Q: Dear Sastra: How do VCs verify startup revenue?
This varies depending on the platform:
Many pre-seed investors take the founders’ word for it that their financials are sound. At SaaStr Fund, we also generally do bank account cash flow test. We ensure that the bank statements are linked to the financial statements given to us. If they do, the financials and revenues are likely to be at least 90% accurate, which is enough for the seed stage. The later stage you go, the more effort is put into it here. Very late-stage deals often also want audited financials, and/or at least some third-party certification or review of the financials. But not in the earlier stages. And usually on Series A, VCs and attorneys typically read your top contracts to see that they are “genuine.” At least, they did outside the crazy times of late 2020 and 2021. Fraud is always possible. Even in earlier stages, founders sometimes claim that pilots are genuine contracts, unsigned deals are signed, etc. They often recognize revenue very quickly. In later stage deals, larger games with higher risk are sometimes played. Round Trip Deals, Camouflage Revenue, and more. It can be possible.
There is certainly a risk here, that what is presented is not quite accurate. In fact, it probably happens far more frequently than is reported. VCs generally sweep it under the rug if it doesn’t blow up on them in public or otherwise. After all what can you do?
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Published on 14 October 2022