Cameron D’Ambrosi: [00:00:00] In a world where bank account opening or loan applications can be completed through an app. Private fund investing has remained stuck on PDFs, hard copy contracts, and wet ink signatures in just a few minutes. This week on State of Identity, I’m joined by the CEO and co-founder of a platform bringing user-centric digital onboarding flows to both emerging and established fund managers. It’s an episode you won’t want to miss. Stay with us. Welcome, everyone, to the State of Identity. I’m your host, Cameron Ambrosi. Tim Flannery, co-founder and CEO of Passthrough is joining me this week. Tim, welcome to the podcast. [00:00:39][39.0]

Tim Flannery: [00:00:40] Thank you so much for having me on. 

Cameron D’Ambrosi: [00:00:42] So excited to have you. You know, I’ve had the pleasure of meeting you and the Passthrough team a few different times, and huge fan of the approach you’re taking, and I think it’s very much in line with the future we see here at Liminal for the digital identity space. But before we get into what you’ve built with Passthrough and why it is exciting, you know, you have a pretty interesting background and throughline into how you got pulled into this digital identity space. So could you illuminate for our audience a little bit about that career journey you had en route to founding a digital identity company? [00:01:21][38.8]

Tim Flannery: [00:01:21] Yeah. So I started my career out of college in 2008, and it was the global financial crisis and I wanted to work at a bank somewhere. And so literally, the only job I could get was in a wire room, wiring money back and forth between investors in private equity funds directly to those funds. That was my first job. Not a lot of fun. And so I spent five years at Jp morgan there, and then I moved into an analyst role, and then I moved into our asset liability management desk in a variety of different things. But it was my first experience with exposure to the alternative investment space. And so I’d left it behind. And I thought after that I would never touch anything to do with the back office of venture funds or private equity funds ever again. Yet here I am today. And so I left that and raised a small venture fund with some other people. And so we went out, we built a portfolio of companies. y went to work at one of our companies, and I ran operations there; then I decided to grab my MBA, got my MBA, and then when I graduated, I decided to take a sales job at Carta. And so Carta, this seven-and-a-half billion dollar fintech today was at the time a couple hundred million dollars, a couple of hundred people with a budding investor services team, which was all these things that you could sell and venture funds. And so I took a sales job there as the only person in my class took a sales job. But given my background in operations and strategy, taking a sales job would be effective if I was going to run a business one day. I spent two and a half years there and when I left I was the head of Go to Market for the Investor Services Group. And then my co-founders, Alex and Ben, had already left Carta about six months before I did and they started Passthrough. Alex left Google, Ben left to start the company and I initially said I wasn’t too interested in joining. I didn’t understand why it was a venture-backed business. And then they asked me a couple more times and eventually convinced me that it was. And so we went out and with success we successfully raised a couple of rounds of capital. We just announced our series A a couple of weeks back, and we built a business with about 28 people today serving 250 or so customers from and on the back of this simple workflow tool that we’ve built to make investing in funds easy. There’s also an exciting, complex financial identity program that we’re building. So that’s how I got there. [00:03:55][153.0]

Cameron D’Ambrosi: [00:03:55] As an entry point into what you built with Passthrough at a 15,000-foot level. You know you want to sand those rough edges of the onboarding process. When you are an investor looking to deploy capital and historically have had to print out reams of paper, fill out things in triplicate, in many cases by hand. And more critically, you know, get asked questions you may not understand and have difficulty navigating through. And that creates a lot of back and forth and friction. And there hasn’t been an easy way to streamline that process and bring that all into a single digital workflow. Would you say that’s a fair, you know, encapsulation of the value proposition you built with Passthrough? [00:04:47][51.5]

