As a venture capitalist, you want to see your portfolio companies grow and succeed. But growth requires cash, and cash can be scarce or unpredictable in the startup world. How can you help your portfolio companies achieve positive cash flow, or the ability to generate more cash than they spend? Here are some best practices to follow.
One of the most important ways to ensure positive cash flow is to monitor it regularly. You can use tools like cash flow statements, projections, and dashboards to track how much cash your portfolio companies have, where it comes from, and where it goes. You can also help them set realistic cash flow goals and benchmarks, and identify potential gaps or risks. By keeping a close eye on cash flow, you can spot problems early and take corrective actions.
Something that I've found helpful in monitoring cash flow is having a sensitivity analysis in the model that tracks the best, worst, and actual case scenarios. By determining several cases, when something good or bad happens, it'll be easier to explain, and create adjustments when something happens. Although you can never really ensure positive cash flows as things will inevitably happen out of a founders control, by creating several scenarios before they happen, you can forecast and track any scenario more efficiently.
It's always about planning and having a worst-case scenario planning. If you only have a short runway left, you probably won't be able to prolong this in a good and fair value. Get funding with good conditions when you're in a power position and plan ahead with an upside and downside scenario. Some platforms like the Gilion platform come in handy to monitor cash flow and other metrics over a 5-year period. You can set different scenarios and understand how they will impact your business and cash flow. It's better to prevent (predict) than to react (last minute).
Monitoring cash flow regularly will certainly help you stay up-to-date on your portfolio company’s cash flow and give you an earlier warning of when the cash flow decreases or flips negative - but monitoring doesn’t in and of itself help you ensure you can keep it positive. You must be prepared with actual ideas about how to right the course if adverse changes in cash flow occur, such as ways to increase revenues, decrease expenses or raise funds from outside sources.
Ensuring portfolio companies maintain positive cash flow starts with regular monitoring. It's like keeping an eye on the fuel gauge during a long drive; you need to know when to refuel. From my experience, setting up a routine to review cash flow statements helps identify trends, anticipate potential shortfalls, and make informed decisions early. This proactive approach allows for timely interventions, whether it's adjusting expenses, optimizing operations, or identifying opportunities for revenue enhancement. Regular monitoring not only prevents cash crunches but also supports strategic planning for sustainable growth. It's a critical habit for financial health and operational success.
Another way to ensure positive cash flow is to optimize both revenue and expenses. You can help your portfolio companies increase their revenue by finding new customers, expanding into new markets, upselling or cross-selling existing customers, or launching new products or services. You can also help them reduce their expenses by negotiating better deals with suppliers, cutting unnecessary costs, or streamlining their operations. By balancing revenue and expenses, you can help your portfolio companies improve their profitability and cash flow.
Ensuring portfolio companies maintain positive cash flow crucially involves optimizing revenue and expenses. It's akin to fine-tuning an engine for peak performance; every part needs to work efficiently. From my experience, this means scrutinizing every revenue stream to maximize its potential while critically evaluating expenses to eliminate inefficiencies. Sometimes, it's about renegotiating contracts, streamlining operations, or innovating product offerings to enhance value. Prioritizing high-margin products or services and cutting down on non-essential spending can dramatically improve cash flow. It's a balancing act that requires constant attention and strategic decision-making to keep the financial health of the company robust.
Working capital is the difference between current assets and current liabilities. It represents the amount of cash your portfolio companies have available to run their day-to-day operations. You can help your portfolio companies manage their working capital by improving their inventory management, accounts receivable, and accounts payable. You can help them optimize their inventory levels, collect payments faster, and pay bills on time. By managing working capital, you can help your portfolio companies free up cash and avoid liquidity issues.
Sometimes, your portfolio companies may need external funding to boost their cash flow. This could be in the form of debt, equity, or grants. You can help your portfolio companies seek external funding by connecting them with potential lenders, investors, or donors, and preparing them for pitches and due diligence. You can also help them evaluate the terms and conditions of different funding options, and choose the ones that best suit their needs and goals. By seeking external funding, you can help your portfolio companies overcome cash flow challenges and pursue growth opportunities.
Finally, one of the best ways to ensure positive cash flow is to educate and train your portfolio companies' founders and teams on cash flow management. You can provide them with resources, tools, and guidance on how to plan, monitor, and improve their cash flow. You can also share best practices, case studies, and lessons learned from other successful startups. By educating and training your portfolio companies, you can help them develop the skills and mindset to manage their cash flow effectively and efficiently.
1. Make sure someone on the founder team is a rainmaker 2. Make sure someone on the founder team is annoyingly frugal 3. Make sure someone on the founder team can personally execute on the technical side of product development (ie write the code) In the perfect world, one person, who is the only founder, is all of the above.
For me, positive cash flow is like teaching a fish to swim. Though you can lead it, the fish must find its own fins. My portfolio startups have been encouraged to go deep into unorthodox growth tactics rather than merely revenue increase and cost-cutting. Using AI to forecast market trends, the gig economy to cut costs, and tokenizing assets to generate fresh capital are examples. It's not enough to get investors—you need a compelling story to attract them. Turning financial management into a strategic weapon requires combining war and finance. Training and education? Absolutely. Let's nurture financial ninjas who can navigate business's uncertain business with agility, innovation and a bit of rebellion.