What do you think about this portfolio company? Nirikvik Logistics has grown revenue 58% since its last round, but margins are down, burn is up and eight months of cash are left. Is it a better or worse business than the one you invested in?

Nirikvik is a bigger company but a worse one to finance. The Rs 35 crore of new revenue came at a 7.1% gross margin, burn is up 50%, and eight months of cash leaves almost no time to raise. Gross profit grew 23% while burn grew 50%. Tell the board to cut burn so the cash lasts at least a year, and to show which customers or lanes earn the old margin before anyone talks about valuation.

A restaurant that doubles its covers by offering a discount on every plate is busier, but it is not necessarily a better restaurant; the owner may be working twice as hard for the same profit. Revenue growth is only good news if the new revenue earns at least what the old revenue did, and costs no more cash to win. So lay the four numbers side by side: revenue, margin, burn and runway, then and now.

Revenue is up 58%. Everything else moved the wrong way. Gross margin fell four points. Burn rose 50%. If burn rose in a straight line from Rs 4 crore to Rs 6 crore, the company spent about Rs 100 crore over the 20 months, so it had about Rs 148 crore after the round, about 37 months of runway at the old burn. Today it has 8 months, and a round typically takes several months to close, so the company is close to raising from a position of need.

Look at the growth on its own. Gross profit was 18% of Rs 60 crore, Rs 10.8 crore; it is now 14% of Rs 95 crore, Rs 13.3 crore. The extra Rs 35 crore of revenue brought Rs 2.5 crore of gross profit, a marginal gross marginThe gross margin earned on the extra revenue only: the change in gross profit divided by the change in revenue. of 7.1%. Roughly Rs 100 crore of cash went into the business while it added that revenue, about Rs 2.9 of cash burned per rupee of new annual revenue. In a trucking network that usually means new lanes were won on price, or trucks are running emptier on the way back.

The next investor will price the round on gross profit and burn, not on revenue. The last round paid about 46 times gross profit; gross profit has grown 23% while burn has grown 50%, so the company would need that investor to pay a similar multiple for a business that turns cash into gross profit less efficiently. The board's first job is time, not valuation: cutting burn to about Rs 4 crore a month makes the Rs 48 crore last a year. The second is evidence that the margin decline is fixable, lane by lane and customer by customer.

Say the limitation. Some of the margin fall may be temporary: a new region that will mature, or fuel prices that have since eased. If the founders can show that lanes older than a year earn 18% and the new ones are climbing, the story changes. Without that, the honest answer to the partner is that the company is larger and weaker, and that the fund should prepare for a flat or down round, or a bridge from insiders on terms that reward the extra risk.