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Venture Fund Accounting 101

    Having spent over a decade in the startup ecosystem through our financial services work, we know a thing or two about rising trends. One area of tremendous opportunity is launching a Micro VC fund. This allows seasoned entrepreneurs and traditional investors a chance to put a relatively small stake in a company with the hopes of a big return down the road.

    So, You’re Looking To Raise Your First Fund…

    While we often share our guidance through the lens of what entrepreneurs in a startup need to know to attract investment, we also work with many General Partners on keeping their finances and reports on target. Below we outline some basic accounting checkpoints for those starting to put together a fund – or in their early years of running one.

    The crucial documents needed in the fundraising process

    There are 4 Key Items needed here to get started as you are initiating your fund:

    • The Limited Partnership Agreement, which lays out the legal parameters of the Fund. This will clearly spell out who is involved in overseeing the management and oversight of operations
    • An Offering Memorandum which states out the scope of the objectives and risks in the endeavor for potential investors
    • A Subscription Agreement which will be need to be completed by each Limited Partner
    • Pitch Deck/Book to attract interest and show potential.

    Reports/Statements for General Partners (GPs)

    GPs need to create a framework of reports on the portfolio companies and the surrounding VC firms with interests that pertain to it. Every GP will have their own personal preferences of frequency and detail, their specialties to focus on for strategy. We recommend reporting a portfolio company’s financial statements on a quarterly basis, at a minimum.

    Reports to Limited Partners (LPs), normal communications

    The normal cycle of communications for LPs is on a quarterly cycle. Within each quarter should be the following; Financial Statements of the fund detailing its overall performance, Individual Capital Account Statements, and lastly a summary showing the Operational metrics of the fund. The operational metrics usually contains the Internal Rate of Return (IRRs), Return Multiples, and Total Value to Paid-in (TVPI). Other metrics may be selected as well to illustrate areas of exceptional growth.

    Commentary regarding the fund such as its overall performance, the highlighting of select investments, and any new initiatives should also be reported quarterly, at a minimum. Updates could be given more frequently however, especially if this is a first-time fund or team. This can help not only with investor confidence but in providing awareness and marketing of managing partners strengths and styles of investment.

    Designating Responsibilities for Fund Accounting Statements

    This obviously depends on how large the firm is. When it comes to Financial Statements or Capital Account Statements, a CFO would typically have the final sign off, but Controllers or Senior Accountants could play a significant role. For many (very busy) Micro-VCs, outsourcing to a seasoned team can be highly time saving while still providing the compliance and due diligence required.

    Auditing/Valuation

    As a fund, it is important to remember that just as important as your returns are so are having proper valuation modeling techniques. It is essential to choose an auditor that is familiar with the Venture Capital industry. The holdings are comprised of Illiquid Securities and need to be valued as such.

    Some Audit firms may apply Valuation techniques used on Public Companies to Private Companies, and very early stage private companies at that. This can result in costly mistakes and possible litigation later. This exemplifies why it is important to have a valuation policy in place. A VC firm should confirm that an audit firm fully understands the policy before choosing them.

    With this checklist in hand and a strong focus on the opportunities building a solid and rewarding fund is achievable. There is no greater thrill to the serial entrepreneur than being able to create and launch new endeavors. If you have any questions on how to keep your financials strong or on putting together experienced valuations send us a message for how we can benefit you and provide support.

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