Fat profits and innovative technology drive approximately $350 million of venture investment into the sector during 2021.
After years of soaring growth and hefty profits, the discrete expert network industry is suddenly one of the hottest sectors for venture capital investment. Rapid industry growth, fat profit margins and a handful of noteworthy liquidity events are enabling a number of technology-focused upstarts to amass significant war chests.
What are expert networks?
Expert networks facilitate deep and rapid research into a company, product or market by connecting their clients – mostly investment managers and management consulting firms – to ‘experts’ with significant and current knowledge of the research subject. Expert network consulting is frequently used to shape investment decisions, conduct due diligence or set strategy recommendations.
The experts are usually former employees, customers, competitors or key influencers (such as doctors or former government officials) of the research topic. The typical consulting project is a one hour call between the expert and the client, where the client will want to rapidly download the facts on the ground from people who know the company best.
Many firms charge clients $1,000 or more to facilitate these consulting calls, with experts often earning hourly rates that can regularly exceed $500. Many firms also regularly coordinate paid business surveys for clients. (If you’ve spent much time on LinkedIn, you’ve probably been approached to participate in a paid consulting opportunity with an expert network company.)
The expert network industry was born in the late 90’s, with pioneers GLG and Primary Insights taking advantage of an SEC crackdown on the sell-side research practices of invest banks, following a number of scandals. The firms grew rapidly by directly connecting investors with executives with firsthand knowledge of the companies that they were considering investing in. However, the young expert networks soon found themselves at the center of several major insider trading trials and making unwanted headlines of their own.
While these high-profile cases seemed likely to kill off the industry, it instead responded by building large compliance teams tasked with implementing more rigorous compliance policies and monitoring for clients. Compliance became a feature to sell to clients (and help justify sky-high pricing).
The industry returned to steep growth over the next decade, with over 100 new firms sprouting around the world. It remained mostly out of the public eye, with a just a handful of early stage venture capital investments or late stage private equity deals — until the dealmaking floodgates opened at the start of this year:
A dozen firms reported approximately $350 million in venture capital investment this year:
- Two firms completed major fundraising rounds fuel further rapid expansion, with Berlin-based Atheneum Partners taking in $150 million and Chicago’s Tegus raising $90 million.
- A number of technology-focused firms, looking to replace armies of young recruiters with artificial intelligence-powered software, brought in additional capital, including proSapient ($10 million), NewtonX ($32 million), techspert.io ($12 million), and Enquire AI ($5.5 million).
- Investment activity in international firms was noteworthy, with Singapore-based Lynk taking in $29 million, Spain’s Arbolus raising $6 million, and Sweden’s InexOne receiving $3 million. (proSapient and techspert.io are also headquartered in Europe.)
So what’s driving the sharp increase in venture capital dealmaking?
Most of the capital investment went to firms developing technology to better identify and source new experts and streamline the process of matching experts to client’s project criteria. This should enable firms to scale without hiring armies of recent college grads to endlessly scour LinkedIn for qualified profiles. Several firms are also shifting towards self-service marketplaces for clients to select and staff experts on their projects at a fraction of the cost of traditional expert networks.
While a new firm seems to now be born every week – many of them touting more competitive pricing – the industry remains enormously profitable. Many firms still charge $1,000 per hour or more to speak with an expert. GLG, the largest firm in the industry, revealed eye-popping 73% gross margins in its recent S-1 filing.
The expert network industry reached $1.9 billion in revenue in 2021. It has recorded double digit growth annually since 2015, with growth accelerating to 20% during 2021. Two expert networks made the top 20 list of the highest paid investment research providers for the first time this year. Meanwhile, a number of firms continue to make inroads into the corporate strategy market, which dwarfs the size of the industry’s traditional investment manager and management consultant customer bases.
While most firms in the industry have long been closely held, several firms established a path to liquidity in 2021. GLG recently filed for an IPO, where it expects to raise $100 million, and Capvision has also filed to go public on the Hong Kong stock exchange in early 2022. VisasQ debuted on the Tokyo Stock Exchange in 2020 and recently acquired industry stalwart Coleman Research for $102 million, perhaps kicking off a long awaited bout of industry consolidation.