Live webinar: Unlocking Untapped Value in Portfolio Updates | Feb 22 | 10AM PT

Table of contents:
BLOG  •  APRIL 2023

Building a “Single Source of Truth” using Alternative Data: Lessons for VCs, PEs and Private Investors

Introduction

"We were relying on a single data source and didn't do enough due diligence. It was a costly mistake”, said George Soros, a Hungarian-American businessman and investor. In an article in The New York Times titled "Soros Fund Sues Company It Invested In, Saying It Was Misled," George referred to his investment in the internet company, Pixelon, which ultimately failed due to false financial reporting. He discussed how he and his team relied too heavily on a single source of data, ultimately leading to a risky investment.

In 2019, WeWork was expected to go public with a valuation of $47 billion. However, investors suffered significant losses when the company's prospectus revealed large losses and governance issues that had not been previously disclosed. The lack of alternative data insights led investors to rely solely on the company's public statements and projections.

In the actively growing investment space, investors today need more data. Even though a majority of investors still rely entirely on traditional data sources, early adopters have already leveraged alternative datasets to create holistic perspectives. Investors, especially those focusing on private markets and hedge funds, are severely limited due to lack of real-time updates and reliable data sources to make investment decisions.

Key Challenges Faced By Private Market Investors

Listed below are some key challenges faced by private market investors across the investment lifecycle:

  1. Narrowed investment options: Since private companies are not publicly traded and their financial data may not be available traditionally, there may be limited opportunities for investors to invest in them. A lack of knowledge about high-growth companies can have a significant impact on deal sourcing and result in a dry deal pipeline for investors.
  2. High risk: Without access to reliable alternative data, VCs and PEs may be more likely to make investment decisions based on incomplete or outdated information. This can lead to higher risk and potentially lower returns. They may also miss important insights that could impact their investment decisions.
  3. Inability to react quickly to changing market conditions: Real-time updates on the company’s key performance metrics and latest news can provide investors with important insights into its current as well as future performance. Without this information, investors may not be able to react quickly to changing market conditions and may miss out on potential investment opportunities.
  4. Lack of analytical insights: Access to disparate datasets might not help all the time. When put together in perspective, they might throw insights that one would not consider otherwise. Without access to analytical insights, investors may struggle to make informed decisions based on the available data. Analytical insights provide context and meaning to the data, helping investors understand the implications of the data and make better-informed investment decisions.
  5. High competition: Investors who do not have access to alternative data may be at a disadvantage compared to those who do. In today's data-driven investment landscape, investors who can leverage the latest technology and analytical tools to gain a competitive edge are more likely to succeed.

    How Leading Investors Are Leveraging Alternative Data and Intelligence Platforms To Their Advantage

    According to Grandview Research, the global alternative data market size is expected to expand at a compound annual growth rate (CAGR) of 52.1% from 2023 to 2030. Alternative datasets can provide valuable insights for investors by tracking real-world events that impact businesses. For example, investors can use footfall data from mobile devices to gauge the performance of retail companies. This information is particularly useful during earnings season when companies release their financial results. By comparing a company's footfall data to its reported earnings, investors can get a better understanding of how well the company is performing and make more informed investment decisions. Similarly, social media platforms have become a valuable source of information for investors looking to understand consumer sentiment and gauge the popularity of certain products or services. By analyzing social media posts and other online content, investors can identify emerging trends and gain insights into consumer perception of different brands and products. Credit card transaction data, mobile device data, IoT sensor data, satellite imagery, social media sentiment, product reviews, weather data, web traffic and app usage data are some valued alternative datasets that investors track and this list keeps growing with increased digital footprints.

    Many investors have successfully leveraged alternative data in addition to traditional data sources to build a single source of truth for their investment research. They have gone ahead to build advanced AI and machine learning models on top of these unified data platforms to further their analysis and make more informed decisions. For instance, quantitative hedge funds like James Simons’ Renaissance Technologies, D.E. Shaw and Two Sigma combined machine learning with alternative data sources such as satellite imagery and natural language processing of company earnings calls.

    In 2017, BlackRock laid off a handful of portfolio managers in its active equity business to switch to AI for investment decisions. Hedge fund AQR also hired prominent data scientist Marcos Lopez de Prado to spearhead its machine-learning impact, while Fidelity Investments built up a team of nearly 140 data geeks. All these efforts were made to ensure data-driven investment decisions based on advanced data platforms and technology.
    Not only does a data platform aid decisoning, it significantly reduces the overall research time. Connetic Ventures boasts a data analytics platform, Wendal, that collects, analyzes, and ranks startups, and supports their team in the due diligence process by speeding it up to 8 minutes. Correlation Ventures reaches a decision on whether to invest or not in 2 weeks and spends another 2 for extra due diligence.

