What is a VC Audit
A VC audit is when a Venture Capital firm enlists a third-party auditor to evaluate its financial compliance.
Are VC Audits Necessary
On August 23, 2023 the SEC approved new rules for private fund advisers. The changes will require all SEC-registered private fund advisers to have an annual audit regardless of size. Prior to this change, some funds were considered exempt but it was still common for these VC’s to conduct an audit to help better position the firm for future fundraising from potential LPs who want to see audited financials.
What’s the Purpose of an Audit
The purpose of a VC audit can be summarized in three parts:
- Ensure the fund’s General Partner(s) are operating in accordance with the fund’s LPA and that the financials reflect compliance
- Confirm the fund’s valuations of portfolio companies and the fund’s ownership position in them
- Give LPs confidence that a neutral third party validates the fund’s financial statements and assessment of its own success
When Do Audits Occur
Audits are typically conducted on an annual basis using end-of-year figures. The audit process typically starts in the final month of the calendar year and wraps up during the first quarter of the calendar year.
Although audits only happen once per year, it’s important to maintain clean records of things like company valuations, company financial metrics, fund expenses, capital calls, and other transactions throughout the year. Continual hygiene of fund records translates into a smoother audit process at the end of the year.
What’s Needed to Prepare for an Audit
While not a comprehensive list, here are some of the items that funds will likely be asked to provide to auditors:
- Limited Partnership Agreement
- Financial statements
- Invoices to prove the firm is charging LPs for permitted expenses
- Transaction records (capital calls, distributions, bank balances)
- Updated ownership positions in each company (cap tables)
- Proof of valuation calculations/policies
- Portfolio company contacts (name and email address)
- Portfolio company financials (year-end)
- Portfolio company financing documents from most recent rounds
- Portfolio company balance sheets
- Portfolio company revenue reports
- An established valuation policy
Hustle Fund reminds investors in this article Fund Audit 101 – Everything You Need To Know that it’s the job of the VC to provide this information to auditors and that the required documentation can change from year to year. It can be helpful to ask your auditor to provide quarterly updates about what they will be asking for during the annual audit.
Related Resource –> 8 Questions to Ask Before Auditing Your First Venture Capital Fund
Justifying Valuations with Portfolio Metrics Using Visible
One of the most time-consuming parts of the audit process is the back and forth that can occur when auditors need more evidence on how the VC firm arrived at company valuation figures. To justify valuations, auditors will likely want to see up-to-date and accurate financial metrics such as revenue, projected revenue, burn rate, and total amount raised from all your portfolio companies (source).
Visible equips investors with a founder-friendly way to build customizable data Requests and schedule automatic reminder emails. This streamlined approach to data collection helps VC firms keep up-to-date and accurate records about their portfolio companies throughout the year — leading to a smoother audit process.
Check out an Example Request in Visible.