#153 VC Fund Audit Retro: Insights for Mid-Year Financials & 2024 Audit

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VC Data from Q1 2024 via Carta, Aumni, Chris Harvey

VC Fund Audit Retro: Insights for 2024

Recently VC CFOs/Finance Pros and fund managers emerged from the depths of audit and tax season (that wrapped up end of April). Each year, VC funds are required to do an audit, where a third-party comes in and reviews all your financial reporting and accounting from the prior year to confirm it’s accurate. This is required for most funds out there and necessary for accurate tax reporting / payment.

Each year, it’s painful, but the pain can be managed :). You can reduce the pain you’ll feel when doing the 2024 audit (in early 2023) by making changes to your processes today. We recently completed our VC fund audit retro for 2023. Here are the biggest takeaways that we’ve incorporated into our processes and VC fund playbook:

1. File Organization: great file organization makes the audit easier. We see most firms use Google Drive, Box, or Dropbox for file storage and sharing. Throughout the year, work with your team and fund administrator/accountant to make sure files are organized for each investment you make and major cash movements.

2. Documentation: document key decisions, cash movements via email. Include text in the email with rationale and context. Save this in your file organization system. One year from now, you may not remember why you decided to classify an expense or investment a certain way. The documentation will jog your memory.

3. Overcommunication: if there’s uncertainty at the end of each month or quarter, address it first via live conversations, then email with your fund administrator. Make sure the key constituents, including the VC GP / fund manager, are aware of most recent guidance. Once a decision is reach, overcommunicate and document.

Remember, an auditor doesn’t know your fund like you do. At the end of the year, their job is to look at records for many different funds and verify the accuracy of financial statements. Do you have the right file organization, documentation, and communication systems in place so that they can come in and understand?

We highly recommend taking the extra time today to organize, document, and overcommunicate. You’ll be thanking yourself in early 2025 during audit season!

Fund Audit 101 - Everything You Need To Know

Don’t just take our word for it! We enjoyed the piece by Kera Demars at the Hustle Fund titled “Fund Audit 101 - Everything You Need To Know.” Here were some of our favorite insights Kera shared about her audit experience:

• Time consuming. “The job of the auditor is to verify the valuation and health of a VC fund's portfolio companies. In order to explain the valuations, auditors ask their VC clients: how do you justify this valuation? What's the revenue, burn rate, total amount of funds raised? They ask this about every single company in your portfolio, and they may write a report on some companies. If you have a small portfolio, this might not be too terrible. But if you have a large portfolio, it can take months to collect this information.”

• It's complicated. “If you're a Series C fund, audits are pretty cut and dry. This is because later-stage rounds are priced rounds... meaning that funds get actual shares with an actual price attached to each share. Early stage investors write checks into SAFEs or Convertible Notes. There aren't any shares yet.” This can make it more challenging to agree on the “right valuation” with the auditor.

• Cost. “The cost of running an annual audit is hefty. Heck, all back-office operations roles are a big expense for a fund. So even though you may have a great vision for a fund, and all the right operational experiences to be a great VC, back-office expenses like an audit” need to be considered. Cost is not just measured in dollars, but also in the many hours required to accurately complete.

That’s all for today folks! Thanks for your support and spreading the word! Share this on Twitter or LinkedIn to help grow “the crew!”