Tim Flannery: [00:04:48] That’s fair. We’ve seen several providers that are vertically integrated solutions today, be they fund administrators, be they law firms, or they might be investor portals, try to figure out how we do investor onboarding. Still, everyone’s done it in a silo. And so sometimes that means tradeoffs. And so those tradeoffs often result in poor investor experiences. And so our idea, instead of this being a vertically integrated industry, should be a horizontally integrated industry. And so, we get to solve investor onboarding with a horizontal approach. And that means that we can plug and play into all these different places. So yeah, that’s the idea. It’s annoying for people to be able to invest in the funds because there’s a lot of different things that they do. And so if we can make it very simple, regardless of the tools that they have or the tools that their fund managers use, then that’s a win. [00:05:41][52.8]

Cameron D’Ambrosi: [00:05:42] So, look, we’re fond of saying, you know, digital identity is not a what; it’s a how. Right. People are interested in something other than having a digital identity for identity’s sake. They want to do things right. They want to remit money. They want to open accounts. They want to invest capital straightforwardly. Your platform excites me because you’re a powerful embodiment of that notion. From that perspective, you know, how did you think about that? Go to market motion and bringing platforms, you know, into the fold and selling them on the value proposition of Passthrough? Was that a difficult conversation? You know, dear buyers, immediately, you know, light up when you describe their pain points and how your platform can solve them. What has it been like kind of going out into the market from that sales perspective? [00:06:34][51.8]

Tim Flannery: [00:06:35] So I imagine most of the listeners understand the pain of investing into a fund, but maybe it’s helpful if I give a couple of quick minutes about just like how painful it is, because ultimately that’s the thing that when we’re going to market we are selling to people is how we can improve that process. So when you want to invest in a fund, the fund manager will hand you a hundred-page or 200-page document called a subscription document. And so unlike a public stock where you can just pull up Robinhood or Schwab or whatever and enter in a couple of things, you can then own whatever you want. You have to do this every single time you invest. And so these documents are nonstandard. Every single fund is different based on its jurisdiction, based on the lawyers that they’re using. And not every question applies to you. So even if you’re a sophisticated investor, you might see something for the first time and not know how to figure it out. And all of this results in more billable hours longer time to close. And people can get they can get moving as fast as they want to. And it’s also the first touchpoint you have with an investor officially in your relationship is this miserable experience where you go back and forth, and it takes you days or weeks to fill it out. And so the first thing we did was we built an electronic subscription document offering so that people, instead of having to be faced with this 100-page, 200-page document with 100 or 200 questions, it looks a lot like TurboTax. We built it custom to the underlying agreement, and they get one question on time, all the questions that are relevant to them. And then the other thing we built and launched recently was to know your customer and anti-money laundering. So taking that similar set of information, appending more information to it, running it against the sanctions list to make sure that you understand the owners of these funds and that you’re not admitting people into your fund who might be trying to launder money. Anyways, that’s setting the table. And so when we go to our prospects and say, Hey, how have you been doing investor onboarding in the past? Typically, they’ll tell they’ve been in DocuSign or PDF and share these things. And so what happens is investors fill them out incorrectly, and you go through revision after revision after revision, and you have one team of people you’re working with. It gets lost in email, and nobody knows the correct version of it, etc., etc. And so we can walk them through some easy pain points. The first is all of the unstructured data. So you already have information in your CRM. You can’t use it. And then the second is you need to understand where everybody is in the process at your investors, how to track them towards the close or your service providers or internal teams so that everybody’s talking about the same thing. And then, on the investor side, it’s a simple experience for them to fill it out. But especially for repeat managers, they care about it’s not just the first investment; it’s the second investment, the third investment. And so how can you take it? This thing that takes days or weeks takes 20 minutes for the first time and Passthrough. But you can do it in about 2 minutes the second time through because what we do on the back end is we just create this financial profile for these investors to reuse across investments. And so when we’re talking to the way we get to meet fund managers is because the first couple of fund managers that we told we got to meet their investors and we got to meet their partners, be they law firms or fund diamonds or whatever it is. And even though those teams aren’t our customers, they have a  good experience. And so they refer first more business. And so it’s viral acquisition. About 80% of our business has come in through a partner, client, or customer referral. It turns out everybody just hates subscription documents, and we have a pretty simple way to do it. And so it’s focused on how we just execute against all the deals that come inbound. That’s our main way of doing it. And the things that we end up selling them are, you know, if you’re going out and raising a fund this year. You’re not doing it again for a couple of years; let’s just show you how to waste the least amount of time possible so that you can just get documents that are in good order back as quickly as you can, lower your costs, let you get focus back on running your fund if you’re somebody who’s in the market all the time. Well, let’s look at how you have four different systems that all need to be able to talk to each other. And you need to solve the gap between marketing and investor is closed one in Salesforce and onboarding them into your fund. And then every other system that comes into play, too. And so it’s different, it’s a different sales motion depending on which of those customers we’re talking to. [00:10:56][261.4]

