When a company was sold years ago, the enterprise acquiring it would ask to see financial and historical company documents as part of the due diligence process. These documents would be stored in a secure room that was continually monitored.
Individuals crucial to the decision-making would visit the chamber to review the documentation. These days, these spaces have moved to the digital realm and are now called investor data rooms.
A data room is one of the hallmarks of a well-organized company, and you may be able to benefit immeasurably from having a highly structured way to tell your startup's story with data.
A virtual data room can be a crucial component of your startup's fundraising efforts and provides backers with all the information they need to decide whether to invest.
What’s due diligence?
Due diligence is the process whereby investors conduct a thorough investigation of an early-stage enterprise to decide whether it’s a good investment opportunity. If this information isn’t readily available, the due diligence process will likely take longer.
Investing in early-stage companies is risky, and investors don’t want any unpleasant surprises after deciding to invest in a startup. That’s why they do due diligence beforehand. Having a data-informed picture of your assets and liabilities can help them to reduce their risk.
Why does a startup need an investor data room?
Helps with due diligence
A virtual data room contains all the documentation that showcases your startup’s strengths and performance. If done right, it presents an accurate and compelling picture of your enterprise, helping investors complete their due diligence.
There are a lot of moving parts to the due diligence process. So, the better and more organized your virtual data room is, the quicker and less painful the process will be. Staying organized also means you won't lose mission-critical documents such as important customer contracts.
Speeds up the fundraising process
An investor data room can help speed up the fundraising process. When you're trying to raise venture capital for your startup, investors will want to see all historical documentation that will help them make an informed investment decision.
However, not everybody agrees on this. Some investors say that data rooms slow down the investment process and cost founders significant amounts of time that could be better spent growing their startups.
Makes investors’ jobs easier
In recent years, venture capital funding has proceeded at a furious pace, which doesn't leave investors much time to investigate deals. You can make their job easier with an investor data room.
If you’re considering a funding round, think about setting up a data room before you even start raising money. That’s because having a data room all ready to go before you have even a single fundraising discussion can save you countless headaches for both you and your backers.
Startups don’t have the history that their mature counterparts do. This means investors may spend more time scrutinizing early-stage companies. Data rooms have all the information they need organized in a single location, making it easy to access critical information.
Keeps you organized and focused
The very act of putting together a data room puts you into a fundraising mindset because it forces you to see things through an investor’s eyes. This process will help you document parts of your business that previously only existed in your head, such as product development and customer acquisition plans.
Doing both these things can help to bring clarity to your efforts.
When should I put a data room together?
It’s never too early to put a data room together.
A forward-thinking founder will already be planning from the very first day their startup is operational. Even as early as the seed money stage, a highly organized data room can go a long way toward impressing potential investors.
How to set up an investor data room
A data room is merely an extension of your existing file structure. That’s why if you’re already organized, setting one up should be relatively quick and easy. When setting up a data room, two of the best file hosting services are Google Drive and Dropbox.
Create a folder structure that’s clean and easy to navigate. Because investors' time is valuable, you will likely want to ensure your system is as simple and as intuitive as possible. Only allow read-only rights so that third parties don’t download or edit your sensitive data. You may want to create separate data room access for each investor so you can provide targeted information for each one–this can help to make the process more personal.
Establish a content update schedule and stick to it. That way, you’ll be ready when an investment opportunity appears, and you won’t have to scramble at the last minute.
Why you might need two data rooms
It might be a good idea to set up two different investor data rooms. That way, you can segment document accessibility based on need. You can allow access to the first room for investors who have expressed interest in funding your startup but haven't made a firm commitment yet.
This room will usually contain things like strategy documents, pitch decks, and product plans. The second room will have more sensitive information such as legal agreements and HR documents for more serious investors.
To make it easier to locate a specific document, create an index to show readers what files each data room contains. This can be a huge timesaver that will make you even more organized.
What to include in your data room
It can be challenging to figure out what documents to include in your data rooms. If you include too little, investors won’t have the information they need. If you include too much, you may risk overwhelming them with data and waste their time as they try to wade through it all.
Here’s what you might want to include:
- Amended and restated articles of incorporation
- Voting agreements
- Investor rights agreements
- Partnership agreements
- First refusal and co-sale agreements
- Customer contracts
- Board of directors' materials
- Board meeting minutes
- Board consents and actions
- Shareholders’ agreement
- Market research
- Competitive analysis
- Sales process
- Marketing materials
- One-page business plan
- Pitch deck
- Branding guidelines
- Office lease
- Legal disputes (past and present)
- Investor updates
- Profit and loss statements
- Pro-forma statements for next year
- Financial projection
- Asset register
- Management accounts
- Audited accounts
- Capitalization table
- Details of previous raises
- Granted and filed patents
- IP strategy
- Software license details
- List of any open-source software used
- Domain name ownership
- All employee contracts past and present (with titles and salaries)
- All intern contracts past and present
- All consultant contracts past and present
- List of current employees, job titles, and salaries
- System architecture diagram
- API documentation
- Details on any large integrations
- Product backlog export and release map
- Screenshots of existing products
Including past investor updates in your data room shows backers you’re willing to share the bad as well as the good. It’s an excellent way to tell them you take investor communication and transparency seriously, boosting your trustworthiness in the process.
In the "employees" section, share the vision of the team you're building. This allows an investor to hire team members you need from their own networks. To give backers insight into your workplace culture and hiring process, include things like onboarding documents.
What you shouldn’t include
While certain information must be shared with investors, there are some things you should never share.
Always research the individuals you’re providing data room access to. Let's say you find out that they've given competitors substantial amounts of cash or are otherwise involved in the affairs of competing organizations. In that case, you might not want them to see sensitive company information.
Not every document needs to be included in your investor data room. Irrelevant documents can confuse the investor when what you want to do is give them clarity. Some documents can be saved for the next stage of the deal after the investor has committed to moving forward.
The more documents included in your data room, the higher the risk of misusing or compromising information. Configure different views and access rights for the parties looking at your documents because not everyone needs to see everything. This will help keep your records secure.
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