As a VC, you’re in the unique position to have a front row seat to the incredible journey that each of your portfolio companies will undertake. This journey will be filled with its ups and downs as your portfolio companies face challenges that range from market disruptions to financial squeezes to technical difficulties — and even the dreaded organizational change management of an enterprise sale.
You are a steward of the capital entrusted to you by your LPs, it is your responsibility — much more your pleasure — to engage in exciting work to maximize the growth potential of your investments. Maximizing the growth potential means recognizing opportunities for follow-on investing in the companies that show tremendous promise, but it also means evaluating circumstances when other companies are at risk. The effort that surfaces both these opportunities and risks comes from the hours of work that you or your analysts do.
This analysis started way before you made an investment decision. Your role as a venture capitalist is to be in the business of buying risk. For the most part, this risk takes two basic forms: agency risk and business risk.
Agency risk is the risk you’re buying as you invest in an individual: the founder or founders of a company. Your team analyzes their background, experience, and skills to understand how they will make decisions and to what degree they will be driven to succeed — with “success” defined as their abilities to be sufficiently resourceful to generate meaningful returns for your LPs.
Business risk is the risk you’re buying wrapped up in the inherent instability of the cashflows of an early-stage business that is managed for growth, not EBITDA.
While agency risk is assessed pre-investment, as you gain conviction to invest in the founders, business risk is an ongoing assessment, surfaced primarily through financial analysis. Financial analysis is a context game, starting with the systematic risk imposed by the market as a whole and then refining this analysis down to the specific risks of your portfolio company.
The primary way we, as VCs, assess these risks is by reviewing the periodic financial statements provided to us within our access rights via the Information Rights of our investment terms.
Typically, though, it’s not just one company’s financials. As a portfolio manager you have several companies in which you’ve invested, each with different founders and each with different business models.
These founders each have different teams, specifically different accounting and finance teams which represent the month-end financial reports in various ways and levels of detail. The effort multiplies and gaining insights in each of these individual portfolio companies — much fewer gaining insights into the companies by benchmarking them against your portfolio as a whole — is large and heavy.
Your goal in this effort is intelligence. For us, intelligence will be most closely associated with wisdom; it’s an aggregation of knowledge points and facts, when joined together, paint a picture that can communicate insights. Portfolio managers like yourself can then leverage these insights to advise not only your founders but also your fellow GPs to take action.
At Golden Section, we call this Portfolio Intelligence, and we do it better than anyone else in the market.
Golden Section’s Portfolio Intelligence is represented through our proprietary software Looking Glass. Looking Glass pulls current financial data daily from your portfolio companies. In financial analysis, the name of the game is to capitalize on opportunities and advise founders of portfolio companies on how to mitigate risk. These decisions must come from insights gleaned through the analysis of each of your portfolio companies’ financials.
The best insights are the timeliest ones. However, surfacing insights is incredibly difficult and time-consuming. If your goal is to try to surface insights easily and quickly, you’ll soon find — if you haven’t found already — that the most valuable insights are neither easy to surface nor are they quick to gather.
Looking Glass does the hard work for you in order to empower and maximize the value of your team.
