Cash management skills are crucial for any startup, especially in times of uncertainty and volatility. As a venture capitalist, you want to help your portfolio companies optimize their cash flow, avoid cash crunches, and plan for growth. But how can you train them effectively in this area? Here are some best practices and tips to consider.
The first step is to understand the current cash position and runway of each portfolio company. You can use tools like cash flow statements, burn rate calculations, and scenario analysis to get a clear picture of their cash inflows and outflows, as well as their cash reserves and needs. This will help you identify any gaps, risks, or opportunities for improvement.
The fastest and most effective way in my experience is to tie the payment of any and all management bonuses to year end cash position. The bonuses will be earned by the achievement of various objectives like revenue and burn but they can only be paid if the company's is in an appropriate cash position. Thus begins the real life journey of cash managment.
Understanding a portfolio company's cash position is crucial for venture capital firms, as it directly impacts the company's ability to execute its strategy and survive downturns. Tools like cash flow statements and burn rate calculations are not just for assessing the current state but are also predictive in nature, allowing VCs to anticipate future capital needs and take proactive measures. Scenario analysis, in particular, can be invaluable for stress-testing a company's financial resilience against various market conditions, thus informing both the company's and the investor's strategic decisions.
Every startup needs a monthly cash budget: money in and money out along with starting and ending cash balance. Such granularity highlights that a contract expected to be signed in Q1 may mean January or end of March close, and thus 2-3 extra months of burn. A deal slipping to the following quarter has even greater runway implications. It takes discipline and accountability on behalf of founders to translate pipeline probabilities into a cash budget.
VCs should work with their portfolio companies to gain a clear image of the cash flow of the business. Current cash, monthly burn, monthly spent, MRR/ARR should always be kept up to date by the startup executives. VCs and portfolios have to work together to plan for various potential scenarios and be ready to move quickly based on the real outcome. Startups might tend to over inflate the revenue projection. The role of mentors/VCs/board members is to regulate that projection and make sure the company is ready for various outcomes. Cash is king, the moment cash runs out, the business stops existing.
In a fast-moving environment, often with limited information, it is key to establish an expected burn rate covering a range of time horizons - sometimes even daily to capture intra-month cash swings. Once this is ready it is time for scenario testing! What assumptions underpin the forecast? Are they conservative, optimistic, or down-the middle? How could movements in assumptions change the overall picture? How much buffer is required to manage these and what contingencies can be prepared should adverse movements occur? Which factors can be influenced to the greatest effect through focusing efforts on them?
The next step is to provide your portfolio companies with guidance and feedback on how to improve their cash management skills. You can share best practices, frameworks, and resources on topics such as budgeting, forecasting, cost-cutting, revenue generation, and fundraising. You can also offer constructive criticism, suggestions, and encouragement on their cash management decisions and actions. The goal is to help them develop a cash-conscious mindset and culture.
In current climate I advise entrepreneurs to assume they will never be able to raise equity again and suggest they plan accordingly by having a path to break even based on current cash and maybe ARR based loans. Right now you have to be an AI genius (OpenAI alum) or have near perfect metrics to raise VC. We learned that lesson the hard way when we were building our first company BigMachines and raised $20M in 2000 at tail end of dot com bubble and then never raised again as VC was not available to us. We had to grow cash flow breakeven or better. I as founder/CEO personally reviewed and approved all hiring and spend decisions personally until we could hire a strong finance leader. I suggest early stage CEOs to do same today.
The VC environment is changing fast. Therefore itis key to adapt and take action (e.g. "raise when you can, not when you must"). An open and continous discussion with the shareholders is key to have this process internally managed. Do what you can to justify that trust with ongoing prudent cash management.
Most of the portfolios I have seen, even if they applied all the proper management procedures and protocols to managing cash flow. The main problem still remain - poor execution, bad ideas and not enough sales to bring cash in. The VC world only plays the money game, but running a company is actually much different. Which is sales, and more sales! If a product or industry pivot even with a good cash flow management, they will eventually become a “zombie company”. Thus no real products or services made.
Startup founders tend to be visionaries not CPAs & this cuts to the challenge many have with cash management. Here are some basic tips we share with our portfolio: 1. Know where your cash goes every day. Build good bookkeeping habits right from the start. Messy books reflect poorly with investors. 2. Use credit cards responsibly. 3. Establish spend protocols- rules for card &check use and consequences for breaking them. Measures like having a primary administrator, requiring dual authorization for certain expenses and having separate accounts for payables and receivables can help prevent fraud. Founders who master the nitty-gritty details of how cash flows in/out of their companies manage risk better and make the most of startup funding.
We find that many founders are not strategically minded financially when it comes to the use of funds and timing for the next funding event. We mentor those founders are not financially minded in running lean and saving some dollars for a rainy day. Where we do not see a company with good cash management in place, then we will institute an executive committee meeting every month or two weeks to review and approve large expenses over $25K or long term agreements over one year. Its one way to share the accountability and keep spending in check.
The third step is to monitor and measure the progress and performance of your portfolio companies in terms of cash management. You can use metrics like cash conversion cycle, operating cash flow ratio, and cash runway ratio to track how well they are managing their cash flow, liquidity, and solvency. You can also use benchmarks, goals, and milestones to evaluate how well they are meeting their cash management objectives and expectations.
make sure a growth any any cost mindset is not adopted. If the startup boostrapped to begin with, then they know how to be frugal. Monitor and measure the burn to make sure you are not creeping on your run rates and that you have enough cash until you raise another round. Calculated growth is key.
We employ metrics such as the cash conversion cycle and operating cash flow ratio, alongside setting transparent objectives and fostering open communication. This friendly and supportive approach empowers them to innovate and enhance financial strategies, nurturing a culture of financial achievement.
