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What is the best way to evaluate cash flow in a VC portfolio?

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Cash flow is a key indicator of the financial health and performance of any business, but especially for venture capital (VC) portfolio companies. VC investors need to evaluate cash flow in their portfolio to assess the viability, scalability, and exit potential of their startups, as well as to plan their own capital allocation and fundraising strategies. In this article, you will learn what is the best way to evaluate cash flow in a VC portfolio, based on four main aspects: cash burn, cash runway, cash conversion cycle, and cash return.

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Theodoros Krintas

Founder & CEO, Koubaras Ltd
Daniel Pi

Managing Director at Coterie Capital
Wen Wen

Early-Stage B2B SaaS VC | Female Entrepreneur | MBA at IE Business School

1 Cash burn

Cash burn is the amount of money that a startup spends each month to operate and grow its business. It is calculated by subtracting the monthly revenue from the monthly expenses. Cash burn is a measure of how efficiently a startup is using its capital and how fast it is growing. A high cash burn rate may indicate a high growth potential, but also a high risk of running out of money. A low cash burn rate may indicate a more sustainable business model, but also a slower growth rate. VC investors need to monitor the cash burn rate of their portfolio companies and compare it with their growth metrics, such as revenue, customer acquisition, and market share.

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Theodoros Krintas

Founder & CEO, Koubaras Ltd
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Cash burn rate must always relate to time. Cash burn means needs for a new capital injection and since in most cases the new SCI takes place at a higher offering price than the previous, cash burning period as well as achieving agreed KPIs are crucial. In all other cases we base our investment on the famous "Greater fool" hypothesis.

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Anuraag Guptaa

Board Member | Mentor-Investor | President & CEO | Listed Unicorn, Pre-IPO Soonicorns | Harvard Business School | MBA-NYU Stern, LSE, HEC | Author Igniting Minds with a Million Views | Incubating CEOs Gurukul
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Evaluating cash flow in a VC portfolio requires a comprehensive approach. Firstly, assess the cash flow of each portfolio company individually, considering their revenue streams, expenses, and burn rate. Calculate the net cash burn rate to understand how quickly a company is using its funds. Analyze cash flow projections to estimate future capital needs and runway. Consider the timing of funding rounds and the impact on cash flow. Diversify the portfolio to manage risk and balance cash flow dynamics. Regularly review and update cash flow assessments, especially in early-stage startups. By adopting a thorough and dynamic evaluation process, VC investors can make informed decisions to optimize their portfolio's cash flow performance.

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Alain D.

CFO at Soliyarn
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Cash runway is a very important number especially for early stage companies with no revenue as of yet. It’s important to have incredible working capital management to extend the runway as long as possible. Any revenue coming in is gravy and extends the runway. The name of the game is surviving long enough to prove out a product in your market and gain traction.

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2 Cash runway

Cash runway is the amount of time that a startup can continue to operate with its current cash balance and cash burn rate. It is calculated by dividing the cash balance by the cash burn rate. Cash runway is a measure of how long a startup can survive before it needs to raise more money or become profitable. A short cash runway may indicate a high urgency to raise funds or cut costs. A long cash runway may indicate a more comfortable financial position, but also a possible underutilization of capital. VC investors need to track the cash runway of their portfolio companies and help them plan their fundraising milestones and timelines.

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Wen Wen

Early-Stage B2B SaaS VC | Female Entrepreneur | MBA at IE Business School
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Founders and VCs need to approach the cash runway with meticulous precision. Given the extended due diligence timelines inherent in the current fundraising landscape, judicious allocation of resources for this process is imperative. For the next fundraising, aim for a cash runway of at least 12 months (preferably 18). This mandates a thorough projection of anticipated expenses aligned with forthcoming milestones. Such deliberate planning ensures that the cash injection not only sustains ongoing operations but also propels the startup toward its strategic objectives. This strategic foresight minimizes the exigency for hastily securing additional funds, thereby fostering a trajectory of sustained and well-managed financial viability.

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3 Cash conversion cycle

Cash conversion cycle is the amount of time that it takes for a startup to turn its inventory and accounts receivable into cash. It is calculated by adding the days inventory outstanding and the days sales outstanding, and subtracting the days payables outstanding. Cash conversion cycle is a measure of how effectively a startup is managing its working capital and cash flow. A short cash conversion cycle may indicate a high liquidity and a low dependency on external financing. A long cash conversion cycle may indicate a low liquidity and a high dependency on external financing. VC investors need to analyze the cash conversion cycle of their portfolio companies and help them optimize their working capital management and cash flow forecasting.

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Daniel Pi

Managing Director at Coterie Capital
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Working capital management is critical for any business but especially so for early stage companies. Early stage companies are rightly focussed on revenue growth, however, if they don’t closely monitor their cash cycle, they can unknowingly run into funding issues. It’s probably not high on a Founder’s agenda but should aim to spend more time on cash or alternatively work closely with the CFO to balance growth and cash.

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4 Cash return

Cash return is the amount of money that a VC investor receives from their portfolio companies as a result of an exit event, such as an acquisition or an IPO. It is calculated by multiplying the exit valuation by the ownership percentage, and subtracting the invested capital. Cash return is a measure of how profitable a VC investment is and how well it aligns with the VC's target return and exit strategy. A high cash return may indicate a successful exit and a high return on investment. A low cash return may indicate a failed exit or a low return on investment. VC investors need to evaluate the cash return of their portfolio companies and compare it with their initial expectations and goals.

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5 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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What is the best way to evaluate cash flow in a VC portfolio?

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1 Cash burn

2 Cash runway

3 Cash conversion cycle

4 Cash return

5 Here’s what else to consider

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What is the best way to evaluate cash flow in a VC portfolio?

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1 Cash burn

2 Cash runway

3 Cash conversion cycle

4 Cash return

5 Here’s what else to consider

Venture Capital

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