A fund operations spreadsheet is a Google Sheets or Excel workbook that is used to manage capital accounts, investor commitments, capital calls, distributions, or fund-level financial data, instead of using dedicated fund administration software. It often seems like a spreadsheet is enough to track all of the above in a fund's first few months. However, by the time a fund has completed its first audit or second capital call, you can already see where a spreadsheet fails. Emerging managers often assume a spreadsheet will suffice when their fund launches. But, the list of LPs can grow from 10 at first close to 40 and beyond, side letters can be used to tailor an LP's deal economics, and an auditor may ask for transaction history with version control. In this blog post, we will explore the areas of operational costs where funds with a spreadsheet often see these costs start to add up, and explain how they may impact the future of your fund.
What "Free" Spreadsheet Software Actually Costs a Fund Although spreadsheet software is free, the operational cost of a fund running entirely on spreadsheets, measured through staff hours, error correction and LP relationships, usually runs $40,000 to $120,000 for a fund with $20M and $75M AUM, per year, according to industry data points and operational audits of other similar sized funds. The problem is that it is a labor-intensive process. For each capital call, you have to manually calculate an LP's pro rata capital requirement based on their commitment, any special provisions they may have requested through side letters, and create a distribution notice to send to all the LPs. A fund with 35 LPs that is issuing calls on a quarterly basis could take 12 hours to 20 hours, per call cycle for a fund relying solely on spreadsheet tracking. One CFO from a $65M growth equity fund told us, "We had 3 people touching the same spreadsheet for every single distribution.
We had color codes to make sure each one of us knew who had already checked what part. We found out 6 months later that a formula was wrong and that formula was used for every single prior capital distribution. It took us 2 weeks to correct it all, and then had to notify everyone." Another consideration are errors. The European Spreadsheet Risks Interest Group found in 2019 that 88% of spreadsheets over 150 rows have at least one material error. Most fund spreadsheets will far exceed the 150 row threshold at any given time. Audit Exposure and LP Reporting Risk Another area in which the use of a spreadsheet can be very costly is at an audit cycle. An auditor typically requests documentation supporting all LP transactions. A spreadsheet trail for this type of audit presents an immediate red flag for an auditor. Any time you use a spreadsheet, it's very hard to prove that you have recorded all transactions and that the information provided is accurate.
Auditors need access to data to verify transactions and to prove that the data is complete, accurate, and has an audit trail. Any time you use a manual spreadsheet, you will be manually reconstituting records to prove that data. Preparing for an audit typically takes an additional 40 hours to 80 hours for a fund, based on the number of manual tasks required to produce data for an auditor versus a fund running on fund administration software. Assuming a blended compensation rate of $85 per hour, an additional cost of $3,400 to $6,800 in incremental cost per audit cycle is common when using a spreadsheet to administer your fund operations. This cost does not even take into account the CPA time to help reconstitute records. LP reporting is also at risk. Institutional LPs, including endowments, family offices and fund-of-funds, typically request capital account statements at any given time, not just at the end of the quarter.
Manually generating those statements from a spreadsheet can turn a minutes-long task into one that spans days. In fact, a couple of the LPs we interviewed for this study cited late or inconsistent reporting as the chief cause for not wanting to re-up with a manager in Fund II. "We passed on a re-up with a manager we liked because their Q3 statement sent to us had different numbers than their Q2 statement sent six months earlier," one fund-of-funds allocator at a $400M platform told us. "They couldn't even explain the difference on the call. We instead moved our commitment to a competing fund." There's a time tax that the GP pays in doing fund ops on spreadsheets, which rises as a fund grows. In a fund's first year, a one-person GP or a small team can absorb 10 hours per month. A fund's third year typically involves quarterly portfolio company reporting, ongoing capital calls, and rising LP inquiries, when time spent on op tasks can routinely jump to 30 to 50 hours per month.