    The Real Challenge Haunting VCs and PEs: Combining Disparate Alternative Data Along with Traditional Data

    For VCs and PEs, combining traditional and disparate alternative datasets is a complex and challenging task. There are several obstacles in the way of unifying these sources of information:

    1. Data quality: Ensuring that the data is accurate, complete, and consistent across different sources is critical to creating a reliable single source of data. However, different data sources may have different definitions, formats, granularity and accuracy, which can make it difficult to ensure high quality.
    2. Data integration: Disparate alternative data sources are often unstructured, incomplete, or noisy, requiring sophisticated algorithms and techniques to clean and validate the data. This may require significant investment in technology and data infrastructure.
    3. The “many vendors, many subscriptions” problem: Investors rely on multiple vendors and subscriptions to collect the information they need to make sound decisions. Data coming in from many sources is stored in different places, in different formats, and using different methodologies. This can create a fragmented view of the data, making it harder for investors to draw meaningful insights.
    4. Higher inefficiencies: Subscribing to multiple data sources can be expensive, and managing multiple subscriptions can be time-consuming and require significant resources to stay on top of updates and changes in the data. This can take away from the time investors have to analyze the data and make informed decisions.
    5. Data security and privacy:Managing sensitive financial data from multiple sources requires strong data security and privacy measures to protect against cyber threats and unauthorized access. This can be especially challenging if the data is stored in different locations or accessed by multiple parties.
    6. Regulatory compliance: Investment research is subject to strict regulatory requirements, which can vary by region and asset class. Creating a single source of data that meets these requirements while also providing meaningful insights can be challenging.
      A recent survey by Lowenstein Sandler shows the key challenges that hinder firms from leveraging alternative datasets.

      Source: Alternative Data: The New Oil for the Digital Economy? Report published by Lowenstein Sandler in Nov’22

      A Suggestive Framework for Building the Single Source of Truth for Private Investors using Alternative Data

      Creating a single source of data for investment research requires addressing multiple challenges as discussed. While building an internal data and analytics platform offers full control and customization benefits to investors, but it is a complex and challenging process that demands significant investments in hiring talent, infrastructure, and dedicated time with experts. As interest in this space has grown, numerous vendors with differentiated solutions have entered the scene, offering easy access to datasets and various analytical features to make the investment research process more effective.

      Off-the-shelf solutions have emerged as a viable option for investment professionals who want to focus on their core competency of analyzing investments and making informed decisions.

      An easier and efficient way to build a single source of truth is to leverage data and analytics platforms for investment research.

      Such platforms offer advanced analytics, voice-based searches, proprietary algorithms to rank startups, easy surfacing of high-growth opportunities and many other AI-based insights. Investors can choose from a range of vendors that specialize in different areas such as financial data, industry intelligence, alternative datasets, and more. With the rise of cloud-based solutions, it has become easier for investors to access these platforms from anywhere in the world, making it a convenient and cost-effective solution for investment research. Alternative data-enabled analytics platforms do the heavy lifting of accessing, aggregating and analyzing disparate datasets to unify all relevant information as a single source of truth for investors. It unifies and works on massive datasets to process insights following a three-step process:

      1. Aggregating Data: The platform ingests millions of data points, and cleans and tags them to the right category.
      2. Driving Analytics: It leverages a workspace with tools to visualize and analyze varied data sets.
      3. Automating Insights: The platform has proprietary ML algorithms that drive intelligent alerts to flag early or predictive insights for investors.
      Once a dataset is integrated, it is made available for customized filters and dashboards. The data is also available for historic and real-time analyses. With a comprehensive picture, VCs and PEs can compare their investment opportunities and dynamically direct their portfolios based on customized alerts.

      Our analysis at Synaptic shows that, for a small investment team managing 4-5 datasets, the total cost of ownership of a data platform built in-house could be north of $850K annually. In contrast, subscribing to an alternative data and insights platform could cost as little as $150K. With such significant cost advantages, in addition to the expertise and tech focus that these data platforms provide, investors can rely on alternative data-enabled data and analytics platforms to build a single source of truth.

      Synaptic is amongst the leading provider of alternative data and intelligence platform that helps private investors to source deals faster, conduct deeper due diligence with holistic company profiles and monitor portfolio investments using the most comprehensive alternative datasets on a single pane of glass! Schedule your personalized demo here.