How Financial Services Firms Should Think About Tech Investments—Lessons Learned from a Venture Capitalist-Turned-White-House-Deputy CTO (Part 2)

How Financial Services Firms Should Think About Tech Investments—Lessons Learned from a Venture Capitalist-Turned-White-House-Deputy CTO (Part 2)

How Financial Services Firms Should Think About Tech Investments—Lessons Learned from a Venture Capitalist-Turned-White-House-Deputy CTO (Part 2)

With a unique background as a current private equity advisor, experienced venture capitalist, and former Deputy CTO of the White House, Nick Sinai’s perspective is always interesting. In this post, I continue my conversation with the Insight Partners Senior Advisor (read part one here) to get his thoughts about the role of data-driven decision making, artificial intelligence (AI), and machine learning in today’s financial tech stack. Nick also divulges ways to “hack the bureaucracy” when upgrading your company’s technology, and reveals what he sees ahead for the financial services industry in 2022.

Here’s what Nick had to say…

 

You’re a strategic advisor to many companies. How would you rate the ability of most to make real, data-driven decisions right now?

NICK:

Well, as one of the largest venture capital and private equity investors in software, Insight Partners has close to 300 portfolio companies and investments. We don’t invest in the very early start-up that has two guys or gals and a dog in a garage kind of thing. So oftentimes, there will be 50 people in a company when we make that investment. But after a few years, with some product-market fit, that company has often grown to 100 people and done fantastically well inventing next-gen software, finding customers, and then finding the next round of customers.
What’s interesting is, they’re so focused on building great product and finding those initial dozen or couple-dozen customers, they haven’t invested in back-end systems. They’re often on QuickBooks, sometimes they’re in Excel. And that’s because these types of systems are just not the top investment most want to make when starting up a company.
But as a Board member, we ask for and expect a lot of information. We help our portfolio companies benchmark on both financial and operational KPIs. So if you’re going to take a $20 million or $50 million investment from a venture capital firm, investment in systems is one of those requirements. We don’t want a lag time between when we can ask data-driven questions and when they can get the answer. We want to empower them, but that can only really happen if they invest in their systems.

 

Artificial intelligence (AI) and machine learning are promising results that are often beyond our imagination. Do you think financial services firms are taking a pragmatic approach to these emerging technologies, or are they trying to make a leap to AI or machine learning without having the right foundational technology in place first?

NICK:

I’m a big believer in using AI and machine learning to transform all kinds of industries, including financial services and government, where I do a lot of work. Every software we at Insight Partners invest in and use talks about AI and machine learning — that’s just table stakes at this point. And they’ve become just part of the experience when you’re in Gmail or Facebook, without most users even really realising it. So, I think we’ll start to see that pervasiveness increasingly in financial services as well, where maybe you’ll get some suggestions on what you can do to close the books faster. (Editor’s note — Sage Intacct offer this capability today through Outlier Detection — a machine learning tool that helps ensure the accuracy of approval processes: Info in Intelligent GL).
But what does AI and machine learning fundamentally depend on? They depend on the data — how that data’s created and how it’s processed. If we have a bunch of lousy data that isn’t really meeting people’s needs, we can’t merely sprinkle AI and machine learning dust on top of it and expect it to be better.

 

I think many people have this vision that AI and machine learning are going to cause a massive displacement or disruption of existing technologies, but what you’re saying is they’re more likely complementary technologies. Is that accurate?

NICK:

That’s what I’m really interested in — this idea of machine learning that’s complementary to people, where we can bring humans and machines together in ways that let humans do higher-purpose things. So it’s not always AI. It could be automation, for example.

 

Even smaller organisations often force people to navigate a maze of red tape in order to implement new software — or even just a new module within an existing accounting platform. Can you tell us a little bit about the book you’re currently writing regarding hacking bureaucracy?

