The era of low interest rates, and the free money environment it created, is over. Nowhere is the impact of this change more evident than within Venture Capital (VC) Funds. With higher input costs, exits limited and facing down rounds for fresh capital, VC Fund Managers can no longer prop-up portfolio valuations with metrics of market share, subscribers or installations. Formerly price takers, the LPs and creditors of Funds are now peppering GPs with questions about profitability and liquidity, not growth.
For VC Finance teams it’s back to basics; namely managing cash flow. And for the “ugly ducklings” in VC portfolios, it’s more about survival. The mundane tasks of reviewing cost data, expense drivers, productivity measures, inventory controls, budgets, etc., will move up on management ‘s priority list. Expenses associated with customer acquisition, cost of sales and ancillary staff deserve special attention. The essential task of linking operations with indirect costs can be painful but must be modeled. Once expenses are categorized the next task would usually be submission of a cost cutting program. But not anymore.
With cost behavior identified, a profitability (or loss) analysis by product, service line, market or customer becomes far more insightful. The VC Finance team should then vector profitability with management’s operating assumptions and current market realities. The result is a complete strategic profile of the company’s prospects. When shared with boards, the profile will be management’s starting point for decisions regarding fixing, harvesting or exiting certain companies. In these discussions what should become clear is that portfolio companies innovating products without established markets, or attempting to disrupt established markets, are especially vulnerable.
Chief Financial Officers (CFOs) with corporate strategy experience will likely soon be in demand. Strategic CFOs have the background to efficiently gather and prepare portfolio profitability analysis and manage the re-balancing process. Most VC CFOs today were hired from a CPA firm because their transaction related skills were needed. Corporate CFOs with hands-on business strategy experience have been out of vogue for the last ten years, but might be exactly what VC Funds need today to retain value in a stagflation economy.