Are Your VCs Secretly Gossiping About You Right Now? - TFP 12/4

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📰 Today's Edition:

You've been heads down building. Revenue is up. Burn is manageable. Things are actually going pretty well.

But most founders don't know, that right now, your VCs might be sitting in rooms with auditors, deciding what your company is actually worth. And you have no idea it's happening.

Let me walk you through the hidden world of VC audits and why this process could kill your next fundraise.

What the heck is a VC audit?

Almost all legit VC firms hire a third-party auditor to analyze their funds annually. This gives their LPs (the people who gave them money) confidence that fraud isn't being committed, capital in the fund is being deployed into legit companies, and performance isn't being fudged.

Here's what's changed recently: Two years ago, auditors basically looked at your books and said "Ok, this is fine." But in this market, with so many down rounds, valuation drops, and companies shutting down, auditors are looking at EVERYTHING with a careful eye.

So let's say we run Hippocorns VC with 3 portfolio companies. It might read something like:

• Company A: $100k invested; $200k current value

• Company B: $100k invested; $100k current value

• Company C: $100k invested; $1 value

• Overall: $300k invested; $301k value; ~1x multiple

Auditors take a look at these reports that we as the VC submit and dig into companies A, B, and C to figure out:

• Should we be marking company A up (increasing its valuation above what we paid)?

• Should company B be held at cost (keeping it at the same valuation we invested at)?

• Should company C be written down (decreasing its valuation below what we paid)?

Bottom line: those three lines roll up to the headline people judge, your multiple on the books, is simply today’s total value divided by what you invested. 

That’s why auditors now probe how you set each value, and why LPs care: small moves in any single company can shift the portfolio multiple and change the story your numbers tell.

Here's where the peer pressure kicks in

Now for the really interesting stuff. Investors in VC funds tend to invest in multiple VC funds. And multiple VC funds may be investors in the same company and even in the same round of the same company.

Let's say a company, let's call it Hippo Inc, raised a $2M seed round from three different VCs. Come audit time, Fund A marks Hippo down to 50% of what they paid. Fund B keeps Hippo at cost. Fund C marks Hippo up to 150% of what they paid.

(As a purple hippocorn, I may be slightly biased toward hippo-themed startups. Sue me.)

Now imagine you're an LP who invested in all three funds. You get their audit reports and see the same company valued three different ways. Who's right?

If you're that LP, you start questioning: Is Fund B being too optimistic compared to Fund A? Is Fund C living in fantasy land? Do I trust these funds to give me accurate valuations?

This creates a "race to the bottom" effect. Fund B and Fund C start thinking: "Maybe we should mark down Hippo too, so we don't look naive compared to Fund A."

The kicker: when you go to raise, some later-stage investors are also LPs in early-stage funds (personally or through their firms), so they see these markdowns before your pitch. 

Even if nothing’s truly wrong in the company, visible markdowns can create red flags and shape the room before you walk in.

What should this change about how you communicate, if you're a founder?

Understanding this hidden process changes everything:

1. The audit season matters more than earnings season

If your VC asks you for data in audit season, send it promptly. It's going to be vital.

If your company is actually doing well or even just ok or surviving, you want to be marked at cost or marked up. You don't want to be marked down.

If they don't have enough data from you, or haven’t heard from you, they may pre-emptively have to mark you down anyway.

2. Create a simple update system

If you have multiple VCs on your cap table, create short documentation and save it as a template. Then with one click you can send that same info out to all your VCs.

It takes five minutes to create it and two seconds to send out.

3. Don't wait to be asked

If you haven't talked with your investors in a long time, they may have just written you off without your knowing.

Proactively send them an update with:

• Revenue

• Runway

• Burn rate

• Any money raised this year and at what terms

If things aren’t going well, add a “Control Plan” so they see you’re on it, with specific actions, owners, and dates. The signal isn’t perfection; it’s that you’re moving decisively and measuring progress.

That's it.

What should you do right now?

Send your investors an update. Today.

This isn't about keeping investors happy. It's about giving them the data they need to defend your valuation when auditors start asking tough questions.

You worked too hard to build this company to let it get secretly marked down because your VCs didn't have enough information to fight for you.

The audit process is invisible to you, but the consequences are very real.

Don't let silence cost you your Series A.

Off to draft that email,

Dunky from Hustle Fund

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