What Is a Tear Sheet?
Imagine you’re running a venture capital fund with a fair number of early-stage companies in your portfolio. You’ve raised quite a bit of money to invest in these companies. That money has come from a group of limited partners (LPs) who have a vested interest in understanding how and why you’ve allocated it the way that you have. Is there a fast, efficient way to fill those LPs in on the investment performance of your portfolio companies? It turns out there is, and it’s called a tear sheet.
The term “tear sheet” can mean several different things, depending on the context. Within the context of startup fundraising, tear sheets are essentially VC fund fact sheets that give LPs the low-down on key financial information about the companies in the fund’s portfolio. Each of these tear sheets is typically a one-page document that provides a basic overview about a company’s executive team, balance sheet, and investment performance.
As the founder of a startup with VC investors, perhaps you’re wondering about the information that may appear on your company’s tear sheet. We get that, which is why we’ve put together this guide that outlines everything you should know about tear sheets—from why they exist to what info they usually include.
- What is a tear sheet?
- What is the purpose of a tear sheet?
- What information is included on a tear sheet?
- How Pulley levels the playing field with investors
What is a tear sheet?
A tear sheet is a brief, one-page document created by a venture capitalist to summarize the key financial information about a portfolio company. These summary sheets help the LPs involved in a venture capital fund keep track of their investment performance and stay on top of all the fund’s portfolio companies.
The term “tear sheet” comes from an old practice in which stockbrokers would (rather dramatically, we imagine) tear out a page from their books and hand it to a potential investor for reference. These pages generally included recommendations for public companies the brokers encouraged their clients to invest in. Today, tear sheets are largely used within the world of private equity, as investors in the public markets can more easily find the information they need online.
In case you were wondering, tear sheets are no longer literally torn out of books. As with many other types of financial documentation these days, they’re most often delivered to investors online (e.g. as a PDF file).
What is the purpose of a tear sheet?
A tear sheet should present a concise overview of the financial information an LP needs to evaluate their investment in a venture capital fund.
As you may recall from our guide to venture capital, A VC fund is a pool of money that a venture capital firm raises to invest in a portfolio of early-stage companies. This money typically comes from a group of LPs, which may include a mix of institutional investors, large pension funds, and accredited individual investors.
While it’s the VC firm’s responsibility as the general partner to manage the fund’s portfolio, the LPs still need a way to evaluate the companies included therein. Tear sheets exist for this purpose. A VC firm typically sends out tear sheets on its portfolio companies on a monthly or quarterly basis, though they may also provide them upon request.
What information is included on a tear sheet?
A typical tear sheet includes key financial information about the company in question, as well information about the VC fund’s investment in the company.
It may begin with an overview of the company and its executive team, or it may dive right into the most relevant financial metrics. These metrics may include:
- Revenue: This is probably the most obvious and important metric used to evaluate the relative health of a company. Revenue information may include an overview of revenue growth over time and the current state of the company’s balance sheet.
- Headcount and expected growth: LPs are often interested in headcount (both FTEs and expected new hires) as a directional indicator of how a company is using its money to grow.
- Core company KPIs: A company may look to more than simply revenue growth to evaluate its own performance. A company’s key performance indicators (KPIs) may also include metrics such as daily active users, lifetime customer value, average contract value, and other indicators of business health.
A tear sheet will also likely include the following investment information:
- Total amount invested: How much has the VC fund invested in this company? What percentage of the fund’s total assets are allocated here?
- The date of the initial investment: When did the VC fund first invest money into the company?
- Investment performance to date: How has the investment performed to date? For startups and private companies that aren’t traded on the public markets, this can be based on considerations such as the company’s most recent 409a valuation.
- General information about the industry or sector: To develop a stronger perspective on its investments, a VCs firm oftentimes focuses on a particular industry or sector. The firm’s most recent industry perspective may be presented in some form on the tear sheet.
- VC commentary: Some tear sheets leave room for other general commentary. This may include a justification of the VC’s expected future return, or it could point to broader macroeconomic factors the firm is taking into account.
What limited partners look for in a tear sheet
Aside from the basic information listed above, investors generally value transparency and consistency when it comes to tear sheets.
You can find a number of example tear sheets and templates across the internet, but most VC firms settle on one approach that’s scalable and incorporates investor feedback. Some VC firms keep things as brief as possible, while others strive to provide as much detail as they can squeeze onto a single page. The right approach probably depends on the LPs themselves.
Once a VC firm has settled on a tear sheet template that’s flexible and scalable, it shouldn’t deviate too far from this template. LPs generally don’t like having to acquaint themselves with multiple new tear sheet templates every month or quarter.
How Pulley levels the playing field with investors
When it comes down to it, tear sheets are all about transparency for investors. That’s something Pulley knows a lot about.
Our equity management platform helps founders clearly communicate relevant company information to investors and potential investors. Export our pro-forma to Excel to immediately reassure investors that they’re receiving the correct number of shares, and use our fundraising modeling tools to level the playing field in investor meetings.
Interested in learning more? Schedule a call with us today.