In the season 1 finale of Controllers Classified, host Erik Zhou is joined by Sarah Hinkfuss from Bain Capital Ventures for an overview of the VC investment landscape and a deep dive into her investment due diligence approach for growth stage companies.
In the season 1 finale of Controllers Classified, host Erik Zhou is joined by Sarah Hinkfuss from Bain Capital Ventures for an overview of the VC investment landscape and a deep dive into her investment due diligence approach for growth stage companies.
The episode begins with Sarah highlighting milestones from her career, including her time conducting water pricing research in the Middle East, her transition into tech, and her pivot from tech into investing. Underlying everything is her passion for empirical based decision making and a belief that complex problems require a multidisciplinary approach.
The conversation then pivots to the investment landscape. Sarah explains the relationship between companies, VCs, and LPs, and how the macroeconomic environment is driving a “flight to quality”. The result is companies are being asked to balance growth and profitability, and increasingly making hard decisions around what to keep and what to cut.
Sarah then gives listeners an insider's look at her investment due diligence approach for growth stage companies, underscoring the importance of a company’s financials in this process. She spends some time explaining why unit economics and a business model are so important and notes that it’s not just about seeing the numbers. A founder must have a clear narrative about what drives their business and where they see things going in the future. Sarah also touches on the transition from Series A to Series B, and the nuances in the fundraising process for early vs. growth stage companies.
This episode is a must-listen for founders & finance leaders aiming to navigate the complexities of fundraising in today’s macroeconomic environment.
Key Quotes
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0:00:00.0 Sarah Hinkfuss: The investors that you want to have around your cap table are those who really understand your business and understand the drivers of your business. And often that's in the pieces of data that make up your unit economics.
0:00:16.2 Speaker 2: Welcome to Controllers Classified the podcast where we take a deep dive into the dynamic world of controllers, accountants, and finance leaders, and hear how their ever evolving roles are redefining accounting and the future of business. And now here's your host, Erik Zhou.
0:00:38.1 Erik Zhou: Welcome to Controllers Classified. I'm your host Erik Zhou, chief Accounting Officer at Brex. And folks, I can't believe it, but we are in the final episode of season one of this beloved podcast. And I wanna just start off by saying I'm so thankful to Brex for sponsoring this show and giving the opportunity for me and so many other finance and accounting professionals to share their stories, ideas, and lessons. It's just been great. And so without further ado, I'm especially honored to have Sarah Hinkfuss partner at Bain Capital Ventures on for our final episode of the season. Sarah in her role is a growth stage investor and focuses on companies in the application software and Fintech industries. Thank you for joining the show. Sarah. Welcome.
0:01:25.9 Sarah Hinkfuss: Thanks for having me, Eric. I'm thrilled to be part of it. Happy I made it in for the last episode, so thanks for having me.
0:01:33.0 Erik Zhou: I mean, we've talked all season long about how to think about reporting, the accounting, the finances, running the company that way. I think getting that information from you on the other side, on the investor side, I mean, I would say as an investor you are probably my number one stakeholder when it comes to bookkeeping, so getting that perspective is super important. Maybe just to start off, can you give us a brief overview of how you got to where you are at Bain and what your story is?
0:02:00.4 Sarah Hinkfuss: I'd be happy to. So I'm from Wisconsin originally. I grew up in the city of Milwaukee and went to inner city public schools, expected to go to University of Wisconsin-Madison. And then through some chance of luck, I did competitive debate in high school. And so pretty cool and nerdy. But that actually took me around the country and I had the chance to see Harvard and totally fell in love with the opportunities there. And it was so different than anything I had experienced from Milwaukee. And so was fortunate enough to get in and then also get a full ride through a few different scholarships and financial aid and really was just alive like a kid in a candy store intellectually, to be there on campus. And I spent all of my time thinking about water. And so I looked at the intersection of economics and environmental engineering and loved this problem of water pricing because I saw it was such a systems level problem where the answer was something you could find through engineering and economics and sociology and theocracy, like there were so many pieces wrapped up together to help you understand how water was distributed and priced in different communities.
0:03:07.1 Sarah Hinkfuss: And so my work actually took me to the Middle East every single summer to do my research and thought I would make that a career actually going in to work with the World Bank and the government of Jordan on some of my research. But then I became pretty disillusioned with the way large institutions work. And so some of the research I thought should create policy change, but there's a gap between what evidence tells you and what policy does. And so I followed my desire for empirical decision making into business and ended up joining a tech company out of school that was implementing the same core thesis research that I used in business. And so we helped large organizations design and analyze in-market experiments. The company was called APT, which stood for Applied Predictive Technologies. And I joined when it was around 30 people and we scaled it to over 500 during the time I was there.
