How Do VC Firms Pick Which Struggling Portfolio Companies to Support?

Q: How do venture capital firms determine when and how to help stalled or stuck portfolio companies?

It is a super interesting topic more should be written about.  You only see the headlines on TechCrunch for the venture rounds that … happen.

Most VC firms do plan for some tough times.  And the the bigger, more established ones do save some extra money for those timesThey expect a rough quarter every 4–5 or so. And then generally reserve some extra cash if you are doing OK but not great, often another 25% more than the initial investment for a bridge or small second check if that gets you over the help.

And as long as (i) they believe, and (ii) you aren’t running out of cash with nowhere to get it (i.e., forcing their hand), they tend to stay with their heads in the game.

It’s when they no longer believe, and/or you are out of cash with no way to get more, that they move to write-off mode.

It just isn’t a good use of time anymore. And almost any VC can afford to write off at least 20%-40% of their investments.

So your job as CEO:

  • Make sure they still believe. No fake metrics. No lying about or hiding the hard times. VCs expect some tough times. They do not expect you to hide them. Most importantly — No Surprises.
  • Understand which of your investors might write a second check — and which won’t or can’t.  Most individual investors and many tiny and newer funds don’t write “bridge” checks.  Just ask.  It’s OK to ask.  But ask before you need the money. 🙂
  • Don’t ask for a third check from the same VCs. If your VCs bridge you once, never ever expect another check from them. Generally, that’s a career-limiting move for the VC. Assume whatever $$ you have has to last. Especially if you raise a bridge.

If you are honest with the numbers, but still give them a reason to believe someday it may be a unicorn, and you don’t force them to write another check they don’t want to … they’ll stay in the game.

A few related thoughts here: How to Avoid Being Replaced as CEO by Your VCs | SaaStr

(note: an updated SaaStr Classic answer)

Published on October 31, 2021

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