What data will investors always look for before a term sheet?

A quick guide/primer for SaaS companies going out for their first institutional capital raise

In the vast majority of cases, investors will look for three primary items, so it’s helpful to have these available off the shelf:

1. Historical & Projected P&L

This is what I’d consider “table stakes”:

Key highlights:

  • ARR Bridge (the first 5 lines) — investors want to see how much of the ARR is driven by new logo bookings vs upsell, and how churn and downsell look; these metrics are then summarized in the gross and net retention lines below the bridge
  • Gross Margin — simple in concept, but one tip: if you have an implementations team or pro services team, it’s worth breaking that out in the COGS, so investors can see what portion of COGS will scale linearly with revenue (e.g. AWS expense), vs sub-linearly (e.g. implementation team) — this is important bc investors will orient more to your “Software Gross Margin” more than they will the aggregate Gross Margin, and this margin is a big long-term value driver
  • S&M / R&D / G&A — don’t be the company that sends a “payroll” line in the operating expense breakdown — investors want to see expense by these functional departmental buckets — this allows them to see how much you are spending on S&M to generate your ARR/Revenue growth, which is a critical metric (shown as “Gross Margin -Adjusted Magic Number”)
  • Quarterly Breakdown —don’t just send annual data — investors want to see your YTD (year to date) performance and how much of the bookings are weighted to the back half of the year in your projection — this will inform their thinking of how achievable your plan likely is, with respect to both the scale of top line in silo, as well as the ratio of top line relative to sales & marketing

2. ARR by Customer by Month

This is self-explanatory, but as context, investors will use this to calculate cohort-based gross and net retention, LTV/CAC, ACV, and ARR concentration.

You’ll hear some people call this the customer cube.

3. Cap Table

Primarily investors want to see this to understand how much is left in your ESOP (employee stock option pool) because of the term sheet will include a specification for a “pre-round pool top-up”. It’s also important in situations where there is a secondary component to the round (where existing shareholders are selling) — they want to make sure those who are selling are not important members of the team, or if they are, that those important team members are not selling a large portion of their ownership. And even in situations where there is not a secondary component, they’ll still want to make sure you and your team owns enough of the company to keep you incentivized.

Investors will also look to make sure they understand who the major shareholders are across each of the share classes (common, pref A, pref B, etc.) because there are typically governance implications for this, i.e. who has voting control.

Other Notes / Disclaimers

  • These three items are just the basics that apply to almost every company. At some point, I’ll write another post about some of the other things you may want to have prepared that are specific to certain business models or markets.
  • Have your financials in Excel format! Giving investors PDFs of financials looks like you’re trying to play hide the ball.
  • Crazy as this sounds, formatting matters — investors are typically impressed with companies that have well-structured and formatted KPIs and financials ready to go.
  • You can include your analyses with the data, but investors will do their own work with the raw data. That said, it’s not a bad thing to show your own analyses to make sure they understand how you think about and track the KPIs in the business.

Investing at Brighton Park