I was going to do a post entitled “Talk to your VC about reserves.” Last week I put together an opening paragraph on the subject and a few thoughts on an outline for a post. However, I no longer need to do that because Mark MacLeod of StartupCFO.ca just published a great blog post on the exact subject! I’ll preface his article a short version of my intended post on the subject and then link to his article.
Talk to your venture capitalist about reserves
After an early stage venture capitalist makes an investment in a startup the firm allocates a certain amount of cash from that particular fund for follow on investments in that particular startup. This is a pretty important process. VCs need to make sure they have enough capital on hand to continue to support the startup as it grows to a cash flow positive position. Startup founders need to be positive that their investors have the dry powder to help them create a sustainable business.
The current, challenging market means that many startups are requiring “extra” capital (and time) to get to an exit or cash flow positive. At the same time, it has become much more difficult to find outside investors for follow on financing rounds. All this is putting pressure on the dollars that venture capitalists have reserved for their follow on investments in their existing portfolios… thus, it is a great time to speak with your current investors about how much capital they have allocated for your company. You will probably want to keep this in mind as you are developing your projections – make sure you have reasonable funding assumptions to get to the finish line!
Thus, the lead in to Mark MacLeod’s post on VC reserves.
March 2nd, 2009 at 7:11 pm
Healy, thanks for sharing my post. Glad you liked it. Very pleased that having just raised in the Fall, I can postpone the reserve discussion myself for now. Many others are unfortunately not in the same position
March 2nd, 2009 at 11:04 pm
Mark, smart move raising money last fall! It's still not a bad idea to have the reserve discussion. It will help you know how aggressively you need to butter up potential outside investors!
March 2nd, 2009 at 11:38 pm
I hear you. Given that we have not officially launched yet, its still a bit premature to talk about acceleration. Rest assured though, I don't like surprises and do like visibility. So when the time comes, I won't hesitate in raising the topic.
October 30th, 2009 at 11:48 am
[...] company match up with the venture firm’s ability to fund it. How much will the fund need to reserve to support the investment, and does this match up with the capital at the fund’s disposal. E. Exit. What does this [...]