How Managers Should View Cash Flow Management

Cash flow metrics effectively convey the status of your venture fund’s health by answering key questions including:

• How much cash is on the balance sheet today?
• How much cash is required to hit your goals?
• How can you allocate cash most effectively to achieve your targets?

Jim Marshall, head of Silicon Valley Bank’s Emerging Manager Practice, advises general partners (GPs) to think about cash flow management at two levels — the fund level and the operating company level.

Fund-level cash flow management

At the fund level, you will try to project an investment pace that is reasonable, matches your investment strategy, forecasts approximately when you’ll do follow-on investments and sets the right reserve ratio. “Although you put forward a projected investment pace at the beginning of a fundraise, you will want to revisit this spreadsheet consistently as the pace of investment you set at the beginning of the fund cycle will very likely not match your actual pace once you begin deploying capital,” says Marshall. “At minimum, this is a monthly exercise, but with the speed of investments this year, it could be even more frequently.”

Operating company cash flow management

“The other math you need to do when starting your fund is to determine how to spend your management fee,” says Marshall. “Most of the management fee is typically used for headcount, but it’s also often used for investing in areas of the business (like conferences, events and platform infrastructure) that will help you win. Limited partners (LPs) are looking for managers who know how to effectively spend their management fees.” Efrat Turgeman Partner at SVB Capital, adds “Budget-based accounting and spending in accordance with your plan creates ideal alignment with your LPs. It is definitely more challenging for emerging managers versus established firms, but it is ultimately in both of your interest because you are working to grow your upside potential through more focused capital flowing directly into your investments.”

From a GP’s perspective, how you manage finances at each level has a substantial effect on your performance. Unsophisticated or poorly planned cash management can create significant and costly drag. The cash flow management process should be iterative so that you’re always ready to answer any questions about how much dry powder you have left to invest, when you will call capital next, what your performance marks look like today, and how you’ll need to react in the event of a market shift or liquidity event.

Why does cashflow management matters to LPs?

Given the performance effect that it has on a fund, LPs are naturally focused on backing GPs who have strong cash management muscles. Primarily, LPs hope to minimize the amount of un-invested capital held in reserve while maximizing its returns. Not only is your LPs are focused on when you deploy the uncalled capital on your balance sheet, but also as well as how they manage capital that they’ve committed to you, but that has not yet been called so that it continues to appreciate while staying liquid. Given this complexity, capital call strategies are a key consideration for GPs and LPs alike.

Budget-based accounting and spending in accordance with your plan creates ideal alignment with your LPs. It is ultimately in both of your interest because you are working to grow your upside potential through more focused capital flowing directly into your investments. Efrat Turgeman Partner, SVB Capital