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What KPIs do major venture capital firms track in quarterly information requests from portfolio companies?

Vanessa Kruze, CPA, is a leading expert in startup taxes and tax compliance. Her team at Kruze Consulting has filed thousands of tax returns for companies that have raised billions in VC funding, and her work has been diligenced by leading VCs, attorneys, and M&A teams at the largest technology companies.
Vanessa Kruze, a highly-experienced CPA, brings valuable tax expertise to startups, drawing from her rich background at Deloitte Tax and as a financial controller for a $20 million startup. As the leader of Kruze Consulting, recognized multiple times in the Inc 5000 list, she specializes in navigating the complex tax landscape for startups. Her firm is known for delivering precise and strategic tax solutions, delivering tax credits utilizing advanced tools to ensure compliance and optimize tax benefits for startups throughout the United States.

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As a finance and accounting firm to venture-backed startups, we see these requests pretty often - usually once a quarter!

Assuming you are a “normal” startup based in the US, you signed an “Investors Rights Agreement” with your venture investor. The Investor Rights Agreement likely grants very specific, and also rather open-ended, rights about what financial statements and data you are required to share.

The exact requests vary by venture firm. Some have very standardized requests, usually executed through some sort of a crude online form that requires the startup (or often us, acting on their behalf) to enter in specific metrics. Others are less formulaic (or maybe just less organized), with the individual VC making specific requests at various times of the year.

Some of the information may be specific to your startup’s industry. For example, SaaS startups may be asked for information on customer count, churn rates, bookings, customer acquisition costs. Biotech companies may be asked for information on drug development pipelines or regulatory approvals stages/updates. Regardless, all startups are required to share financial data per the Investor Rights Agreement.

The “3.1 Delivery of Financial Statements” part of the Investor Rights Agreement is the part of the legal documents that your startup will sign that lays out what the investors are going to ask for. The following legal text is taken from the National Venture Capital Associations’ Investor Rights Agreement in their Model Legal Documents.

National Venture Capital Associations’ Investor Rights Agreement_1

National Venture Capital Associations’ Investor Rights Agreement_2

So what does this really mean to you, as the CEO who has just raised a lot of money?

  1. Your accounting systems and bookkeeping must be strong enough to:
    1. Deliver reliable financials every month
    2. Periodically generate specific reports for your investors
    3. Do accrual accounting that produces GAAP or close to GAAP numbers
    4. Survive an audit, should they ask for one - this means having your schedules and back up information neatly organized
    5. Produce a capitalization table on demand
  2. Your strategic finances must be strong enough to:
    1. Create a budget that your team can follow
    2. Produce a budget before the end of the year
    3. Compare your actual performance to your projected
    4. Explain the difference in your period over period difference
    5. Know when you are running out of cash, and understand the impact of hiring decisions, margins, and more on your projected cash out position

We break have few more of the sections in the Investor Rights Agreement broken down in a more detailed fashion on our blog in a post called “What Financial Information do VCs ask For After an Investment.” And we also explain what financial and accounting resources we suggest that most startups have to support these information requests. Congratulations if you’ve just raise a bunch of money from VCs! You do have work to do though to keep them happy.

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