Cameron D’Ambrosi: [00:10:58] So from that perspective, it seems like there’s a  fantastic opportunity for you to get a flywheel spinning right, not just your value proposition being, you know, we can help lift this thing that you are not good at as a fund, right. Which is the administration of hoop jumping. Right. Your value proposition is I can take your capital, I’m going to give you a strong return on investment and you don’t want the people you have invested with to be focused on these administrative tasks instead of making you more money. But there’s also a tremendous opportunity for federation here in terms of, you know, unlocking value for repeat investors, of which I presume there are many you know, if you’re a person of means that that can cut $1,000,000 check, probably you’re going to be cutting more than one. You know, what do you think the opportunity is for beginning to get kind of that flywheel spinning federating these identities kind of across investors and potentially unlocking value in the sense that, you know, if you are a fund, you can maybe unlock access to investors that Passthrough has already seen. [00:12:10][72.0]

Tim Flannery: [00:12:11] Yeah. So there are two parts to this. Part one is I’m a fund manager; I’ve raised fund one, I’ve raised SPV one, I’ve raised whatever, and I’m going to go raise a subsequent fund because I have multiple strategies because we raise every two or three years. After all, we raise SPV all the time. And so what we do is it’s straightforward. You tend to have the same subscription documents from one to the next. And so we can take all that information and just it’s simple. Somebody says, What’s the investor’s name? We ask, What’s the investor’s name again? And we can just provide the exact same information back. We become more complex. I’m an investor in your fund and somebody else’s fund and one of your funds uses. GOODWYN And the other fund use reps and GRE for counsel. And so they  very different subscription documents. It’s still based on the same underlying law. But the way that Ropes thinks about it differs from how the good one thinks about it. And so they ask different questions to get the same answers. So instead of getting the question, what’s the investor’s name twice, I might get the question what’s the investor’s name? And then I’ll get another question what’s the subscriber’s name? And so the hard thing about investor onboarding is everybody asks different questions, but they’re all looking for the same thing. And so how can you make sure that you identify that the answer is a legal entity and be able to move it back and forth? And so what we’ve done is we’ve asked 36,000 questions to our investors today. And so those 36,000 questions boil down to about 800 different data points. And so 218 of those data points are life in our software today where this example of a legal entity, somebody who answered a legal entity question in one fund, that information is good for a legal entity, question another fund, even if it’s asking differently. And so gradually over time, you get to build up more of these data points in a more robust investor profile. To that end, investors are only answering net new questions. And so that way, it’s even faster for you to go raise your first, second, and third funds on Passthrough. Than any other way you could do it. It’s it’s a it’s a simple model for them to have, to your point, a federated profile that they can reuse at their own discretion across any investment. And that means that it’s a consolidating space where ultimately there’s going to be one set of information that people can reuse across anything they want to do in the context of subscription documents and other contexts. And so that’s why we launched KYC Ammo because that’s the next obvious context of here’s pieces of information that we need to use to screen against fact lists and adverse media and politically exposed persons. But also need to collect some additional information so it’s reusable across jurisdictions, across whatever it might be. How has that happened. [00:14:42][150.5]

