Today I will be examining Graph Advisors - a small but specialized firm providing fractional CFO/COO services to VCs, family offices, and startups. Having moved to Boston and working in the business district, one of the biggest buzz words thrown around is venture capital, at which point the atmosphere seems to always take on an affluent air. But what truly is it, how is so much wealth associated and generated by it, and how does Graph Advisors fit into it all? I don't exactly know, but today, after making a new friend on the train (Eric, a cofounder of the company), I have been inspired to take a deeper dive and analyze how Graph Advisors works, what they do well, and ponder some food for thought/possible recommendations (if you want, just click here to skip to the last part). Let's get into it!
What Is a VC Fund
To start, I'd like to begin at the very essence of the world Graph Advisors operates in. A Venture Capital (VC) fund is essentially a vehicle for pooling together money for investment purposes. A small group of people, the fund managers, convince institutions, wealthy individuals, or organizations to give them money, pool it together, then invest in early stage startups in exchange for equity.
The idea is that as long as a small percentage do very well, the return will be extremely profitable when the company exits (IPO or gets bought out). Unlike traditional companies, VC funds typically have a lifespan, so after deploying money in startups the first couple of years, VC's will then wait for the company to exit, and return the proceeds to the investors. If the fund managers want to keep going, well then it's time to create a new VC fund baby! As a quick note, at times GPs can request extensions to a fund's lifespan, typically 1-2 years, if the startup needs more time before going public. LP's will usually say yes (as opposed to a firesale of equity), but becoming a zombie fund is the biggest no no to avoid (dragging on too long and not exiting)!
Lingo Check
Limited partners (LPs) are the individuals or institutions who put up the capital for the fund. Why are they limited? Because their involvement is limited … they open their wallets, front the money, then wait. Limited involvement.
The general partners (GPs) are those actually doing the work: creating the fund, making decisions in which companies to invest in, and deciding when to sell. In return, GPs will typically receive their fees in what is commonly referred to as the 2 and 20 structure, 2% of all assets under management (AUM) of the fund annually as a management fee and 20% of all profit generated above a certain threshold (the carry, short for carried interest). The carry is where the money is to be made for VCs…
The carry can get a bit more complicated when it's not a clean cut cash moment that comes with acquisition. When a startup IPO's, the GP's carry, which remember is calculated after the initial investment by LPs has been subtracted from the profit amount, can be paid in stock or (after the lockup period) gradually overtime in capital as the fund sells shares.
Fair market value (FMV), simply put, is the price a seller and a buyer are willing to agree upon within an open market, applicable to any asset. What's difficult about FMV, and a part of what a fund's GPs have to do, is deciding it for a company before they IPO.
Family Office is for that olddddd money (grandpa sold a business for 500 million). Basically, a wealth management operation set up to help manage the financial affairs of a single (or multiple, rich people love rich friends!) ultra wealthy family. These organizations help to manage and grow that money across generations rather than just dumping it all in an index fund. Important to note, but compared to a VC, Family Offices are a more permanent (not time specific) operation that can invest in many more asset classes (not just startups!)
Now to Graph!
So, now that we've established a solid foundation, where does Graph come into play? Well going back to GPs, their role is quite grueling: sourcing deals with new startups by constantly meeting founders and attending events, helping existing companies within the portfolio, and reporting back to LPs. However, what can be the real kicker of it all is the back office work, or behind the scenes infrastructure work keeping the fund running - capital calls, valuations (marking the portfolio with a defensible evaluation), audit prep, and . . . tax reporting. Have no fear however, this is why Graph is here!
The Unsung Hero, the Fractional CFO
Despite the flabbergasting amount of money VC funds tend to manage (at least to me who still checks the newspaper for what type of bread is most financially optimal for the week), they tend to be very small teams - maybe 2-4 GPs and a handful of analysts. For a team of this nature, the role of a fulltime CFO is largely under utilized. Team management, one of the most time consuming parts of the role, largely disappears as there are so few people to manage. Strategic planning and investor relationships are practically at the core of what the GPs are already doing when making their investment decisions, so that responsibility is also minimal. What ends up remains is largely the back office work mentioned earlier. It's very important but can also be periodic, making it often a waste to have a full time CFO.
Finally, this is where the genius of Graph Advisor's fractional CFO services come in. Rather than having an under utilized full time CFO or offloading that back office work to GPs, the fractional CFO provides their expertise only for the work the VC fund actually needs.
