Growing the fund brings obvious benefits, such as increased management fee revenue, enhanced bargaining power, heightened prestige to attract additional investors, and, of course, greater profitability. However, absent a competent and professional operations team, growth can pose major problems—business ending problems.
Scalability Is a Must
Scalability is a term that, like so many others today, originated in the tech sector, eventually to find its way into business parlance. In the business/economic context, scalability suggests that the fundamental business model is conducive to the prospect of the firm’s economic growth.
Is Your Firm Prepared?
Many startups and small funds fail to establish the foundation necessary to scale their businesses. Rather than using automated systems and processes to tick-and-tie reconciliations and generate reports, they rely on spreadsheets and manual workarounds. As a result, such firms must rely on a linear headcount ramp-up in order to handle any significant growth. While it is understandable that startups and small funds have a keen interest in reducing costs, the downside is that scalability is sacrificed, condemning such firms to profoundly negative consequences as they struggle with growth.
What Are These Consequences?
- Cost pressures—As previously stated, a firm’s reliance on manual processes must rely on increased headcount to meet the demands of growth, which is not cost effective.
- Lost profits—Service constraints and limited capacity means that the firm is less capable of supporting investor inflows and may be forced to turn them away.
- Missed opportunities—Successful firms must be prepared to pivot in order to meet investor demands and take advantage of new opportunities. While the front-office may have the right stuff to act, absent middle-office and back-office capabilities, their hands will be tied.
- Risk to reputation—Any growth that exceeds the firm’s capacity can result in operations errors, delays, non-compliance, and other serious issues that may damage the reputation of the firm.
Of course, there are additional possible consequences for which we have neither the time nor space to address, but these are illustrative of the dangers.
Set the Proper Course
If you believe in your firm, why not establish a foundation for success and for growth from the outset? Make the investment necessary to create a stable operating foundation that incorporates the functionality and flexibility not only to support the enterprise, but to prepare it for growth.
It is a false economy to do otherwise. Is it not a waste of investment resources to operate on the cheap, only to suffer the loss of valuable time and the throes of disruption that must be dealt with down the road?
Smart, confident firms will plan ahead and be prepared for any market in which it operates, any asset class it trades, any clients it targets and any fund structure it may adopt in the future.
Not only will this save money, time and resources in the future, this preparedness makes a statement to investors, present and future, that the firm is competent, confident and ready for success…or you could just hire more people.