0:04:01.8 Sarah Hinkfuss: And so it was just this incredible journey of starting in one industry with one product and then imagining how we could build other types of innovative solutions and the predictive analytics space for our customers, and then take what worked in one industry and bring it into other industries as well. And so it was an incredible experience for me as a young person to take on increasing amounts of responsibility and really have a seat at the table and thinking about scaling this large global organization. We were on the IPO path and then ended up being acquired by Mastercard in 2015. And so it was a great exit for the organization, but I decided that I wanted to do something more entrepreneurial again. And so as I reflected on what I most love doing, like what brought me energy, what I was really good at, and my theory of impacting the world, I ended up thinking investing might be the right home for me. And so I decided to go to Stanford for business school really with the purpose of exploring that idea, a hypothesis that I would enjoy investing. And was fortunate enough to work with Aileen Lee at Cowboy Capital during my time at school. And then got into growth investing at KKR where I was for a number of years before coming to Bain Capital four years ago. And so now at Bain Capital Ventures, as you mentioned, I do our work in growth stage Fintech and embedded financial services, which is all over Vertical SaaS investing as well.
0:05:20.1 Erik Zhou: What a story now that you're a growth investor, I think it's really interesting that you kind of... You have that operator experience actually that's not a common story I would say. Like having been in a room where it was only 30 folks and then scaling to 500, I mean, you're really kind of different companies at 30 then 150 then at 400. I mean that totally resonates with me. I remember Brex when we were 70 people, now we're 1000. I just feel like I've worked at five different companies actually.
0:05:48.1 Sarah Hinkfuss: And I think it's really important because it's more common, I would say for early stage investors to have that background. But you're right that it's less common for growth stage investors just because by the time you get into growth stage, which we define as series B and beyond, you also need a lot of financial acumen, which typically comes through finance or investment banking backgrounds. And so I find it a superpower of mine in the market because I can actually understand from lived experience what's happening in the companies that I'm working with. And then also I have deep empathy for what the founder and their management team is going through. I know how hard it is to create culture and to bring people along, or when you're going from that moment of knowing everyone in the company to actually creating a system and a process that helps you communicate and create structure to make sure everyone's on the same page. So there are a lot of growing pains that are a privilege to go through, but I also realize how hard they are. And so it's nice to now be on the investor side and be able to support folks going through that.
0:06:49.2 Erik Zhou: So moving on to your experience as a growth stage investor. What can you tell me about just what the current environment is like for your particular segment? Like I hear all these things in the news, but I'm curious about your take.
0:07:03.5 Sarah Hinkfuss: Yeah, so it's obviously been a crazy experience, and it's been a lot of ricochet back and forth, right, over the last four years as we think about what it's been to be a builder or an investor in the market. And where I would say we are now is this flight to quality. And so it means different things at different stages or at different sectors, but I think generally speaking, there's this realization that first in the public markets, but then that trickles down to private markets as well, that ultimately the way that we create value in a company is by creating cash flow, right? And so there are precedents of that that show up in increasing amounts as a company scales that are really important for investors to see. And that is a radically different orientation than we had earlier in a low interest rate environment where it was all about growth. And so the transition of the past few years, and the reason why I think it's felt uncomfortable is because companies have had to readjust to this new market, and that's required making hard decisions around which programs you continue to keep versus which ones you cut. And then also companies themselves, your buyers may not need everything that they needed before. And so only the best have been able to survive. And I think that's what we're seeing in both the funding rounds as well as the business failure rates.
0:08:22.5 Erik Zhou: And how much of what you're experiencing as an accounting professional who looks at the P&L, like all in, like we didn't just look at top line revenue. Like some of the things I got... I learned in business school, like you go all the way down to EBIT, right? And like you look at cash flows and you do DCF, and that's how you get real enterprise value. I can understand how it's different during the Zep era now that... Like how much of what you're talking about is just general VC industry trends. Is it from the LPs? Like where is all this coming from in terms of the push down, so to speak?
0:08:56.1 Sarah Hinkfuss: Ooh, I love that question. Yeah, so if you take one step back and think about the pressures that VCs are under, why don't we do that for a second. So 'cause companies like we work with, right? They are affected by what VCs are seeing, and VCs are affected by what LPs are experiencing. And so for LPs, there's been a few things that have been at play. So first of all, there's a public markets reset. And that is true just if you look at what's happened to stocks over time from the Zep era into where we are now. And so because valuations are down overall, they've also been reined to a mix of profitability and growth, not just growth at all costs. So if you look at who are the companies with more resilient multiples, they're the ones who have been able to balance between those two objectives.