NICK:

The White House and federal government is one of the largest, most notorious bureaucracies. My co-author and I were fascinated by watching what works and what doesn’t work there because high-profile entrepreneurs-in-residence or leading executives from Big Tech would come in, and they would fail. But other people would be able to get momentum and make real, lasting change.
My co-author was the CTO of the Veterans Administration (VA) — a Fortune-10 enterprise with 400,000 employees — yet the president of the U.S. was asking her to “go fix the VA.” She had an epiphany that it was up to her because the leader of the free world couldn’t make the VA actually work better. So she really set out to understand the VA bureaucracy and how she could make it more efficient and veteran-centric.
We used real-life scenarios like that one to come up with a bunch of tips and tactics on how you can hack your own bureaucracy. A lot of people try to make big or small change in what we call “organisational karate” — they come in with full force, using speed and strength. But I think it’s better to use the natural rhythm of the bureaucracy itself — “organisational Judo,” if you will, where you harness your opponent’s strength and find ways to actually make lasting change.
It’s about how you can really understand your organisation, take the way it works into account and then use it to your advantage.

 

In the spirit of “organisational Judo,” how does Insight Partners handle things when you know one of your portfolio companies needs to upgrade its tech stack, but you don’t want to come across as heavy-handed?

NICK:

Other private equity firms that own more than 50% of a company typically have a standard playbook outlining the systems its investments are going to use. It’s more prescriptive. But Insight Partners invests in high-growth companies, so it’s more of a conversation, more encouragement instead of “thou must” directives.
For example, we introduce CEOs to other CEOs they can talk to who are maybe a year ahead of them in their growth trajectory. They benefit from those CEOs’ real-world experience and perspective. We’ve also built as part of our firm centres of excellence for sales, marketing, finance and so forth, so executives in each of those areas can easily connect and share best practices.
We find that when it comes to tech investments and upgrades, though, it’s often not a question of whether something is a good idea. It’s a question of priorities. So it’s a question of “when,” not “if.”

 

Would you mind sharing one or two other hacking tips and tricks from your book?

NICK:

A lot of these are common sense about organisational behaviour. I’m a big fan of giving credit, for example. If you can authentically give credit to other people, it’s going to show you’re a team player.
I’m also a big fan of just writing it down. When I worked at the White House, people would come in from the outside with all these ideas, and we’d ask them to summarise it in a single one-pager — force them to crystallise their ideas. That can be really powerful.
I’ll give you another one, one that I didn’t even realise had become a big, heralded Amazon technique — it’s about visualising success, thinking about what success looks like. When I worked in the Office of Science and Technology Policy, we’d make new staffers who wanted to propose a new initiative write the press release and fact sheet announcing it. That’s because journalists are critical and will put the news in the context of what’s happened before.
In the course of researching our book, we found out Amazon does something similar. Their “PR/FAQ” process requires anyone wanting to launch a new product at Amazon to write a press release and FAQ sheet that basically answers “so what?” for Amazon’s internal organisations and customers.

 

2021 was fairly tumultuous, but there also was an air of prosperity and a lot of growth across many financial services firms. To conclude, as we look ahead to 2022, do you have any macro-level thoughts or predictions around what the year could bring?

NICK:

We’ve realized we can work from anywhere, even from home. Now it’s a hybrid environment. The nature of how we work and how we collaborate, those things have changed pretty significantly. All of that has implications for talent — we’re going to have a more distributed war for talent because you don’t have to move to urban areas to work anymore.
There’s also a ton of innovation that continues to happen. This idea of payments and software coming together is a big one. We at Insight Partners have made a number of investments —probably over a dozen — in financial services and payments. It feels like the big financial services and big banks are nervous, and that’s great.

 

If you missed the first part of this interview, be sure to check out that post. You can also learn more about Sage Intacct and why it’s the accounting software of choice for more than 670 financial services firms that collectively manage more than $1.3 trillion AUM.

 

The Akuna Solutions Team

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