Setting up the right processes and structures early can prevent future challenges with things like financial reporting, financial forecasting, audit, and tax. While we love technology and software solutions (and are avid users of many platforms), there are still certain financial tools that are currently best built in Excel. On that note, we’re excited to share our latest thoughts for “VC Funds: The 7 Core Finance Files You Must Have.”
This view is based on hundreds of institutional funds we’ve evaluated for investments or worked with, as well as our conversations with peer institutional investors. We’ll be sharing a deeper dive on these in the coming weeks, but in the meantime, here’s a list and some insight to get you started:
1. Budget (Fund & Mgmt. Co.): Just like the businesses VCs invest in, a VC fund needs to forecast revenues and expenses to make key decisions. How much does it cost to start and run a VC fund? How do you classify expenses? For more detail, we’ve written about this in our Fund Launch Series and were also interviewed by our friends at Oper8r.
2. Fund Model (Construction & Reserves): There are many important strategic questions that VC will have to answer for their prospective LPs. How will you invest your fund? How many companies, how much per company, over what stage (initial vs. reserves) and time period? It is important to start with a plan and validate that your base assumptions can produce the venture returns LPs expect. We use Excel and tools like Causal to help funds model various scenarios. Eniac Ventures’ post on Portfolio Construction is also a great place to start thinking about this.
3. GP / LP Waterfall Model: Cash flow timing is important. Based on forecasts in your budget and fund model, as well as your legal agreements with investors, this tool helps forecast when and how you and your investors will receive actual cash proceeds from portfolio company exits.
4. Deal Registrar with All Deal Details: for each investment, there are a lot of details covered when you invest, buried in emails and legal documents. This file is meant to encompass all the details you’ll need for audit / tax reporting, tracking, compliance, etc. If built and maintained correctly, this file can reduce the amount of time GPs spend supporting quarterly valuations, annual audits, and their next fundraise.
5. Schedule of Investments: a financial statement that provides a “snapshot” of a fund’s investments, including items such as investment name, date, classifications, investment amount, investment value, etc. Most investor agreements require a quarterly update on the fund’s investments.
6. Track Record: What is the full picture of your professional experiences, investments, reputation, references and network? Fundraising is a constant in the venture business so keeping an updated track record to share selectively is important. Check out Sharing Your Track Record by Oper8r for great detail on this.
7. Investor & Terms Tracker: Keeping organized investor records is crucial. If you’re just starting the process of fundraising, see Mark Suster’s post here. If you already have existing investors, make sure you’re tracking key details in one place (name, tax IDs, class / terms, contact information, commitment amount, etc.).
