Cash Flow Management for Emerging Managers

Best practices for emerging managers as they approach capital calls and distributions

You may have heard the lifecycle of a venture fund compared to a farmer tending a crop cycle — a period of seeding, a period of watering and a period of harvesting the fruits of their labor. In this analogy, strong cash management lays a foundation for a fund manager to plan and predict from seed to harvest.

The questions a fund manager asks are similar:

• How much should I invest per crop (startup)?
• How can I prepare to weather future storms (market cycles)?
• How and when can I yield a large enough harvest (return) for the entire partnership to share?

Strong cash flow management is integral to an emerging manager’s success because it tells a compelling story to limited partners (LPs). Cash flow directly affects a fund’s performance, so LPs are naturally likely to focus on backing general partners (GPs) who have proven cash management skills. From an LP’s perspective, cash flow metrics shed light on whether they can minimize the amount of uninvested capital held in reserve while maximizing returns.

But LPs aren’t only focused on when funds deploy the uncalled capital on their balance sheets. They also typically want to know how best to manage capital that they’ve committed but has yet to be called. Because they typically want that capital to continue to appreciate while staying liquid, GPs tend to prefer a holistic cash flow strategy that encompasses both capital call strategies and distribution strategies designed to show LPs exactly how they intend to deliver the best possible results.

From an LP’s perspective, cash flow metrics shed light on whether they can minimize the amount of uninvested capital held in reserve while maximizing returns. Natalie Fratto Managing Director, SVB Emerging Manager Practice

Resources

Review these Capital Call and Distribution templates

• Capital Call & Distribution Notice Sample Cover Letter and Description by Institutional Limited Partners Association (ILPA)

• Capital Call & Distribution Notice Excel Template by ILPA

• VC Portfolio Construction Model and Cash Flows Template by Dan Clayton, SVB Capital​

Click on each topic below for a deeper dive into how fund managers should think of cash flow management, as well as strategies for balancing the needs of GPs and LPs alike when mapping out plans for capital calls and distributions.