Venture capital firms are facing the most challenging deal and fundraising backdrop in more than a decade. Investment in operational infrastructure is helping managers to navigate it.
In the first half of 2025 global venture fundraising came in at just US$41.6 billion, according to Venture Capital Journal (VCJ), down from US$60 billion over the same period in 2025 and the lowest first half total in eight years. Venture capital investment volume, meanwhile, fell to a record quarterly low of 7,551 deals in Q1 2025, according to KPMG, with the second quarter not much better as a challenging investment backdrop persisted.
A scarcity of LP allocations and transaction flow has thrown venture capital deployment and fundraising schedules out of kilter and intensified competition between managers for capital and deal flow. In the face of these headwinds, operational excellence is becoming point of difference for managers in a competitive market.
A factor in fundraising
For venture firm CFOs and COOs, the growing importance of the back-office as a differentiator when competing for LP capital is a game changer.
Historically the primary predictor of fundraising success was front office excellence and track record, and the ability of managers to identify and execute on the best deal targets and maximize investor returns. The back office was a necessary but primarily administrative function.
This has been a catalyst for the traditional siloes between the back office and front office breaking down. Operational infrastructure is now a key enabler of front office success, with the CFO and COO setting this interface and participating in the implementation of technology and service provider support to build out of centralized operational processes and data infrastructure that underpin core front office functions.
Indeed, due to the increasing sophistication of the LP base, LPs are paying closer attention to back-office capability when deciding which managers to allocate limited capital resources to. According to Private Funds CFOs 2025 Insights Survey, 36 percent of respondents said LPs were paying closer attention to operational and infrastructure capabilities – up from 22 percent a year earlier.
A robust operating model is seen as a risk mitigator for LPs when selecting managers, as LPs require the managers they back to have the right people, processes and technologies in place to support strong governance and protect firms against downside risk. Alter Domus has noted a steady increase in due diligence requests from investors and prospective investors. These have involved calls, questionnaires and onsite visits to fund administrators.
A sound operational model is also a key enabler for managers to scale as they stay on top of ever-changing fund structures, co-investment, SPVs, continuation vehicles and special account fund structures.
The venture ecosystem hasn’t been isolated from trends reshaping the wider private markets space, where a wider mix of investors, with varying returns objectives and tax and regulatory obligations, comprise a manager’s core LP base. This includes servicing a potentially growing base of non-institutional investors allocating to venture strategies through semi-liquid and interval structures, which require the management of liquidity sleeves and the more regular publication of net asset value (NAV) marks. Venture managers have been pioneers in development of evergreen and permanent fund structures. Blue chip venture managers, including Sequoia and Thrive Capital, are among the venture firms to have launched permanent capital funds with indefinite fund lives. Some of these funds can hold public stocks, a natural fit for early venture investors in what are now some of the world’s largest companies.
In a market where liquidity is at a premium (distributions as proportion of private markets NAV well to 11 percent in 2024, the lowest percentage in a decade, according to Bain & Co analysis, LPs are also placing premium on managers with the back-office capability to manage capital calls and distributions with maximum efficiency.
Cash-constrained LPs will not want to face capital calls too early or have cash locked up unnecessarily because of a premature call. LPs will also note which managers can expedite timelines for distributions. With distributed-to-paid-in (DPI) now almost as important as IRR for LPs when backing managers, the way firms handle cash management processes, capital calls and distributions, has been elevated from relatively low value, administrative work to a key differentiator for LPs.
The speed of capital calls can also present a venture firm as more attractive in competitive deal auctions and funding rounds. In a deal environment that is low volume and more competitive, having an efficient cash management model (opening accounts, issuing capital calls, funding deals) that doesn’t create a bottleneck or pose as a risk area can make the difference in winning or losing a deal.
Venture regulatory and reporting demands are also intensifying. In addition to meeting LP expectations for more frequent and granular reporting on fund and portfolio company performance, venture firms are also having to steer through regulatory change, with the next iteration of the EU’s Alternative Investment Fund Managers Directive – AIFMD II – applying from April 2026, and the US Securities and Exchange Commission (SEC) issuing record levels of financial penalties in the 2024 fiscal year. With data privacy regulation and environmental, social and governance (ESG) compliance also on the venture manager to do list, the regulatory and reporting ask of venture firms has never been more demanding.
The challenge of scaling the back-office
For the venture CFO and COO, who are responsible for laying the foundations and strategic direction of their franchises, an innovative approach to overhauling old expectations of how a firm’s venture back office looks and operates has become necessary to put firms on the right trajectory.
Keeping up with the expanding expectations of the venture capital back-office presents significant cost challenges and complexity for managers, and it is the responsibility of the CFOs and COOs to lead the organizational transformation required to keep their firms in tune with changing market dynamics.
Venture firms have long-operated as nimble, efficient partner-led organizations focused predominantly on deal execution and fundraising. Back-office requirements were relatively light touch and could be handled by small, inhouse teams.
In the current market, CFOs and COOs are under the pressure to determine the best course of action; continue with the in-house model and invest in hiring and growing the team, along with implementing technology to manage increasing operational workload; or partner with service providers.