The best part? The fractional CFOs of Graph can split their time across multiple funds and pick up on industry wide patterns, fully utilizing their expertise while the funds each individually only pay a fraction of the cost for their (fractional) CFO. With so much experience accumulated across multiple funds for back office work that can at times be highly repetitive and process driven, this is what allows great software to be written. A deep understanding of this back office work and the possible edge cases that arise when working with different funds is what enables Graph Advisors to provide not just great consulting, but also custom software. This leads us to the next ingredient in Graph's great recipe, SWiS!
No, Not the Cheese Kind
Service with integrated software, SWiS! The real crux of this concept and why it works for Graph comes from the industry expertise and knowledge of doing the work first. Most software companies build first and sell after - SWiS flips this on its head. Coming in first as consultants, diagnosing the issues (which are repetitive and can have specific edge cases), then and only then, do they build the software with the preexisting trust of the client and real world validation of its need. Service first, then integrate the software. With this methodology, the software has no wasted features and is tailored for the specific needs of the client - grounded in the real evidence of having already solved it by hand.
My Thoughts (and recommendations?)
So, what are my thoughts on Graph? Well, I definitely first have to commend the strengths. The combination of fractional CFO and SWiS gives these funds low commitment yet extremely reliable ways of both handling and optimizing their back office/consulting needs. They don't overpay for a full time CFO whose capabilities are under utilized OR software that is overengineered, it's been tailored to have the exact features that come up when handling their funds specific problems.
The cornerstone of all this however is the people of Graph, and to make this concrete I will take Eric, one of the cofounders I mentioned earlier of having met on the train to spark this post in the first place. He has embedded himself in the process end to end multiple times before - forming the relationship with the VC fund, consulting for their specific needs, doing the work by hand and accumulating knowledge about edge cases, and finally creating the software for it. There is trust built throughout that whole process that gives these funds confidence that their fractional CFO and software they're receiving is battle tested and optimal. And, during that process, Eric himself will accumulate more knowledge for future iterations of this process for other funds, allowing him to build better software and provide better consulting. At the end of the day, Graph is a trust centric business and this model is designed to keep earning it.
So, the strengths are there for sure, but are there holes in Graph? Well, I won't sit here and pretend to understand the exact flaws of the company after a couple days of research, but there are undoubtedly some open questions to ponder that I'd want to understand better.
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My one open question about the SwiS model is whether it creates lasting dependency or just a very valuable first engagement. The knowledge that makes Graph's software so well suited to a fund's needs is the same knowledge that gets transferred to the client through the custom software and consulting relationship. At some point a fund may feel equipped enough to handle their back office independently, and because Graph charges fractional rates, will the profits of this short engagement still justify the depth of effort invested? Whether there's always a next problem big enough on the horizon for VC funds worth keeping Graph around for after that first interaction is the question I'd want to understand better. To my understanding, funds are always growing and new problems are emerging which would justify keeping Graph around, but has existing evidence shown clients to feel that way too?
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There's no arguing that combining AI with the industry knowledge of Graph's team is a powerful combination, but what happens when both AI and Graph themselves scale? As AI undoubtedly advances, the same repetitive back office work Graph aims to address with their software becomes more susceptible to automation by better models and potentially threatens the service side of the business funding the operation. Consequently, this puts more importance on the experts of the industry within Graph to have the knowledge and experience deep enough to outpace AI and keep the software genuinely differentiated. However, as Graph takes on new clients is there the possibility of stretching the expertise thin? Is the solution to expand the team early on so there is time to train new consultants/developers to have the standard of expertise needed for future growth? This intrinsically brings on the risk of diluting, at least in the beginning, the expertise that makes Graph worth hiring in the first place - a sort of scaling paradox for knowledge driven businesses.
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In speaking with Eric, something that stood out to me was how much time on both sides can be spent evaluating a prospective client and whether they are a good fit for Graph's service model. It's a tough situation because on one hand the obvious answer would be to have some sort of intake form, but this is a bit at odds with the warmer, trust embedded nature of the value Graph provides and uses to differentiate themselves. A possible solution could be a structured, lightweight qualification layer on the website enabling prospective clients to self-select and understand whether Graph is the right fit before beginning the trust building process. Here's a rough mockup of what that could look like:
Graph Advisors is proof that the best software companies can sometimes not start as software companies at all. What Eric enthralled me with on the train and sells as his product isn't just software, it's the compounded and accumulated knowledge he's gathered by sitting in every seat of the VC fund process packaged into software. What made me want to write this article in the first place was to replicate, in a small way, what makes Graph so good. Understanding not just the software or financial side, but the end to end chain of the industry Graph operates in and how they mix these two worlds. There's plenty more to learn, but I'm glad to have gotten that taste - and I'm excited to see where Graph goes from here.