0:09:40.3 Sarah Hinkfuss: Second of all, there are fewer IPOs that are happening, and that trickles down because it also means that there are fewer exits that VCs are able to prove. And so there are fewer dollars that are going back into the hands of LPs themselves. And so VC as an asset class has become less productive. So if I take those two things together, the fewer exits, and then also the fact that public markets as a value have gone down, it actually means that a lot of LPs today are overweighted to VC. They're over allocated in their portfolio of investments. And so they've actually been pulling back on the number of dollars that they've put into new VC funds as a result because they're over allocated. And that means that not just are VCs crunched at getting new capital, but also they need their existing capital to last longer, which is why there are fewer dollars going out the door to new investments as well.
0:10:35.0 Erik Zhou: If you were someone looking for a good stage round today, what are some of the things that you would advise them on? Like if I was looking for a series B round, for instance.
0:10:47.7 Sarah Hinkfuss: I'm happy more generally to get into the difference between the series A and the series B and like tactically what to do. But maybe just taking that at face value for anyone who's thinking about raising a round, I would strongly encourage you to do market checks ahead of time with people you trust. And so that could be current investors on your cap table or it could be a friend that you know that's in venture, but find someone who you can be really honest with, tell the story about how you're thinking about presenting it around what your metrics are, and then ask what the questions are. And so it's really good to have a perspective before you actually get out of the gate or before you're at the end of your line in terms of capital on the balance sheet to understand what the market will see when you tell your story, because then you can plan against that.
0:11:33.8 Sarah Hinkfuss: And so I think the people who are in the hardest position are those who haven't done that or are caught unexpected, right? So they're surprised by what they hear in the market, and then they don't have the runway they need to fully raise the round or they go out to the wrong set of investors from the get go, or maybe they're not thinking about strategic opportunities and they really should be from the beginning. And so again, my biggest suggestion is talk to people so that you actually know how the other side will think about it.
0:12:00.0 Erik Zhou: Walk me through the process. Like if you were an investor and you're doing due diligence what are the tactical things you're thinking about? And then therefore, how would the founder like respond or how should they respond to that as a result?
0:12:15.9 Sarah Hinkfuss: Yeah, so like pull back the curtain, the veil.
0:12:19.4 Erik Zhou: Yeah, yeah.
0:12:20.6 Sarah Hinkfuss: Of venture. I'd be happy...
0:12:21.3 Erik Zhou: Tell me how to raise money from Sarah Hinkfuss, basically.
0:12:25.3 Sarah Hinkfuss: Yeah, totally. And I should say also that every place is different, right? So what I'm gonna be describing, I'm generalizing from BCV, but obviously every place is different. So first of all, there's generally been a relationship build that's happened over time. And so there's a process of meeting maybe an associate or a principal on the team, or maybe it's a partner, but that's happened incrementally over time. And so the founder generally is keeping me up to speed around what they're achieving in the market. And if it's a company that I'm really interested in based on past conversations, when I see things of interest to that person, I'll also reach out to create value and have a reason or an excuse to have another conversation to hear how the story's evolving. And so oftentimes today, there is a reason why that fundraise is happening.
0:13:13.6 Sarah Hinkfuss: So it could be that the company got an insider term sheet, or maybe they expect to get an insider term sheet, or it could be that an outsider preempted the round, or it could be that they're planning to do a fundraise in Q2. And so it's coming up. So then there will be this initial meeting where the founder says, I am doing a fundraise, or I have a data room available, or I got a term sheet, right? And so that's kind of like the gunshot that goes off like at the beginning of the race. Like that's where it's actually starting, where you're lining everyone up at the same point. And so then on my side, I have all of the perspectives that I've gained over time from these incremental conversations and that have told me a lot about who the founder is, how they tell their story, what market they're going after.
0:13:57.8 Sarah Hinkfuss: I've also understood the consistency over time. So did the numbers that they tell me around what they would reach at the end of Q4, did they reach that? What about at the end of Q1? Did they do that? Where are they tracking in Q2, right? So I have all this information and then generally when the gun goes off at the beginning of the race, that's where we're doing a lot more research to help really qualify where they are in the market today. And so maybe we had already done work to understand that market and some of their competitors, but now we're refreshing that to hear the story directly from customers, understand how they perceive the ROI, how they made the decision between them and competitive products. And then we're also getting the data room, which we should talk more about like what's in that and how does that work.