Cameron D’Ambrosi: [00:14:42] Journey been in terms of the regulatory elements? Obviously, this is a highly regulated space with compliance considerations. How has that interface been with chief compliance officers and the regulatory agencies here in the U.S.? Has the response been strong? Are you guys getting some pushback because you’re rocking the boat? You know, maybe somewhat naively, I hope people are excited about the possibilities that platforms like yours offer. It leads to becoming more compliant, getting a stronger bead on who these identities are from an AML perspective and being additive in value from that compliance perspective. But have you run into any unexpected brick walls when it comes to folks thinking, Whoa, this isn’t how we’ve done it? And we’re not sure that this is going to be able to meet the compliance needs that we have fully. [00:15:40][58.5]

Tim Flannery: [00:15:41] A few hurdles you will generally run into are GDPR.  And so making sure that everybody in Europe or a citizen of a European country or the UK has ownership of their information and what to do with it. And so Luxembourg, for instance, has some more strict requirements; it feels like in everything but GDPR and KYC, how these things all tied together. So that’s number one. We’re based in the U.S.; we’re not based over there. What do we do with it? The second thing concerns KYC, AML, and the underlying requirement. So the way that we’ve built the software is flexible. So if you’re in Caymans and need to collect information about owners, beneficial owners that own up to 10% of an entity as opposed to being in Delaware, and you need to collect beneficial ownership information of up to 25%. Great. Or workflow can do that. And I should be clear about the problems we see in KYC and how we attack it. So we attack it in the case of onboarding investors into funds rather than I’m any old fintech that needs to be able to go KYC potential consumers coming onto my product. So what we do is the greatest challenge in onboarding investors into private funds. Every type of investor that comes in has different requirements for what they need to be able to provide. So if I’m an individual, you just need my license and my passport; you need my proof of address. If I’m trustful, then you need the trust documents. You need a list of the trustees, grantors, and beneficiaries. Based on that, I must perform additional diligence on all the underlying investors in your trust. And so if another of those is a trust, I need to collect information on that trust. And another one of them is an LLC. I need to continue doing that iteratively. And so, in each jurisdiction, there are different rules for what you need to be able to collect. And so, we must ensure that we set up the rules correctly and stay on top of them. And so, yeah, it’s a challenge because the world is complex, but frankly, every additional ounce of complexity is kind of good for us because we can abstract away.

The investors are just focused on, okay, I’ve already provided information, my information is still good or not, and I need to provide some small additional information. We solved it with software, but we also solved it with people. So we ended up hiring Julius Living, Kamiya. So Julius was the chief legal and compliance officer at Wealthfront and Carta, and then he was the chief compliance officer at JPMorgan. And he ran a whole division at the SEC that was focused on this. So it’s a combination of all of the software and having the right people so that you can stay on top of it. But if you’re not in, how can you be a good solution for people in this place? And you should expect pushback as it is like you still have to undergo some intense vendor diligence, but that’s to be expected. [00:18:31][169.3]

Cameron D’Ambrosi: [00:18:32] So Tim, as someone who’s at the proverbial ground zero of this intersectionality between capital markets and digital identity, I would love to get your thoughts on the shape of the space to come. You know, where do you see these trade winds blowing and, you know, how are you hoping to hoist your sales to capture them? [00:18:50][18.8]

