The Profile: Deputy CFO, Northzone
The Drawdown (TDD): Across the alternatives space, there is a growing focus on data and how to leverage it as an asset. What’s your current approach to data?
Jackson Heddy (JH): We split out operations and portfolio company data. On the portfolio side, we have migrated to a central database, from our fund administrator to our internal systems.
The main problem is trying to use historical data that’s not as rich as our current data standards and collection. It’s tricky to really interrogate that data unless there’s a specific question. And there doesn’t seem to be an automated solution that would enrich historic data.
At the moment we’re building and collecting more data so that in the future we have a richer data set to work with. And we’re supplementing that with manual work on the historical data in order to prove correlations.
Our strategy therefore is to build for the future and use specific questions to help enrich older data.
As a VC, you do run into the problem of having a smaller data set to work with. Compared with a large institutional investor, say, which is invested in so many funds, they must have an amazing homogenised data set to work with. But for us, with a portfolio of roughly 25 per fund, if there’s an anomaly that causes a big reduction in the workable data set. Small data sets are too vulnerable to be skewed by oddities and outliers.
Another venture specific issue is the difficulty to quantify some of the assessments. We’re dealing with pre-profit companies, and if we’re asking for too many data points we can easily become an onerous investor, especially as these companies are focusing on their growth and building their business. It’s important to find that balance.
Some aspects are also hard to quantify. You know they will need to raise more funding, but how do you quantify that ability with data? It requires softer metrics such as how well does the team pitch?
TDD: Similarly, the PE and VC industry is increasingly concerned with data security, how are you responding to this?
JH: When we collated the entire deal database, we had conversations around who has access. But when you’re fundraising, information has to be shared. That’s the nature of LPs; they need to collect data and use it for multiple purposes, not just singular investment decisions but also benchmarking exercises. You have to rely on the discretion of LPs.
For historic data, or data sent out in previous years, that doesn’t matter so much. But for fresh data, you have to be comfortable that it might get released. There does always need to be an awareness, and we watermark very sensitive information.
You could lock it down and make sure that the data can’t be shared, but that goes against broader aims of developing a trusting relationship with potential investors.
TDD: What’s your compliance strategy? And what are the specific regulatory challenges that come with being a VC?
JH: We have our internal procedures plus we use a fund administrator, which means there’s a double layer of protection.
VCs are typically smaller so you can fall within different thresholds compared to larger PE funds. But you also have less capacity. You want to take comfort from service providers who are specialists in these areas. You also want to know you’re doing the same as everyone else. We expect guidance from our service providers; we have to trust that if we’re in-line with the market then it’s all good.
TDD: ESG is increasingly prominent, how have you addressed it in your portfolio?
JH: Smaller portfolio companies certainly have less capacity to address ESG full time, but there’s a great appetite for knowledge sharing. It’s great to be a matchmaker between the younger, smaller portfolio companies and the older, larger ones which have that capacity.
Given the variety of sectors we’re looking to disrupt, the potential ESG risks and benefits can also vary greatly. Our investments are also geographically diverse, which can throw up some interesting challenges. For example, recently we were collecting ESG data, and found some of the portfolio companies weren’t allowed to collect certain data points being requested.
TDD: Beyond regulatory constraints, what’s your experience of collecting information from early-stage portfolio companies?
JH: We don’t want to be a burden, so we don’t want to ask for too much. It really helps to have ex-entrepreneurs on our team; they know what the portfolio companies will be able to respond to, how to get their attention, and what they won’t be able to provide.
But then you watch these start-ups grow into large companies with even more resources than us!
The balance is about being useful and not onerous. It’s very dependent on the company; when they’re small they’re more likely to struggle to find time to respond or might not have the information. Then they grow and list and legally they can’t supply data!
TDD: What would you say is the biggest challenge specific to CFOs and FDs in the venture capital space?
JH: The IPEV Guidelines, which need to be implemented in January. Under the new framework, the price of the last round isn’t an applicable methodology. But in venture, it’s very difficult not to look at the last round.
It’s different for private equity firms where you can look to EBITDA multiples etc. But for venture, portfolio companies typically aren’t earning. Ultimately, the valuation of a company is what someone is willing to pay – and the last round is the most recent data point on that.
I understand the motivation of guidelines; that the last round can’t be applied blindly, and current circumstances need to be accounted for. But not being able to use last round makes it a real challenge for VCs. So far, the guidance we’re receiving is to carry on referencing the last round, but to better document why it remains applicable given the company’s subsequent performance.
Just because a company’s revenue has increased 20% doesn’t mean the valuation has accordingly increased. Each start-up has its own goals and that typically means standard correlation models don’t work.
Of the US venture firms who are already using similar guidelines, it seems like that it’s only the software providers who are benefitting.
I’m keen to find out more from people with first-hand experience.
Jackson joined Northzone in 2017 and is based in London. As deputy CFO, he works closely with CFO Stine Foss to ensure Northzone runs a tight ship, and is responsible for portfolio reporting to Northzone’s limited partners, and ensuring the smooth running of operations.
Before joining Northzone, he was financial controller at IP Group, a FTSE-listed VC firm specialising in university spin-outs. There, he helped improve systems and build the portfolio monitoring process as they scaled- something that comes in handy at Northzone, with its geographically distributed portfolio and team.