How can you best track the progress of your portfolio companies, both to report to limited partners and also for your own allocation of time & resources?
I summarize here the vectors I generically recommend you use for tracking portfolio company activity. Of course, every VC fund needs to customize their model based on their resources, strategy, and particularly portfolio size.
In an ideal world, all this data would be gathered via AI + APIs. In the real world, we often get critical data on what’s really going at a party, via a text from a mid-level employee, etc.
REPORTING
I recommend use a standard set of metrics for all portfolio companies, reported monthly and normalized to a common format. The most important metrics are:
Liquidity & Runway
- Cash on Hand
- Monthly Burn Rate (Net cash outflows)
- Months of Cash Remaining = Cash ÷ Monthly Burn
- Cash Conversion Score = Gross Margin ÷ Burn (proxy for unit efficiency)
Revenue & Growth
- ARR / MRR
- YoY / QoQ Revenue Growth
- Net Revenue Retention (NRR) for SaaS
- Customer Acquisition Cost (CAC)
- LTV / CAC Ratio
Efficiency & Profitability
- Gross Margin
- EBITDA
- Operating Margin
- Burn Multiple = Net Burn ÷ Net New ARR (ideal: <1.5x in growth stage)
- Rule of 40 = Revenue Growth % + EBITDA Margin %
At one of my prior VC firms, we produced monthly a ranked list of all our companies in terms of the following. This highlighted the companies which needed the most attention…or which we needed to write off.
- Months of Cash Remaining
- Burn Multiple (Net Burn ÷ Net New ARR)
- QoQ revenue growth
- QoQ headcount growth
- QoQ expenses growth
QUALITATIVE ANALYSES
At weekly meetings, we’d ask everyone in the firm for an update on major news from portfolio companies, with particular regard to:
- Capital Raise in Progress
- Executive Hires (CEO, CFO, etc.)
- M&A Explorations
- Churn Spikes / Major Customer Losses
- Pivot or Business Model Change
- Tech/Product Milestones upcoming (or missed)
We also ran a Founders Survey, covering strategic needs, hiring plans, current challenges, and Net Promoter Score.
PROCESSES TO GATHER & REFRESH DATA
Gathering the data has historically been a real pain point, although it’s now become more automated. At one of my prior firms, we would send out quarterly a standardized financial template to collect data. Even better is to gather this data via API integration into your financial reporting package (e.g., Ipreo, which I’m a past customer of).
Further reading:
- Marketing Your Portfolio Companies to Other Investors
- Launching a Portfolio Acceleration Platform at a Venture Capital or Private Equity Fund
- What should VCs do with zombie companies?
- How Private Equity and Venture Capital Investors Accelerate Portfolio Company Success
- How to run your company based on metrics: what, why, how, who, and when
