I joined Hustle Fund in the summer of 2019. The team was super small – in fact, I was the first full-time employee.  GP and co-founder Eric Bahn had an idea that I could help with fund ops. After all, I had a boatload of experience with startup operations. But within a few weeks it became embarrassingly obvious that fund ops are not as straightforward as regular startup ops. They are way more complicated. I even started to wonder if they required a specialized degree... and a specialized therapist to help manage all the stress.

Over the last 3 years, 9 months, and 4 days I've witnessed just how consuming back-office operations are. They take up around 30-50% of the GP's time.  

And according to Eric, it's "utterly draining". Recently I got Eric on the phone and we talked for an hour about the four biggest areas of back-office operations:

1. Fund Admin

2. Auditor

3. Tax accountant

4. Legal stuff

This article focuses on Fund Administration. We'll cover:

• what a fund admin does
• why it's the most important aspect of back-office ops
• what makes a good fund admin
• where can things go wrong?

Let's dive in.

What does a fund admin do?

A fund admin is a 3rd party vendor who is responsible for moving cash around on behalf of a VC.

This includes:

• wiring investment money directly to founders
• managing capital calls
• reporting capital

They're also a big part of the audit and tax processes. But more on that later. Fund admins usually have a background in accounting, as a CFO or controller. They're finance experts. And they're the most important part of your back-office operations.

Why are they so important?

So many reasons.

Reason #1: having a third party to wire money to founders is best practice. It creates a checks-and-balances system that prevents fraud (so Eric can't send money to himself) and ensures accuracy.

Reason #2: capital calls are critical to a fund's success. They can also be complicated. Let's say we're ready to call down 3% of our capital from our LPs. The fund admin is responsible for looking at all the LP commits, figuring out how much each LP should send, then sending personalized letters to each LP with wire instructions.

Reason #3: reporting. ugh. Part of a fund admin's job is to provide quarterly reports of each portfolio company's valuation. This is an incredibly tedious and time consuming task. Especially if you have a large portfolio. It means tracking down every founder and getting information on their latest raise and latest valuation. These reports are basically informal audits that help streamline the big hairy audit that happens annually. But we'll get to that later.

Why can't a GP do this?

In short, because things related to capital are just too important to mess up. Imagine that your fund invests in a founder. That founder gets a great exit, and you make $100m return.

Well, you've got 99 LPs you need to return money to. Figuring out each LP's share of that exit, setting up wires to each LP, and ensuring accuracy of those shares is critical work. If we send the wrong amount of money to an LP, that's unforgivable. It could even get to lawsuit level of serious. That's unlikely, but it indicates gross incompetence.

Fund admins design their firm around this kind of work. They have a team of people working on your fund, ensuring that everything related to capital runs smoothly. GPs, on the other hand, have a heck of lot of other things on their plate: fundraising, sourcing deals, investing, supporting founders, building their brand...

If anything related to fund admin slips through the cracks, it has the potential to destroy the fund. In fact, fund administration is such a crucial aspect to venture investing that some funds have internal team members to oversee the fund administration.

So, what makes a good fund admin?

With a role like this, even small errors can lead to huge consequences. So fund admins need to be:

• maniacally detail-oriented → every wire detail is perfectly set up
• tediously precise → every number is accurate
• responsive → if a GP says it's time to make a wire transfer or do a capital call, the fund admin has to respond right away

Where things can go wrong

For starters, you've gotta pick the right fund admin. But new fund managers with no experience in this area rely largely on referrals from other people. And even if the referral comes from someone you trust, there's still a chance that fund admin isn't right for you.

Maybe you interview dozens of fund admins. And you vibe great with one. So you hire that fund admin firm. But that firm is handling 10 or 15 different funds. And maybe the person assigned to your fund is overworked. Maybe they burn out and you're assigned to a new rep. And maybe that rep isn't as detail-oriented.  

Basically it comes down to luck. Luck that you're interviewing good fund admins. Luck that you find a good rep. Luck that the rep sticks around. For what it's worth, we are currently with Vector and we actively recommend them.

What's the point of this article?

Many folks in the Small Bets community are launching a fund or considering launching a fund. We wanted to share this information so that anyone who falls into those buckets has a clear understanding of what to expect when it comes to back office operations.

Next up: auditors. It's a juicy one.