Right of Audit
The term ‘right to audit’ refers to an investor’s (or board member’s) right (but not obligation) to audit the books, balance sheet, user base, code base or other centralized record of their portfolio companies’ that is directly related to its business operations and performance. Typically the right to audit is included in the provisions of the term sheet that is provided to the business receiving the investment. A recent example of an investor leveraging the right to audit, is Elon Musk who requested access to the user logs of Twitter to determine how many actual fake and spam accounts there are (compared to the 5% they reported).
The term run rate refers to the financial performance of a company based on its current business fundamentals, and is used to predict its future performance with the assumption that market conditions remain constant. For example, if a company has generated $50 million in revenue each quarter for the past three quarters, the run rate for the following quarter would be estimated at $50 million, and the annual revenue run rate would be estimated at $200 million.
Calculating the run rate of an organization is a more accurate form of forecasting compared to the bottoms-up and top-down forecasting methods. It is particularly useful for estimating the performance of companies or departments that have been operating for less than a year.
While the run rate of a mature business is relatively consistent, for seasonal businesses or businesses whose sales are highly dependent on the economic landscape (such as the travel or luxury clothing industry) it can be highly inaccurate.
Runway refers to the period of time that a startup can “survive” or continue operations based on its monthly cash burn and its cash in the bank. The shorter the runway a startup has, and the higher the burn it has, the more likely it is to go bankrupt. During periods of economic expansion, the burn rate a company has doesn’t matter as much as its growth rate, as investors are willing to fund companies that are growing exponentially. During periods of economic compression, investors are much more stringent on a company’s cash burn and growth rate, often suggesting that company’s conserve their cash and cut back on their growth plans to extend their runway. A company has an infinite runway when it surpasses the break even point—i.e. when its revenues exceed its expenses.