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The Importance of Privacy Due Diligence in Early-Stage VC-Backed Startups

Legal Solutions May 4, 2023

I recently had a riveting conversation with a manager of an early-stage startup. What started as a casual discussion took a more profound turn when we delved into the topic of growth versus revenue in the context of venture capital (VC)-backed companies.

The essence of our dialogue highlighted a crucial yet often overlooked aspect: the significance of privacy implications in early investment rounds.

Growth Over Revenue

It's no secret that early-stage companies backed by venture capital prioritize growth over immediate revenue. Traction, or measurable evidence of user interest and adoption, serves as a vital metric to demonstrate to investors that the startup is on a promising trajectory. This emphasis on growth underscores the need for startups to collect granular data points about their users to refine their product offerings continually.

The Privacy Conundrum: Personal Data in the Spotlight

While the pursuit of user data is integral for understanding consumer behaviour and refining product-market fit, it raises pertinent questions about privacy.

How many of these data points constitute personal data? The answer is nuanced.

If these data points are interconnected across databases to identify a specific user, they inherently become personal data. The implications become even more pronounced when such data is aggregated and made accessible to a broader spectrum of founders and managers within the company.

Elevating Privacy in Investor Due Diligence

Given the increasing scrutiny on data privacy and protection globally, it's imperative to elevate privacy considerations in the due diligence process of investors. Traditionally, early-stage investment rounds focus predominantly on market potential, team capabilities, and revenue projections. However, the growing emphasis on data-driven growth strategies necessitates a recalibration of this approach.

Investors should prioritize evaluating not only the technical accuracy of usage data, such as ensuring data integrity and adherence to security standards but also assess the scalability and compliance of current data processing practices. A robust privacy framework not only mitigates regulatory risks but also fosters trust among users, thereby reinforcing the startup's long-term growth prospects.