0:14:45.4 Sarah Hinkfuss: But we're running quantitative analysis and that's really helpful because it enables us to benchmark that company against other companies. And then we usually have a couple of meetings with the company to go through questions we have coming out of all of that work. Then that enables my team to put together a memo which summarizes our perspective on this investment. We share that with our team as a pre-read to get questions or to invite areas that we should spend further time or inquiry to better understand. And then that'll culminate if we continue to be excited in an investment committee meeting where we will invite the founder in for our partnership, they will present after the founder presents, they will leave, and then the team internally will discuss the opportunity and vote at the end of the meeting. And then at the end of that, we actually can call the founder and say, Hey, we'd love to invest. Like here's how we're thinking about it, or we will not be. And this is the way we thought about it. And so what I think's really important is that although there are a lot of puts and takes and a lot of things that come together, it is not a long drawn out process. And it's actually something where we have a decision that day in the vast majority of cases.
0:15:54.2 Erik Zhou: So you're reviewing a lot about what the company's business is, you're doing due diligence. I do wanna talk about the data room and some of those specifics. How do I break it down in terms of how much of your analysis is qualitative, kind of like just general innovation of the business or the company, what the founder is like maybe personality-wise, that drive that you always are looking for in a founder versus some of the technical aspects of like how they're doing in terms of revenue growth or gross margin or all these other things related to cash burn, et cetera. Is there a way to balance that or how do you think about it in your head? Because they are still pretty early stage, like as a series A, maybe early series B.
0:16:40.9 Sarah Hinkfuss: I think it's always a mix across stages. And so even at the earliest stages, there's some quantitative data like market size, right? And then even at the latest stages, founders still matters a lot. And so there's this qualitative squishy art to it. And so I think generally across the spectrum both matter. And I would say that the earlier stage, the more qualitative is important versus the later stage, the more you can use benchmarks and other quantitative data, both inside out and outside in to gain conviction on an opportunity or company. The way I think about that is a founder needs to have a unique insight on the market. So there has to be something that they believe that uniquely they can see based on their background or the work that they've done in the market, or maybe experiences that they've had. And then over time, they are increasingly expanding the group of people that follow them, that believe that with them.
0:17:41.3 Sarah Hinkfuss: And so at the beginning is maybe just a founder and a co-founder, and then they're recruiting a team, and then they're recruiting a bunch of customers, but those first customers are diehards, right? That they believe this crazy thing in the world that it has to exist. But then those customers keep telling more customers and they recruit more and more people to the team. And then if you think about it at a pre-IPO moment, you're actually telling this story to the public markets, right? Like that's what the IPO event is, is telling that story. And so as we think about what is that qualitative piece, it's how effective is this founder in telling this unique insight to the market? And how much is there a why now as to why this unique idea has to exist in the world today?
0:18:24.0 Erik Zhou: Circling back on your post-college experience right off the bat, working at a startup. Have you been now on the other seat and you kind of see, I mean, you talk about empathy for founders. Are there any situations where you said, this is exactly what I experienced when my company became successful, so it gives me more conviction? Or maybe even vice versa. You don't see signs of that. Curious about that dynamic for you?
0:18:51.1 Sarah Hinkfuss: I see that all the time, but one example that I would describe is, I think I understand intuitively the power of partnerships. And so when I see a founder who can construct multiple competing interests and hold them together at the same time and get them to work together, I know how hard that is. Having done that before, like having tried it and failed and having tried it and successfully stood it up. And so there are some players who their superpower is... Maybe it's in distribution, right? It's the way that they achieve network effects is by putting together players that otherwise wouldn't cooperate. Or maybe it's in the way that they manage their investors of getting different competing strategics to come to the table and play ball and like put small checks in. Like there are different ways that this manifests, but I think it's an example of... Because I've struggled with getting people with competing interests to cooperate. When I see that it's an insight around the power of that company.
0:19:57.9 Erik Zhou: We had an episode earlier in the season, and this was with a controller. And as an accountant, a big part of our job is the technical aspects, like making sure books and records, obviously balancing, but make sure everything's classified appropriately. We have to meet gaps standards, and there's all this stuff that you can learn in the craft. But our conclusion after the end of that conversation was like actually the number one thing you need to be successful, whether it's our profession or any, the arts of persuasion, the art of cooperation.
0:20:29.3 Sarah Hinkfuss: Totally.
0:20:29.4 Erik Zhou: The art of just working together across different personalities and people and getting to hit mutually aligned objective, so to speak. So that totally resonates with me. Yeah.
