, which is the case at CMEA, outsourcing is an excellent opportunity to really bring up the quality of service.

If you're going to select an outsourced relationship, it's a good idea to do a lot of due diligence on the firm. Find out who's left them, and why. Do some good reference checks on existing clients and see if they're happy with the level of service that they're getting.

I'm getting up to speed on a system that has a nice subledger package around the portfolio and around the individual partners' accounts. And frankly that's where a lot of the fund accounting complexity comes in.

Why do you say the GP subledger is complex?
Sometimes the complexity of accounting around the GP entities is more complex because of changes in personnel.

Fund accounting is not all that complex at the end of the day. If you were to look at the general ledger for a particular fund, there's simply not that many transactions involved. You pay your management fees on a quarterly basis and your expenses as and when they occur. On transactions, maybe Carlyle has tremendous transaction flow, but for the most part, a venture firm may see two or three deals per month, whether they're follow-ons or new investments.

The area that does get a little more complex is the equity accounts – making sure that you're keeping track of each individual limited partner's ownership of the fund. You may have GPs or LPs that are selling their interest or transferring their interest, or they may have some unusual type of relationship with the firm. It's usually at that level that it gets a little bit more interesting to keep track of things.

If somebody leaves a firm, their vesting is going to stop, but the limited partnership for the general partner may have other provisions where some economic requirements continue, some others stop, and this is going to lead to a different approach to allocating profits to individual partners. This is not rocket science by any means, but given the size of these firms, the size of the finance function, it can be engaging.

Going forward, what are your future plans in this area?
I've just started a new working group on director accountability and board effectiveness, and the objective of the group is to deliver a template for measuring venture-backed company board effectiveness. We have about 15 people on board so far and are thinking of adapting the public company board selfevaluation and customizing it for the venture industry.