Exploring the options: insourcing vs outsourcing
Historically venture managers have been slower to adopt an outsourced model than other asset classes. Venture structures have been relatively straightforward to administer, especially for emerging managers where structures may be simple and the volume of investors per fund small enough to manage effectively inhouse. For many of the smaller VCs, cost sensitivity has been another factor for insourcing.
There is also a sensitivity around confidentiality. Several venture deals will be confidential, which has led to some nervousness about sharing too much information with third-party service providers.
The insourcing model, however, does present challenges that venture CFOs and COOs have to consider.
To keep up with increasing complexity, investor expectations and regulatory demands, back-office teams are leaning more and more on technology, software, process automation and AI tools. Advances in technology will also be led by many of the companies that venture managers have invested in and are familiar with. As a result, venture managers will be more familiar and comfortable with automation, AI and new technology, and will find technology more valuable and easier to implement.
The private markets industry has already embarked on this technology trajectory, with an industry survey led by Alter Domus and Deloitte recording that well over half of managers are already utilizing digitization and automation in daily operations, and that almost 63 percent anticipate that AI and GenAI will have a significant impact on the alternative investment industry. The survey found that respondents saw streamlining operational processes, enhancing decision-making capabilities, and increasing portfolio performance areas where digitization and tech-adoption should focus.
Keeping pace with tech adoption, upgrading and transitioning legacy technology platforms, and training and recruiting back-office teams that are fit for purpose, however, requires significant upfront capital expenditure that can prove overwhelming for venture managers – especially if this investment would otherwise have been directed into core front office dealmaking resources and recruitment.
According to VCJ, the average venture fund in H1 2025 closed at US$124.5 million, the lowest average recorded in six years. With smaller funds and fee income than other private markets strategies, such as buyouts or private credit, venture firms will often lack the budgets to add to inhouse teams, invest in new technology platforms and retain back-office staff who are being stretched as reporting and regulatory workflows increase.
Outsourcing presents a solution to these capital expenditure and tech-adoption bottlenecks.
Outsourcing fund administration specialists service thousands of managers and funds, across multiple asset classes and geographies, and are thus able to achieve economies scale that enable them to deliver high-value fund accounting, fund administration and investor services as significantly lower costs than an individual venture manager in isolation.
Fund administrators will also be engaging with regulatory and technology developments, on behalf of clients, on a daily basis and have the scale to deploy dedicated teams with deep expertise in these areas to support venture clients.
Outsourcing providers can also advise venture managers on the software and technology platforms best matched to a manager’s deal strategy and investor base, and leverage relationships with technology vendors to roll-out bespoke solutions at competitive price points that can be benchmarked by LPs.
Fund administrators can also provide venture clients with access to proprietary and automation tools that are fit for purpose, allowing managers to reinvest in other aspects of their business. Alter Domus, for example, has invested significant capital in data analytics and workflow automation, which clients can use to drive efficiencies across the back-office. Clients using these tools have reported efficiency gains of between 10 percent and 20 percent.
The evolution outsourcing
The fund administration industry, however, has recognized some of the challenges presented by “old-fashioned” outsourcing arrangements and has tailored services that allow venture managers to retain the ready access to data and institutional knowledge that an insourced model provides, at the same time as unlocking the cost-efficiencies and scale that an outsourced model can offer.
Fund administrators can now provide co-sourcing operating models where data is held in a cloud environment, rather than behind an administrator firewall, and can be accessed by both manager and fund administrator as required.
For CFOs and COOs this removes the friction points of going back and forth to an administrator when fielding LP information requests, but still gives the manager the back-office scalability and cost advantages of an outsourced model.
In addition, co-sourcing makes it easier to switch administrators if a manager chooses to, as the manager retains control of the platform and software its back-office data is running on.
Lastly, another outsourcing model that growing managers have found compelling is the “lift out”. This involves a number of the manager’s incumbent team leaving and becoming employees of the fund administrator, while continuing to support the same funds they covered in-house. Institutional knowledge isn’t lost, and the manager retains continuity of the team servicing the funds, while putting in place a more scalable and cost-effective operational model for the future.
Building partnerships
As the venture capital ecosystem faces an operational inflection point, where operational infrastructure evolving from a back-office matter to strategic differentiator, working with a tech-enabled fund administration provider can help venture managers to level up their back-office capability without drawing resources and senior partner attention from the core business of raising and deploying capital and delivering returns to LPs.
Relationships between managers and outsourcers, however, are deepening and becoming more sophisticated, to best meet manager requirements.
A fund administrator is no longer just providing arms-length services and basic support, but serving as long-term partner to managers as their operational requirements develop and change.
Managers will now turn to their fund administrators for advice on the optimum operational model for their organization and support on how to execute business transformation, manage data migration and implement new systems. Fund administrators will also advise on the technology and software that best dovetails with a manager’s operational model and keep managers up to date on regulatory and compliance requirements.
A fund administrator like Alter Domus can provide genuine strategic value to venture capital CFOs and COOs as they navigate the shifting industry backdrop, serving not just as provider of basic support functions, but as an important partner and counsel.