0:20:39.7 Sarah Hinkfuss: And I would say that's one of the things that sometimes I hear missed when it comes to fundraising, that fundraising should not be acrimonious. It should not be about convincing people of something that you want to be true, but isn't true. The investors also shouldn't be out to get the company like on both sides at its core. It's a collaborative process where you're finding someone that you want to be partnered with for a very long time.
0:21:06.0 Erik Zhou: So, but then going back to the technical aspects, so okay, now the company has talked to you for a while. You got understanding of the business, you've kind of their actual results to what they projected, now you're in data room. What are the things that you would expect see in there? And what are things, things you would kind of try to drill into more than others? What's really important to you?
0:21:28.2 Sarah Hinkfuss: Sure. So I'm not gonna give you the laundry list of everything. I'd want in the data room. And again, that totally changes based on stage, but three things I'll call out that I think are really important or at least worth considering. One would be the precedence for unit economics. So back to the conversation we were having around what is the funding environment now and how has it changed? And I think also the struggle that a lot of founders have had to react to this new environment by far, the most important thing today is unit economics. And so the investors that you want to have around your cap table are those who really understand your business and understand the drivers of your business. And often that's in the pieces of data that make up your unit economics. So that could be the customer cohort data to understand retention over time.
0:22:15.3 Sarah Hinkfuss: That's the gross margin. And that's also the sales and marketing costs. So what's the distribution? How efficient is it? How effective is it? Those pieces together give you the full picture of unit economics. The second thing I'd say is the model. My point here is not that a model has to be this like big drawn out, big thing that breaks Excel or breaks Google Sheets. Not at all. But rather, I think it's a really important instrument to show people how you think about the business. And so what is your view of the future as a company and what do you believe are the most important drivers of the business? And so as I think about the companies that are best positioned for success, they've been able to instrument the business. And so they know that if I spend on this, it'll result in that.
0:23:08.4 Sarah Hinkfuss: And if I spend more here, I don't know what will happen because I haven't tried it or I'm at the point of diminishing marginal returns. And so the model, again, it's not about being overly prescriptive, rather it's a mechanism to get people on the same page in how you think about the future. And then the third thing I'd say very quickly is actually a memo. And so I think the narrative form is just as important in telling the story as is the quantitative form. And so something I've seen become much more in vogue that I'm totally here for is telling the story, not just in a deck, but in a memo.
0:23:46.4 Erik Zhou: I think that came from Jeff Bezos even, or Amazon. Like they have a memo culture in the company. Like.
0:23:51.6 Sarah Hinkfuss: Yeah, They do.
0:23:51.7 Erik Zhou: Yeah. Well basically they try to write out everything because that's the best way you can actually know what it is that you're talking about through the writing process.
0:24:01.2 Sarah Hinkfuss: Totally.
0:24:02.2 Erik Zhou: You put it in the deck, you're just picking thoughts, but not necessarily thinking them all the way through. Brex actually does that. The last time I saw a deck was maybe for like some marketing materials. But...
0:24:12.3 Sarah Hinkfuss: Right. It's 'cause other people expect it. Yeah totally.
0:24:14.0 Erik Zhou: Yeah. But like internally, when we make decisions, we have to do the whole writeup. And it's expected because that's the only way the user or the reader or the stakeholders can really see the full logic.
0:24:25.6 Sarah Hinkfuss: Exactly. That's why I totally love it. Yeah.
0:24:29.1 Erik Zhou: Yeah. So, okay. So one of the questions that I then have is you're mentioning that you don't need the... And by the way, I know exactly what you're talking about. 'cause at Brex, I won't say how many tabs the model is, but it's a pretty big model. But obviously we have a finance team and we have all the folks that we need to get that together. When you're a series A company, sometimes you're not that many employees still. So, should you be looking for that help on the finance side to get these materials together? Or like maybe they go to their existing investor base because they already closed a series A to help, like what's the tactical process to get even off the ground?
0:25:07.8 Sarah Hinkfuss: Yeah, totally. I've seen all of the above work really well. I would start with what you can already do. And I think even if you don't have a finance background, a model at its core is just logic, right? So it's like if there are these inputs, what are the outputs? And it helps you think about the business and how you... Like what the business looks like over time. Earliest stage of a company, it doesn't need to be more complicated than that as it's later stage. It does. And that's where you could like bring in specialized help to be able to do that. As you think about specialized help, I see people use outsourced CFOs. I see people call on their existing investors. So we do that for our companies who are going from the A, from the C to the A or to A to the B. We help them and partner with them to think about building that first model and what that looks like over time. And then it could also be that you're bringing in that expertise and so you're bringing someone in who maybe worked in finance or worked in investing or has been around venture before and has fulfilled that role and has worked on models, and so they can come in and actually hit the ground running and build that from scratch within the team.
