VC10X - What VCs Should Look for in a Fund Administrator - Shalin Madan, Co-founder, Formidium

The venture capital industry is about to experience a brutal consolidation, and most fund managers are sleepwalking into partnerships with service providers that won't survive the shakeout. Shalin Madan, co-founder of fund administration firm Formidium, argues that VCs making vendor selection decisions based on peer recommendations rather than fundamental business analysis are setting themselves up for operational disasters.

Madan's central thesis challenges the conventional wisdom of following the herd. "A lot of fund managers just simply say, well, five of the people that I know are with this guy, and I'll just go with them," he explains. "That's not the right approach either. You have to learn how to think for yourself. You have to learn how to ask the right questions." This deceptively simple observation reveals a deeper problem: VCs who excel at evaluating startup business models often abandon that same analytical rigor when selecting their own service providers.

The stakes extend beyond inconvenience. Fund administration touches every aspect of a VC's operations, from investor reporting to compliance and tax management. When a fund administrator goes out of business, it creates cascading problems that can paralyze a fund's operations for months. Madan warns that the current environment makes this scenario increasingly likely: "A lot of companies are gonna go out of business over the next few years. You can mark that down. The companies that are run better, have better technology, have better understanding of processes, have better management will win."

This prediction stems from his observation that the venture industry has entered what he calls a "zero sum environment." The easy money era that allowed marginal businesses to survive on venture funding and aggressive pricing is ending. Fund administrators that built their client bases through below-market pricing to gain market share now face a choice: raise prices to sustainable levels and lose clients, or maintain unsustainable economics and eventually shut down.

Madan advocates for a due diligence approach that mirrors how VCs evaluate their portfolio companies. The most critical question VCs should ask potential administrators is straightforward but often overlooked: "Is the company that you're doing business with going to be around even in five or ten years?" He recommends digging into fundamental business metrics that most fund managers never request. "Are they cash flow positive? If they're VC funded, is their pricing stable and realistic, or are they just trying to get market share and we'll bait and switch you in the future?"

The cash flow positive question is particularly revealing. Many fund administration companies raised venture capital during the 2020-2022 boom and used that funding to subsidize artificially low pricing. These companies now face the impossible task of raising prices to achieve profitability while competing against newer entrants making the same unsustainable promises to win market share. VCs who partnered with these administrators based purely on price are discovering that the cheapest option often becomes the most expensive when measured by total cost of ownership.

Madan's framework extends beyond financial stability to operational competence. He emphasizes the importance of understanding a potential partner's technology infrastructure, process discipline, and management quality. These factors determine whether a fund administrator can scale efficiently and maintain service quality as they grow. A fund administrator with poor technology will struggle to automate routine tasks, leading to higher costs and more errors. Weak processes create compliance risks that can expose VCs to regulatory problems.

The consolidation Madan predicts is already beginning. He notes that "when the tide is no longer rising, those companies will win at the expense of the companies who will fail." Well-capitalized, efficiently run fund administrators are acquiring struggling competitors or winning their clients as they shut down. This mirrors broader market dynamics where "safety is paramount" and investors favor established players with proven business models over growth-at-any-cost startups.

For emerging fund managers, this environment creates both risks and opportunities. The risk lies in choosing administrators that won't survive the shakeout. The opportunity comes from improved service quality and more realistic pricing as the market matures. Madan recommends that "if you are a small team, make sure that you are outsourcing the aspects of the operations which are going to interfere with the main core part of your business." Fund administration clearly falls into this category, but only if the chosen provider offers genuine long-term stability.

The practical implications are clear. VCs should treat administrator selection as seriously as they treat investment decisions. This means conducting reference calls with multiple existing clients, reviewing audited financial statements, and understanding the administrator's technology roadmap and competitive positioning. It means asking uncomfortable questions about pricing sustainability and growth plans. Most importantly, it means recognizing that the lowest-cost option often signals unsustainable business fundamentals.

Shalin Madan's warning about industry consolidation should prompt every fund manager to audit their current service provider relationships. Those who continue to select administrators based on peer recommendations rather than fundamental business analysis are essentially making investment decisions without due diligence. In an industry built on evaluating business models and management teams, that approach is both ironic and dangerous.