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.