0:26:17.0 Erik Zhou: That makes sense to me. Yeah. If I was a different kind of person and I had a series A company, I didn't have a finance background, I would need help. Certainly. And maybe I get that directly from you, Sarah, if you were already at the cap table. One of the things that I saw during the Zep era, even before that, there's this concept of an operating partner. And some funds will employ them. And I think those people are hired just to help out the portfolio companies with advisor day-to-day operational support. Do you guys do that at Bain? I'm curious what you think about how different funds differentiate themselves. And I think part of it is just to even sell themselves as you want me on your cap table?
0:27:00.4 Sarah Hinkfuss: So we, at BCV, we have less of the operating partner model, but I've seen it work extremely well before. And so it's not to say it's not a good model, and you're exactly right. I think the way that operating partners generally work is you have people who have a particular expertise in a space, and so maybe it's pricing or maybe it's go to market or maybe it's specifically in a domain like vertical software, building new products or whatever. And private equity firms do this really well. So I saw this at KKR in Capstone or at Bain capital private equity, we have operating partners too, and then they can parachute in as you're describing to companies and then partner with the operators there, or even sometimes fulfill a role in the company itself in order to implement whatever is the space that they have an expertise in.
0:27:46.9 Sarah Hinkfuss: And folks like this are usually former operators, or they could also be someone who has a management consulting background and maybe they've developed an expertise in the industry on a certain topic. What we do more generally at Bain Capital Ventures is a platform approach. And we're not the only VC fund to do this as well. Of course, we believe that ours is extremely strong because we focused on particular spaces where our founders have told us that they want support and partnership. And so our team thinks about executive recruiting or recruiting in general as one of the core areas that we deliver value to our portfolio companies. We also help them think about marketing. And so putting together a brand that narrative, having feature pieces, announcements that are really important and partnering with them to make sure they get the visibility that they need. And then also some of the tactical coaching and mentorship that happens for the executive team.
0:28:42.6 Sarah Hinkfuss: And so we have folks who've been in those positions before. We have Leslie and Noah who co-lead our platform team. They have had multiple positions at high growth startups, they've been in the seat, and so they can help provide that support and counsel to our portfolio CEOs as well. And so there are a number of areas that we think about it, but those are just a few of them again, which have come from asking our portfolio companies what are ways that they want support from us, and how do we think about productizing those offerings rather than just having them be bespoke with an operating partner parachuting and providing them.
0:29:18.5 Erik Zhou: And when you look at the operating partner model, do you have a group across all the different funds or do you kind of have specific folks that each fund or like how does that work?
0:29:30.4 Sarah Hinkfuss: Yeah, so at Bain Capital there are different individuals by fund. And so each fund at Bain Capital is its own entity as well, with its own set of LPs and LP agreements and everything. As an aside, we happen to be the largest investors across our funds. And so there's a co-invest, and that's really important because it means that we are all not just culturally tied to each other, but also economically tied to each other, which is part of the collaborative spirit that I think is so unique at Bain Capital. But when it comes to any of the operating partners, those are all fund hired just like the investors are. And then there are some services that fit across the platform. So that's like finance for example or IT, which supports all of the Bain Capital funds.
0:30:15.2 Erik Zhou: So what you just mentioned is very similar to just this notion in the securitization world of having skin in the game.
0:30:22.1 Sarah Hinkfuss: Yeah, exactly.
0:30:24.8 Erik Zhou: And I think as an investor if you're the ones underwriting the investment and you're also putting some money in, then I have a little bit more confidence because you're not just collecting management fees whether [0:30:31.9] ____.
0:30:32.2 Sarah Hinkfuss: Totally. It's your own dollars. I totally agree. Yeah.
0:30:35.9 Erik Zhou: Yeah, 100%. On the topic of operating partners and just how fund, not how funds, but how these companies can mature themselves grow. What about gen AI? How will gen AI change that landscape where certainly if you're in engineering, right, I think people are using copilot, people are able to leverage it to expand their productivity without hiring more people. Can that also be applied to some of these other areas or what do you think about that?
0:31:14.5 Sarah Hinkfuss: So within companies themselves, I think the biggest opportunity that we're seeing today is in enabling professionals to do their work more quickly, more efficiently, and generally increase productivity. And so it's a lot of these back office functions, coding is one of them, but it's also true in sales, right? So when once I have a lead that comes in, how am I enriching that lead with information around who that person is, where they are in their buying cycle, what they're already using today, what are the key things about their family that I find on social that I could include in the email, right? There's all of this stuff that I can do that today is done by people that could actually be leveraged using AI. I could even draft that initial email itself. So I could think about that across enterprise search, across marketing, across compliance, right?