Monitoring progress in deep-tech startups is about understanding the rhythm of innovation. Founders should be encouraged to engage deeply with the financial aspects of their projects. This involves creating a synergy between the technological milestones and financial health of the company. VCs can foster this understanding by helping founders align their innovation goals with financial realities, ensuring that each breakthrough is not just a technical success, but also a step towards financial viability. In this way, monitoring becomes a strategic tool, not just a report card.
In my experience, monitoring and measuring cash management through metrics like the cash conversion cycle and cash runway ratio is crucial for early intervention and support. These metrics provide a clear picture of a company's financial health and can indicate when to take corrective actions. Regularly comparing these figures against industry benchmarks can also offer valuable insights into a company's operational efficiency. As an accounting manager, I've seen how effective cash management can significantly enhance a company's ability to respond to market changes and capitalize on growth opportunities.
The most important metric here is your Burn Multiple = Net Burn / Net New ARR. Make sure you measure this every quarter and every year. Seed to Series A startups that are early on in generating revenue should expect between 1.5x-3x and should see numbers lower over time.
The fourth step is to support your portfolio companies in their growth and scaling efforts, while ensuring that they maintain their cash management skills. You can help them access additional funding, partnerships, and markets, as well as optimize their business model, product, and pricing. You can also help them balance their cash flow needs with their growth opportunities, and avoid overstretching or overspending their cash.
I recently heard someone say on a podcast: The first value proposition of Venture Capital is Capital. As an early-stage VC the second obligation towards portfolio companies is to secure further funding down the road.
Venture Capitalists can play a pivotal role in guiding portfolio companies through the intricacies of cash management. With my background in accounting and proficiency in tools like QuickBooks, I understand the importance of maintaining a strong cash position for growth. It's essential to teach companies to forecast cash flow accurately, manage receivables and payables effectively, and make informed decisions based on financial data. Balancing the cash flow needs with growth opportunities requires a strategic approach to financial planning, ensuring that companies don't overextend themselves financially while pursuing expansion.
The fifth step is to foster a learning culture among your portfolio companies, where they can continuously improve their cash management skills. You can facilitate knowledge sharing, peer learning, and mentoring among your portfolio companies, as well as connect them with external experts, advisors, and coaches. You can also encourage them to seek feedback, learn from failures, and celebrate successes in their cash management journey.
If you are a VC-backed startup, ask your investors if they run active portfolio metrics. If they do, volunteer to contribute your data in return for anonymized average data so that you can compare how you are doing relative to peers in the portfolio.
In my role, I collaborated with a tech startup facing cash flow challenges. To foster a learning culture, I organized a workshop where they could share experiences with peer companies, focusing on effective cash management strategies. We also brought in a financial expert for a hands-on session on optimizing the cash conversion cycle. The startup implemented these insights, significantly improving their payment terms with suppliers and customers. This led to a more positive cash flow, enabling them to invest in growth opportunities. Regular feedback sessions were set up to ensure continuous learning and adaptation, turning their financial management into a success story.
Understanding an industry and its margins as well well time for the investment to mature are integral to good investment. Neither the complacent nor the panicked investor is an asset.
Understanding an industry and its margins as well well time for the investment to mature are integral to good investment. Neither the complacent nor the panicked investor is an asset.
The final step is to review and adjust your cash management training strategy according to the changing needs and circumstances of your portfolio companies. You can solicit feedback from your portfolio companies on the effectiveness and relevance of your training methods, tools, and resources. You can also monitor the market trends, customer demands, and competitive dynamics that may affect your portfolio companies' cash management challenges and opportunities. The aim is to keep your training strategy agile, flexible, and responsive.
If the burn is creeping up above what you planned at the beginning of the year, be quick to alert your board. Get to the bottom of what is causing the higher burn - cloud costs, additional headcount, ads, etc. Figure out if this is something you were expecting or something new. The quicker you know about the issue, the more time you have to resolve the problem before it has too large of an impact on your cash balance.
Os estágios iniciais s?o diretamente proporcionais ao risco e à necessidade de testagem de oferta de valor do produto e da empresa. Cada teste deve ser mensurado com um objetivo claro, utilizando métricas SMART e playbooks ágeis, como OKRs. Quanto mais simples e padronizado for a quantifica??o dos dados da startup, mais fácil será para os investidores analisar e ajudar no ajuste de rota e estratégia.
Issue with VC / PE funded companies is the promoters / entrepreneurs start behaving like there is no end to money. So, it’s about coaching and pushing them towards self reliance. The idea that cash is king and one day in the not so distant future they have to generate enough cash to manage expenses as well as declare dividends ; this we need to implant in their minds. Sometimes we have to implant this idea in the minds of younger team members at the VC also.
For any company, whether VC backed or more mature, the time to raise cash is NOT when you need it. It is when there is an opportunity to get it.
Arrange 1-on-1 coaching sessions from experienced finance executives to advise on cash strategy and optimizations, if needed. Also, encourage knowledge transfer across portco finance teams. Rising tides lifts all boats. With the right financial acumen training and support system, portfolio companies can master cash flow management to extend runway and minimize risk.
“ Cash is a proxy for time; time is a proxy for opportunity“. Management projections should be cash only. No GAAP. Said differently, show fixed expenses and assume no sales or cash receipts. “Revenues”/sales only turn into cash when received. Fix the date the next fund raise needs to BEGIN. Identify what validation points need to occur before then to make the company’s next round financing possible. At the bottom of each monthly projection, show how many months of cash remain. A stark reminder automatically getting people’s attention. Every board meeting should start and end with a cash discussion. Why? “Cash is a proxy for time; time is a proxy for opportunity“. If you survive, you can thrive. If you don’t, you can’t.
Offer office hours with financial mentors or advisors that portfolio companies can utilize as needed for cash planning questions.