This time also has an opportunity cost. In this scenario, where a GP's most important use of his or her time involves sourcing, diligence, and portfolio support, every hour that a GP spends on spreading reconciliation and formatting a distribution notice is an hour that isn't spent talking to a portfolio founder or a prospective LP. At a conservative $500 an hour of GP economic value, an extra 20 hours each month on spreadsheets would translate to $120,000 in opportunity costs per year. Fundraising can also suffer from the increased time commitment needed to do ops on spreadsheets. Sophisticated LPs will often conduct operational due diligence before making a commitment and if this process reveals a spreadsheet back office, it tells institutional money managers that the fund isn't ready to scale. Placement agents we surveyed reported that their operational due diligence questions are surfacing in LP DDQs at a higher frequency than they did five years earlier in response to LPs being increasingly more careful about asking these types of questions in order to gauge their portfolio manager's back-office readiness.
The Failure Modes That Matter In Spreadsheets Spreadsheets tend to fail in predictable ways in fund operations. Version-control problems are the most prevalent, often occurring when multiple people are simultaneously working on the same spreadsheet, or when an LP gets a "final" version of the spreadsheet only to be sent a revised copy several weeks later. Reconciling these differences is a major project. A close second is formula drift, where a formula that's working properly for rows 1 through 10 suddenly stops working at row 47 because of a relative cell reference, a problem that is extremely difficult to find. Access control is another structural weakness. Because spreadsheets can't provide role-based access for cells, a junior analyst can technically delete a capital account as easily as the CFO can; most funds manage this with things like spreadsheet naming protocols, protected spreadsheets and approval via email, all of which fall apart in a pinch.
The other common way spreadsheets fail is a data loss. Spreadsheets residing on local drives or in shared drives don't have the same data redundancy and backup schedule as cloud-based fund admin products. One emerging manager lost three months of LP transaction history when a shared folder was damaged during a server relocation and spent 60 staff hours recreating those transactions and had its annual audit delayed by 6 weeks. The point of transition: when to abandon spreadsheets. The right moment to adopt a dedicated fund-administration platform is well before your current setup fails you. Typically, an emerging manager's operational inflection point comes when they have over 20 LPs, more than one close, side letters with individual terms, or an institutional investor who wants quarterly reports on a schedule. Most emerging managers are there by the time they reach a first close. The cost of a late transition, including data migration, historical reconciliation and the time it would take for staff to rebuild records, exceeds the cost of starting on the right system from the outset.
A dedicated fund-administration platform will automate capital calls and LP notifications, keep immutable audit trails and deliver GAAP-compliant financial statements. Such software costs roughly $15k to $40k annually for a sub-$100m fund, a small fraction of the cost of spreadsheet administration in terms of error and staffing time at that size. Q. How much does it cost to administer a fund using spreadsheets? A. Funded by spreadsheets for a sub-$100m fund of between 20 and 50 LPs can run you $40k to $120k a year, including staff time, mistakes, audit prep and time value. That also excludes the cost of lost goodwill with LPs through errors and delayed reporting that makes fundraising your Fund II harder to pull off. Q. What is the fund size at which spreadsheets stop working? A. Spreadsheets become a problem when you have more than 20 LPs or more than one close. At that point the calculations for pro-rata rights, the terms in each side letter and the capital account balances on each transaction will become too complicated to support with a simple manual book and no separate reconciliation process.
Q. What are some specific errors auditors see from spreadsheet-based funds? A. Most errors auditors see are formulaic, capital-account miscalculations, the absence or incorrectness of timestamps for transactions, cells without any history after being overwritten and LP capital commitments that do not reconcile with the finalised and executed subscription documents. Each one of these will take time to resolve, causing delays in audit completion. Q. Is it possible to use a hybrid model: spreadsheets for some, software for the rest? A. The answer is yes and no, because a hybrid fund will only create more issues than it solves. When capital account information is recorded in one place, and notifications to LPs in another, the records between the two become misaligned almost immediately. Both auditors and LPs need one place to find the truth, so using fund-administration software in part means the work of entering data into it twice, which in practice will only increase the error potential rather than reducing it.
Q. What should a GP look for in a software package? A. There are five things to consider. Does the software support your LP structure (the various types of LP entities, waterfalls etc); are the capital-account statements ready for an audit; does it have support for your fund legal documents, including side letters; what is the LP portal for self-help; what support do they offer in terms of getting the software up and running. A $100m fund should not take longer than four to six weeks to get a new fund administration system up and running.