Visible supports hundreds of investors around the world to streamline their portfolio monitoring. One of the most common questions we receive is — what metrics should I be collecting from my portfolio companies?
Everyone from Emerging Managers writing their first checks to established VC firms ask this question because they want to make sure they're monitoring their portfolio companies in the most effective way possible.
The Standard Metrics Value-Add Investors Should be Monitoring
It’s important to know which metrics are the best to collect from portfolio companies so that investors can extract the maximum amount of insight from the least number of metrics. This streamlined approach is easiest for founders and allows investors to get what they need to provide better support to their companies, inform future investment decisions, and have good records in place for LP reporting or fundraising.
Below we outline the six most common metrics investors collect from portfolio companies.
1) Revenue
Definition: Money generated from normal business operations for the reporting period; also known as ‘net sales’. We recommend excluding ‘other revenue’ from secondary activities and excluding cash from fundraising.
Revenue tells you how a company’s sales are performing.
This metric is a key indicator for how a business is doing. It can be analyzed to understand if new marketing strategies are working, how a change in pricing might affect the demand for a good or service, and the pace of growth in a market.
By asking for revenue from just ‘normal business operations’ you’re excluding money a company could also be making from secondary activities that are non-integral to their business. This helps keep the revenue data more precise, allows you to compare the metric more accurately across the portfolio, and will allow you to use it more accurately in other metric formulas such as Net Income.
Visible helps over 400+ VCs streamline the way they collect data from companies with Requests. Check out a Request example below.
2) Cash Balance
Definition: The amount of cash a company has in the bank at the end of a reporting period.
Cash Balance is an important indicator of ‘life expectancy’.
This metric is essential to track because it tells you about the financial stability and risk level of the company. There’s no bluffing with this Cash Balance metric. A company either has a healthy amount of cash in the bank at the end of its reporting or they don’t. Cash balance also gives you an idea of how soon a company will need to kick off its next round of financing.
3) Monthly Net Burn
Definition: The rate at which a company uses money taking income into account. The monthly burn rate will be positive for companies that are not yet profitable and negative for companies that are considered profitable. Net burn is usually reported as monthly and calculated by subtracting a company’s ending cash balance from its starting cash balance and dividing that by the number of months for the period. We recommend collecting this metric from companies on a quarterly basis but still asking for the monthly rate — this helps rule out any one-off variability.
Monthly Net Burn = (Starting cash balance – ending cash balance) / months
Monthly Net Burn is an indicator of operational efficiency.
This metric becomes even more relevant during market downturns when the focus shifts from growth at all costs to growth with operational efficiency. This is a good metric to benchmark and compare across all companies in your portfolio.
You can also use this metric to calculate a key metric, Cash Runway.
4) Cash Runway
Definition: Cash runway is the number of months a business can survive before it runs out of cash. It can be calculated as:
Runway = Cash Balance / Monthly Net Burn
Cash runway tells you when a company will run out of cash.
This metric is essential because it determines when a company needs to kick off their next fundraising process, usually, it’s when they have 6-8 months of runway left. If you see one of your companies hit a cash runway of six months or less, you should be reaching out to see if they need support or guidance on their fundraising efforts.
While Runway is definitely considered a key metric, you don’t need to ask your companies for it since it can be calculated easily with other data you should already have on hand (Cash Balance & Monthly Net Burn Rate).
5) Net Income
Definition: Net income is a company’s total earnings (or profit) after all expenses have been subtracted. It is calculated by taking a company’s revenue and subtracting all expenses, including operational expenses, interest expenses, income taxes, and depreciation and amortization.
Net Income = Revenue – Total Expenses
Net Income is an indicator of profitability.
If net income is positive, meaning revenue is greater than a company’s total expenses, it is considered profitable. This is a metric that startups should have readily available since it’s the ‘bottom line’ of an Income Statement, making it very easy to report.
This metric can also be used in a formula to calculate Net Profit Margin, total expenses, and cash runway.
6) Total Headcount
This is the total number of full-time equivalent employees excluding contractors. Contractors are excluded because of the variability of the nature of contract work — a contractor may only work a few hours a month or they could work 20 hours per week. This variability will cause back-and-forth clarification between you and your companies which wastes time.
This metric gives you insight into company growth and operational changes.
This metric is important to track because it’s a reflection of decisions made by the leadership team. If there’s an increase in headcount, the leadership is investing in future growth, on the other side, if there’s a major decrease in total headcount it could be because the leadership team has decided to reduce burn by letting people go or employees are churning. All are post-signs of operational changes worth paying attention to.
Check out an Example Request in Visible.
Suggested Qualitative Questions to Ask Your Companies
While metrics are the best way to aggregate and compare insights across your portfolio, you may also be wondering which qualitative questions you should ask portfolio companies as well. Qualitative prompts can be a concise and valuable way for startups to share more narrative updates on company performance with their investors.
Below we outline the two most common qualitative questions investors ask portfolio companies as well as suggested descriptions.
1) Recent Updates & Wins
Description: Please use bullet points and share updates related to Sales, Product, Team, and Fundraising. This will be used for internal reporting and may also be shared with our Limited Partners.
We suggest asking companies for bullet points on these four categories because it’s a focused way for investors to understand the narrative context behind a company’s metrics.
With your companies’ permission, this narrative update can also serve as the foundation for your tear sheets for your LP reporting and your internal reporting.
2) Asks
Description: How can we best support you this quarter?
You can make your reporting processes more valuable for your portfolio companies by asking your companies if there are specific ways you can provide support to them in the next quarter.
Once you have responses from your portfolio companies, you can take action on their requests and you’ll be able to extract support themes to inform the way you provide scalable portfolio support.
Monitor Your Portfolio Companies Seamlessly With Visible
It’s important to know which are the most important metrics to collect to ensure your portfolio data collection processes are streamlined and valuable both for you and your companies. In this article, we highlighted Revenue, Net Income, Cash Balance, Runway, Net Burn Rate, and Total Headcount as the top metrics to collect from all your portfolio companies. With Visible, its also easy to ask for any custom metric and assign it just to specific companies.
Investors of all stages are using Visible to streamline their portfolio monitoring and reporting processes. Book some time with our team to learn how Visible can automate your portfolio monitoring processes.
Visible for Investors is a founder-friendly portfolio monitoring and reporting platform used by over 400+ VCs.
