If your palms become a little sweaty when it comes to the complex intricacies of venture fund accounting and administration, you’re not alone. In fact, the furor surrounding Rothenberg Ventures will have you reaching for a hand towel just thinking about it.
After spending lavish amounts to promote his firm, CEO Mike Rothenberg was hit with a slew of allegations citing lack of accounting transparency toward his investors. A US Securities and Exchange Commission investigation and a few lawsuits followed, causing executives to flee like rats from a sinking ship, and Rothenberg — who nicknamed himself “Virtual Gatsby” — to change the firm’s name to save face.
The Rothenberg rodeo is textbook sloppy, unorthodox accounting with more and more layers being peeled off every day. The ordeal should be a lesson to any accountant charged with monitoring a venture fund: Venture fund accounting can be a dicey undertaking and can produce dire consequences if not handled properly.
Don’t Fall Afoul of Tax Intricacies
Venture fund bookkeeping has its oddities, particularly when it comes to accounting and taxes. Not only must new managers conjure proprietary valuations of the companies they invest in, but they must also take several accounting steps unique to investment fund management.
Having portfolio companies with misfiled (or unfiled) taxes can be, at best, a distraction. At worst, it can put one of your companies behind the eight ball on scaling. Preparedness is the best strategy for well-organized venture fund accounting.
This includes the fund’s financial statements, current operational metrics, and individual capital account statements. If you’re not on top of your communications with your limited partners, things can go sour in a hurry and cause a fund to go belly-up.
Doing due diligence on the companies in which you invest is crucial. You must be as plugged into your company’s financials as you are into the fund’s financials, so carefully vet the financial models of prospective investments.
And though the term is not to be used in polite company if you want to stay popular, an annual “audit” is necessary for an investment fund to manage internal controls, valuations processes, and operational procedures. Any mistakes can potentially cause massive problems, including scuttling your entire fund. Encourage transparency, and make sure all tax compliance bases are covered.
Help Your Fund Flourish
Being prepared is frustratingly clichéd, but you can never be too safe when it comes to managing a new fund’s books. Here are three specific actions a new fund manager can implement to streamline venture fund accounting and administration:
- Keep Your LPs in the Know – Most funds require a pool of investments from limited partners to properly build out a fund. This isn’t a one-time transaction, and regular reporting must be compiled, provided, and updated when any new activity happens.
Regular communication is key to a healthy fund, and it helps increase investor confidence when it comes time to raise another round of capital. Build out communication policies that dictate when, what, and how you reach out to your partners.
- Position Yourself as a Resource – Every fund manager operates uniquely, but investors being more than just a monetary resource for their portfolio companies should be an across-the-board requirement for all fund managers. Plug your clients into your network, and recommend an accounting or tax firm to help portfolio companies with their accounting needs.
If you have a strong hardware background with lots of contacts, connect your companies and support them in building out a supply chain for their own hardware startups. Your companies’ gains are your gains. Leverage your own network to help them grow.
- Know When to Seek Outside Help – Fund managers are typically savvy folks with sharp minds, but sometimes you need a specialist. Proper fund management includes the schedule of investments, audit preparation, tax work, LP correspondence, and much more.
If any weak spots exist, bring in professionals who can ensure compliance and provide your team with all the resources you’ll need to help grow your fund. Outsourced accountants give fund managers the set of eyes needed to guarantee everything is lined up when it’s time to complete and file the necessary paperwork.
Implement these tactics, and you’ll sleep at night confident that your venture funding accounting and administration is up to snuff. When your investors are confident in your management, the only rats leaving your ship will be the frustrated unethical ones who can’t find any cheese.
David Ehrenberg is founder, partner, and CEO of Early Growth Financial Services. He established the company in 2008 to address the lack of on-demand financial support available to startups. His passion for mentoring entrepreneurs and guiding early-stage startups prompted David to construct EGFS’ integrated financial solution, which includes day-to-day accountant support and strategic financial, tax, and valuation support. Read more fundraising advice from David.