One of my primary responsibilities is to gather monthly reports on our portfolio companies…. The founding partners are a close group of six serial entrepreneurs and senior financial industry professionals who co-founded the firm in 2010 and have primarily deployed their own capital for their investments…. [W]hat sort of granular details should I be asking from the portfolio companies? KPIs, Burn Rate, etc.?
There are dozens of reporting standards templates. We use the Institutional Limited Partners Association templates for our fund reporting, but they do not always give the most accurate picture for earlier stage companies. We supplement these templates with direct information on what really matters, using the principles described below.
I should note that most institutional investors and family offices are run by finance and accounting professionals who want to understand quarterly valuations, financial statements, and traditional financial numbers, like revenue and margin, as they must mark their investments each quarter. Traditional financial reporting does absolutely matter, but may not always reflect the most relevant information for an early stage portfolio company — and can even be misleading about a company’s true prospects.
Because you are reporting for an earlier stage fund and for investors who are themselves the limited partners, I would suggest a specific focus.
A venture-backed company has one paramount mission: to keep surviving until its exit or the next infusion of money that will allow it to live longer. The game ends when the company “exits” through (typically) an acquisition or IPO, or runs out of funds and dies. (If the company becomes self-sustaining without an exit or investment prospect, the game becomes complicated for a venture investor, but the company will at least survive long enough to figure out next steps.)
Startups really are that simple. Money typically comes in three flavors: (a) investment from a next round investor, ideally at a higher valuation, (b) revenue sufficient to sustain the business and its growth, or (c) less typical sources of cash, like grants, debt, or strategic NRE.
If you work backward from this fundamental theorem of early stage investment, then you should focus on whether the company is progressing apace to a next financing, self-sustaining revenue, or an exit.
Therefore, analyze each company with the eyes of a next round investor or a potential acquirer. What specific KPIs would create a 2-3x valuation increase from the last round for this company in this industry? Is the company tracking for these metrics prior to its cash running out? The particular facts of each company will vary, but I expect all would contain some combination of the following:
Is the management team the right one? Has the company proven value and growth hypotheses, as well a clear path to Product/Market Fit? If not, what are the MVPs and experiments in progress? Do you know whether those experiments are achieving success? Is the company measuring the most important metrics, or something useless (vanity metrics) which only makes everyone feel good (success theater)? How much cash is left? Can the company pivot if needed? Who are the likely acquirers and what are they looking for?
In short, what is the clear path to the next round or an exit? Reverse engineer that path and determine what you should focus on by answering that question. I find most inexperienced management teams sort of muddle around, unclear on their mission. Focus them now.
Your companies should always know what they must do to achieve a next valuation increase or exit, as they should be in contact with potential future leads and acquirers. Your fund will also know these metrics as well.
I try to simplify my LP reporting by requiring that each company provide 5-10 key metrics that we agree upon each reporting period. (If you do not trust your management to provide this information accurately, you have a different issue than reporting.) The metrics often change, depending on stage of the company. I would, for example, ask for different information from a Series A company than from one targeting an IPO in six months. When relevant, I also require companies to report shutdown costs and months of burn remaining (after subtracting the shutdown costs), as that has a way of laser focusing the management on reality.
Of course, you should include the usual items, like key deals, management changes, achievements, news coverage, valuation methodology, other investors, ownership percent, recent financial statements, and the like. Do not ignore the traditional reporting items, but focus on what matters to your ability to increase the value of the fund.