When private market investors are conducting due diligence on startups to make investment decisions, they may gravitate towards traditional data sources provided by the company like information on the campaign page, pitch decks, and any historical financials that were provided. However, now there are a number of additional alternative data sources that investors can research as well. In this blog, learn more about using alternative data to assess startups and how to find alternative data sources.

Using Alternative Data to Assess Startups

Before we can explore alternative data sources, first we have to understand traditional data sources. Traditional data sources are pieces of information that are proactively provided by a startup to investors during the fundraising process. Traditional data sources include:

• Financial Statements – Historical and projected income statements, balance sheets, and cash flow statements
• Pitch Decks – The simplified overview of a business and investment opportunity, typically in the form of a PowerPoint presentation. Contains information about the problem the startup is solving, an outline of its products and services, information about the founding team, and the overall ask of the funding round
• Key Metrics – Internal tracking metrics that demonstrate company performance such as burn rate, user growth, recurring revenue, customer acquisition cost, etc.
• Cap Table – A detailed breakdown of the company’s ownership structure, including equity distribution among founders, employees, and previous investors

Alternative Data Sources

On the other hand, alternative data sources include anything that falls outside that list of company information provided directly to investors. Some examples of alternative data sources  include:

• Company Website & Social Media Pages
• External Social Media Buzz
• News Articles & Features
• Patent Filings

Analyzing these alternative data sources may help provide a more holistic view of a startup’s health since they also contain information not directly provided by a company.

Company Website & Social Media Pages

A company’s digital presence is one form of alternative data. Unlike a polished pitch deck, a company’s website and social media pages are dynamic and can reflect a company’s ongoing operations and market engagement.

Reviewing a company’s website may help reveal new information such as new products, recent milestones, and new team members. Case studies or user testimonials, if provided, can help to confirm product-market fit. Additionally, a company’s social media channels offer real-time insight into brand voice, community engagement, and marketing effectiveness through engagement rates, comments, and tags.

External Social Media Buss

In addition to analyzing a company’s social media pages, seeing how others are talking about the startup/brand on social media can help with due diligence efforts. Being able to analyze public sentiment, complaints, and customer satisfaction may help investors understand the unfiltered challenges that the startup is facing. Are users engaged and excited for the product/service? Are they reporting bugs, challenges, or negative customer support experience? Is there organic, word-of-mouth recommendation?

User reviews may also help investors conduct due diligence. Typically found on the App Store, Google Play Store, Trust Pilot, or G2, the amount of reviews and the sentiment of reviews can also provide unfiltered customer feedback for investors to evaluate.

News Articles and Media Features

Media coverage can also provide a perspective on a startup’s public reputation and its standing within the broader industry. Sites like TechCrunch or Crunchbase picking up achievements or funding rounds from company press releases or features on The Wall Street Journal or CNBC on series’ like Make It can demonstrate momentum, credibility, and overall industry recognition.

The quantity and quality of press mentions can impact startups. For example, features in major, reputable industry publications help to build credibility. Alternatively, a lack of press coverage or the press picking up negative news stories about a startup may be cause for concern for investors.

Patent Filings and Intellectual Property

For technology and science-driven startups, patent filings and intellectual property can add value to the due diligence process. Public patent databases provide visibility into patents that have been filed for or granted. Reviewing a startup’s patent filings can help investors gain insight into its pipeline or long-term growth strategy.

Final Thoughts

While alternative data helps to provide unique insights into a startup’s health, it should not serve as a replacement for standard due diligence processes. Instead, investors should consider integrating alternative data into existing due diligence processes in order to potentially enhance the view of a startup’s opportunity. Strong social media engagement may point to validation of a startup’s claimed user growth metrics. A series of news articles from reputable sources can help confirm claims that the startup is making about milestones, partnerships, and achievements. Investors can use these types of alternative data sources as part of their due diligence research process.

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Want to learn more about investing in startups? Check out the following MicroVentures blogs to learn more:

• Building a Portfolio: B2B vs B2C
• Beyond Chatbots: AI Use Cases
• Investing in the Future: The Rise of GreenTech
• Time to Exit: Are Startups Getting Older?

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The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.