Tim Flannery, Alex Laplante and Ben Doran were working together on Carta’s investor services team when they realized that incorporating funds to invest in startups was a taxing process (no pun intended). It required manually creating subscription agreements – agreements that investors fill out to invest in a fund – by piecing together unstructured data in various financial systems. Often, this unpaid work led to mistakes and took an incredibly long time, says Flannery.
“It was a nightmare to deal with,” Flannery told TechCrunch in an email interview. “We also found problems around pooling investors, having a single source of truth for collection and incomplete or inaccurate underwriting documents.”
The solution they came up with is Passthrough, a web-based fund automation workflow tool for investors. Launched in 2020, Passthrough — which Flannery, Laplante and Doran founded after leaving Carta — facilitates the incorporation of investors for private funds, specifically aspects such as the processing of subscription documents, identity verification and anti-money laundering compliance.
“We make investing in private markets as easy as Robinhood for public stocks. Even though this asset class has been around for decades, it wasn’t built to handle this volume of investors,” he said. Flannery. “Sign up for Robinhood? It takes two minutes. Do we invest in a VC fund? You have to fill out a 200-question questionnaire every time you make an investment. The forms are not standardized and not every question applies to every investor. Investors lose questions or answer the wrong ones and then have to do the whole thing again… We’ve built a TurboTax-style workflow where investors get one question at a time and only the questions that are relevant to them.”
There is certainly interest in the idea. Passthrough today announced that it has raised $10 million in a Series A funding round led by Positive Sum with participation from Motley Fool Ventures, Broadhaven Ventures, Company Ventures and Great Oaks VC. Flannery says the round — which values Passthrough at $50 million — will be put toward product R&D, marketing and scaling Passthrough’s core offering.
At a high level, Passthrough orchestrates tasks such as screening investors when they are admitted to a fund and on an ongoing basis to manage risk. It achieves this with an ID system that uses over 200 data points to create investor profiles, which can be quickly applied to any compliance and form workflow on the Passthrough platform to save time . (Investors can delete their data if they wish, of course.)
“Most fund managers today do not have an onboarding solution. It takes days or weeks for investors to fill out the documents. On Passthrough, it takes about twenty minutes if you do it in one sitting,” said Flannery. “We asked over 36,000 unique questions to investors, and used those questions to create a model of the information collected across all the funds we work with… Investors design their beneficial owners, we underwrite them against sanctions lists and fund managers can assess their risk, admit investors into the fund and monitor their risk over time.”
Passthrough competes directly with firms such as Anduin and Plus Subscribe, which offer a suite of investment fund services including client relationship management systems, investor portals and data warehousing. To stay ahead, Flannery says Passthrough plans to expand into the enterprise with a robust new API offering that allows anyone to develop on the startup’s platform. Later this year, Passthrough will be fully embedded, he added, allowing customers and API partners to control the user experience — meaning find investment opportunities — from start to finish. end
“[Many of these enterprises] use trade order systems developed in the 1990s to process requests for investments and need to send and receive information from outdated customer relationship management systems and investor portals,” said Flannery. “The API Passthrough’s open platform helps them connect the dots while having a uniform onboarding experience regardless of where those investors come from.”
Passthrough also has rivals in fund managers like AngelList as well as law firms like Cooley Vanilla, Kirkland & Ellis’ Funded and Gunderson. But Flannery argues that they only offer point solutions – and even then, point solutions that present a challenge for investors because their data is trapped in each provider.
“From the fund manager’s point of view, you have to work with one of them first. Then, you need to adopt their standard forms. And if someone breaks out of shape, it’s probably out of luck,” Flannery said. “Meanwhile, we can work with any provider and build completely custom workflows for what you need… Our goal is to invest as much as investors invest in a venture fund, a private equity fund, or any other alternative asset, the Passthrough will be the operator. . We aim to be the default.”
You are making gains on that front. According to Flannery, Passthrough has processed billions of dollars in investments for more than 12,000 unique investors and more than 250 clients, including $50 million venture firms and $100 billion-plus global asset managers.
Flannery credits the pandemic with sparking interest in the space. “Electronic subscription documents were a curiosity until no one had access to a printer,” he said. “Fund formation exploded and we had a seamless workflow automation tool ready that simplified investor onboarding for everyone evolved.”
When asked if the current challenging investment climate could impact growth, Flannery said it would not; he did not see evidence of a decline in business. In fact, he claims that Passthrough didn’t need to raise but decided to because “it felt like it was the right time to be aggressive,” particularly since Passthrough plans to double its 26-person headcount.
“When we raised it, we did it with a three-year plan in mind,” Flannery added. “Then, we can make the decision if we want to raise again.”