0:31:58.0 Sarah Hinkfuss: Like there are all these different back office functions where we see gen AI being really useful. And then the other dimension I would offer here is it's not just about a copilot feature that you're saying, right? Where you have a human getting a productivity boost, but I'm really excited right now around automation, which are actually agents. And so agents replacing analysts on teams to do work just like an analyst would. So there's a lot more there that's really exciting in the market today. And then separately from how it could be used by companies, there's also how venture firms or investing firms could leverage generative AI as well. And so we're thinking a lot about that. So we already use AI as we think about sourcing for companies. And so looking for signals around great companies, we have a full part of our platform team that helps us with data-driven investing.
0:32:45.6 Sarah Hinkfuss: And we also think about it in the ways that we do our own work. So for example, when I have all of these notes around a company, or I've done all of these customer interviews, how do I compile that into a summary that then makes its way into investment memo, right? What are high leverage ways that I can do my job more efficiently? And also I think it's really interesting to think about bias in our own process and have AI help inform us of where there's quantitative data and where there's qualitative data and where investor judgment comes in.
0:33:15.3 Erik Zhou: With your mention of Gen AI think I had two reactions. The first is if you have gen AI doing all this work, does Sarah Hinkfuss even have a job? Because the gen AI could technically take all the conversations that you would have with prospects investments and do all the summaries and maybe pull in all the market data that you would need on the analysis. Just curious about your thoughts there.
0:33:44.5 Sarah Hinkfuss: Yeah, it's a great question. And I think every moment of technical innovation in history, we've had similar questions like this. So I think it's a really important conversation to have. One way to think about it or an analog is no longer do I go to the barn, milk the cow, take the milk in a bucket, put it into like a churn and churn it to crate butter, right? I'm not doing that anymore, but rather I go to the fridge and like I take butter out of the fridge and that is what I use to make my cake. And I think it's similar here where there are going to be levels of work that are abstracted away and automated, but that doesn't take away the art of cake making. It actually means that we can now do that much more and create that much more beautiful, delicious cakes than we could before because we're not spending all of our time doing the low level labor work that we used to have to do because that's been taken away through AI and automation.
0:34:43.4 Erik Zhou: I think that makes total sense because ultimately, right, the AI is the summation of data that we taught it, and how much inference can it really do beyond that, And there's still the art of looking at all the deliverables or the results and making a judgment, right? Making a recommendation that you yourself can back and has just that element of human logic behind it that perhaps the AI can't get to just quite yet. Of course, Sam Altman and OpenAI may have something different to say years down the road, but that makes sense. Because I'm talking about AGI.
0:35:19.2 Sarah Hinkfuss: But all of it as well, it enables major developments in human history too, right? Like when we don't have to spend as much time doing low level work or menial tasks or labor, that's where the explosion of the arts and science and theology, like that's where those transitions have come from. And so I think it's easier for us in this moment today to focus on what we're losing, but we can't even imagine all the things that we'll be gaining in the future.
0:35:46.0 Erik Zhou: The second thing that I wanted to dig in on this particular topic was if you were to pick across all the different back office functions that you mentioned, are there any particular ones that stand out that you think we'll see the most traction with Gen AI in the call it next two years? I don't wanna say the next six months, but a little bit farther, like medium term, where do you see areas that maybe even my team could across the whole back office, so to speak take advantage of.
0:36:16.7 Sarah Hinkfuss: The area that I would pick for that would actually be coding. And the reason I say that is because there is a way to determine whether or not the code is right. And so the feedback loop is actually tight. And what that means is that you can have AI create code, commit the code into production, and then you can test in the same way as already now we have automated testing, right, of code to see if the code does what it's expected to do. And so as I think about where we're gonna be able to make progress on this automation, it's in areas that have that feedback loop. And that's different than places where in order to know whether or not the AI is right, you need a human to go in and often through painstaking processes determine whether or not it it's correct.
0:37:07.7 Sarah Hinkfuss: That's just gonna take a lot more work at scale to create those types of feedback loops in that type of data to be able to create it. But the second question you asked I think is really important, especially for the audience here, which is how does finance play a role? And I actually think the finance team is in this really important position of helping partner with the rest of the management team to think about priorities and ROI across AI. And so generative AI is this buzzy thing. Every company's using it. The board's asking, what's your roadmap? How do you think about it? But what I hear more often is that there are a lot of pilots, but there are very few things that have successfully been rolled out. And there are a lot of ideas, but very few things have actually made it to the bottom line impact. And so I think the finance team is in the position of actually holding business leaders accountable that if they're paying for this new gen AI product, what actually is it doing for the bottom line? How is it reducing costs or how is it increasing revenue? And if it's not doing that, then it's not something that they should be investing in today. And it's worth experimenting to find the next thing that actually will deliver that to the company.