Tim Flannery: [00:18:51] So the big thing is that alternative investments are finally going mainstream, and they’re going to retail. And so there’s this broad trend of financial products that were always available to the few becoming available to the many. I used to have to call my stockbroker to place a trade. Now I can pull up something on my phone to buy or sell stock trade derivatives. I can have automatic portfolio rebalancing. I have low-cost ETFs to be able to buy whatever baskets of securities I want. And so we think that the same thing is happening in alternatives. The alternatives were incredibly niche back in the 1980s. That changed when David Swensen stepped in as Yale’s CIO in their endowment. And so Swenson thought that the world was massively under-allocated to alternatives, and Yale was part of that too. And so he started rebalancing the portfolio so that they would have a large exposure to private equity. So when he joined in 1985, they were a $1,000,000,000 endowment. Today it’s a $42 billion endowment. It’s about 11% annualized returns. And so this model that he built, the Yale model, also called the endowment model, was adopted by all of these other endowments and then by pension plans, family offices, and other long-term investors. And so there’s been a lot of growth in the alternative space. So the entire venture space was less than $50 billion in 1999. Today, Andreessen Horowitz manages over $50 billion by itself. According to frequent, the asset, the overall asset class, and the overall alternative space were $15 trillion at the end of 2021. And so there’s been this fantastic growth in it. And this is before we’ve even gotten to retail. And we’re hearing it from prospects, we’re hearing it from customers. So one bank we talked to processed 50,000 subscription documents last year, double what it was two years ago. They expect it to double again in the next two years. And then whether we’re talking to publicly traded asset managers or smaller private equity funds, everybody wants to bring in retail. There’s demand for retail both by the retail investor. And also by the fund managers. And so that’s one avenue. The other avenue to solve it is by people building the space. So we had a front-row seat to this where we got to participate. It’s not just a car, it’s Angeles and its moon fare, and we fund it and its figure and allocations and its alternative and its capital, and it is the case. So everybody’s coming and building in the space to take advantage of it. And so with that, I think you’ll see regulatory changes to enable this as it is. Icahn is already on the floor of Congress today, and they’re seeking to increase the number of LPs in a venture fund. Partners Group successfully lobbied the Department of Labor to allow IRAs to invest in alternative assets. And then we’ve seen all sorts of other things around the changes of investor accreditation and definitions and stuff like that. So there’s more access to other people. And so that means there will be changes in technology, too. And so right now, all of these different spaces have verticalized solutions, and there’s not going to be any one winner. And that means the data is very siloed. And so that data needs to be able to move from one provider to the next so people can have a window on. And what is it worth across everything? And so, if you can’t standardize the processes, what you need to do on the back end is normalize the data. And so that’s exactly our play, right? By normalizing investor data, we think you can ensure that information works across everything else. But it also means not just the data moving back and forth but great consumer experiences. The software I first saw in 2008 is very similar to the software still out there today in 2023. And so you should expect a lot of that at one of our strategies. And I think one of the things you’ll see from us in the next couple of months is Passthrough as embedded software. So all these people can solve all the different ways to bring investors into the space, but they shouldn’t have to solve investor onboarding. And so, I think the big thing that’s coming is that this thing that was available only to large, sophisticated asset managers and institutional investors will now be available for retail. [00:22:45][233.5]

Cameron D’Ambrosi: [00:22:47] I love it. And that clocks with some of the broader trends we’re seeing. Right. I’m fond of referring to the rising tide of consumer experience that lifts all ships. And that’s a trend we’re going to continue to see. Platforms like Apple make it hard to provide a bad user experience. It doesn’t matter what industry vertical you’re in. You know, you could be paying your taxes. You could be looking to open a bank account, a credit card, or any kind of transaction. There is one as a consumer; you get a taste of, you know, a best-in-class user experience. It’s hard to go back, even more so for these very high-value types of transactions. So you’re spot on. And I think this is, you know, the future is bright for any sort of platform that can bring this consumer-grade experience to these, you know, previously more frustrating use cases, with user interfaces straight out of the 1970s. To your earlier point, to bring us on home what I like to call shameless plug alert for those folks who are listening, who are very interested in getting involved with Passthrough, learning more about the platform, reaching out to the EU to discuss how they can become customers, what is the best place for them to go. [00:24:19][92.2]

Tim Flannery: [00:24:20] Yeah, if you’re interested in making the onboarding experience something painful and to a competitive advantage, then shoot me an email. Tim@Passthrough.com. You can learn more about Passthrough, and if you’re interested in joining the team, there should be an email to say we have our jobs up on the website, but we are growing, and we’d love to have you join us. [00:24:38][17.6]

Cameron D’Ambrosi: [00:24:39] Amazing, Tim. Thank you so much for your time. I greatly appreciate it.

I look forward to having you back to check progress and learn more about what you see in the space. You guys are playing in an exciting area within digital identity, one that I think is poised for tremendous growth. [00:24:57][17.9]

Tim Flannery: [00:24:58] Thanks. This has been awesome. [00:24:58][0.0]