Financial Management for Technology Start-Ups

Let’s use an example to illustrate how this works. Imagine a $300 million fund that wants to invest in twenty companies. VCs normally use a portion of their investments for their very first investment (called de novo capital), but the rest they keep as reserves (called follow-on capital) to maintain ownership in their companies in subsequent rounds

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Founders should decide how much to raise based on how much money they need to reach the next set of milestones. Startups have many layers of risk stacked on top of each other. Leo Polovets, managing partner at Susa Ventures, calls startups a “bundle of risk.”6 These risk layers could be as broad as “product risk,” but ideally the risk layers should

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Given the inexorability of math, therefore, there is only one other way to hit the 30x target: invest at a lower valuation. So if the initial valuation we agree upon with the company is, say, $1.5 million, our 30x target means that the company will need to be acquired eventually at a terminal valuation of $45 million. And guess what? It turns out t

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A venture capital firm invests under the premise of an upside scenario, this is to say that if the firm invests in 10 companies through the fund, they only expect one or two companies to hit a home run (an 8-10x return or more), and couple solid returns ( >1x), while the other six or seven companies may fail (no return) or simply return the amou

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