0:38:16.8 Erik Zhou: Being on the finance team, obviously I love growth. The other part to the equation is I love stability, I love predictability.
0:38:27.7 Sarah Hinkfuss: Yes. So do markets.
0:38:30.2 Erik Zhou: When I think about a gen AI investment, and we've looked at a bunch of them one of the things that I always have to consider is, okay, if I do this, how risky is it? And what if it doesn't work? I've spent all this money, it doesn't actually increase productivity. It's not like I try something out with this gen AI and I can let go or of these other costs that I have for the existing process, I have to run both concurrently. And so that's just one of the things like having that risk is pretty difficult and especially if you do multiple of them because now you have compounding bets and what if they all don't hit? And so it's just one of the things as a finance mind, that's what I'm thinking about.
0:39:11.1 Sarah Hinkfuss: But I think that's the reason why there's so much value in trying things out in a limited subset of the business. And now this is going back to what I did back at EPT, right? That it was all experimentation. So the only way you know if the generalized result will actually produce outcomes for your company is to try it and see. And if it does, if you do it with one call center or maybe a few agents and you actually see that benefit, then expand it and do it more and continue measuring and continue holding the feet to the fire of that manager and saying are you actually seeing the benefit here? And if you are, then you have the proof that it's worth that investment. But if not, you can actually scale it back and roll it back.
0:39:53.5 Erik Zhou: A 100%. We are nearing the end of the episode. And there is this fun little segment that I do with all the guests. Now they're mostly accountants and CFOs and finance folks, but, I don't think they're an exception in terms of this section. And so do you have a favorite finance joke or CFO joke or just maybe a generally funny story that you can share with the audience?
0:40:21.2 Sarah Hinkfuss: I'll try one joke on you and then I'll tell you a more personal story as well to close it out. So my joke is, why did the controller take up meditation? She wanted to find her inner balance. Thank you for laughing Erik. I appreciate it.
0:40:43.9 Sarah Hinkfuss: I like that. I do like... I love those. I mean, come on. Like.
0:40:47.5 Erik Zhou: I know they're corny, so they're good.
0:40:49.5 Sarah Hinkfuss: No, it's very good.
0:40:51.7 Erik Zhou: Okay. And then maybe my final story, which is on a personal note, so you know this, but I have a three-year-old son and then an eight month old daughter. And one of my favorite stories of my son having a working mom who's always on calls and stuff on the weekend and everything is that one day I came into my office and he was on the floor under my desk crawling around, like looking for something and I have a bunch of cords and stuff hanging off. So I was really worried that he was gonna run into one of them. And I said, KJ what are you looking for? Like why are you here? What are you doing? Like there are no toys, there's nothing interesting. And he said, mommy, I need to find EBITDA. He was looking for EBITDA and I said, KJ, what do you mean EBITDA? What are you looking for? EBITDA? He said, you never know where EBITDA is. So I think revealing the venture asset class that I spend time in, he must have heard enough conversations, the lack of EBITDA and so he went searching for it to help mommy.
0:41:51.3 Sarah Hinkfuss: Yeah, I mean for these stage of investments, I think finding the EBITDA might be the holy grail in some ways.
0:42:00.3 Erik Zhou: Holy grail. Or maybe an indication that there's a lack of optimization and they should grow faster. But, depending on stage.
0:42:08.1 Sarah Hinkfuss: Sarah, it has been my honor to have you on the show. Thank you so much for your insights and all the advice that you gave during the episode. Look forward to keeping in touch with you and I don't know if you have anything else to add to close it out.
0:42:22.6 Erik Zhou: Yeah. Well thanks so much for having me. And I would just invite folks as they have questions around going from that series A to the series B or what metrics look like in the market today, feel free to reach out. I would love to continue the conversation and be a help. And if I can't be happy to recommend someone else who I think would be a good fit.
0:42:40.2 Sarah Hinkfuss: Thank you Sarah.
0:42:42.8 Speaker 2: Thanks for tuning in to Controllers Classified presented by Brex. Brex is an AI powered spend platform with global corporate cards, expense management reimbursements and travel. Visit brex.com and follow Brex on social to see how they can take your accounting game and your company, to new heights.