A data room is one of the trademarks of a well-organized firm, and having a highly structured manner to communicate your start-up’s story using data could be beneficial.
A virtual data room can be an important part of your start-up’s fundraising efforts because it gives potential investors all the information they need to decide whether or not to invest.
Due diligence is the process through which investors investigate a start-up company thoroughly to determine whether it is a good investment. The due diligence procedure will certainly take longer if this information isn’t readily available.
Early-stage investing is hazardous, and investors don’t want any unpleasant surprises after deciding to invest in a firm. That is why they perform preliminary research. They can lower their risk by having a data-driven understanding of their assets and liabilities.
It's only fair that we say you might not require a data room. How do you know whether or not you require one?
To put it another way: The more the requirement for confidentiality, the more a data room is required.
You should be good without a data room if your business plan or pitch deck contains nothing confidential, your financial statement has nothing that could raise eyebrows, and your company strategy documents contain nothing that you'd want industry competitors to access.
A virtual data room stores all of the paperwork that highlights your start-up’s strengths and accomplishments. If done well, it paints a clear and appealing picture of your company, assisting investors in their due diligence.
The due diligence process has several moving elements. The faster and less difficult the procedure is, the better and more structured your virtual data room is. You will not lose mission-critical documents such as vital customer contracts if you stay organized.
A data room for investors can aid in the fundraising process. Investors will want to examine all previous paperwork that will assist them to make an informed investment decision when you're looking to raise venture financing for your start-up.
However, not everyone shares this viewpoint. Data rooms, according to some investors, hold down the funding process and waste founders' time that may be better spent expanding their businesses.
In recent years, venture capital investment has moved at an incredible speed, leaving investors with little time to scrutinize offers. With an investor data room, you can make their job easier.
Consider putting up a data room before you start collecting money if you're considering a funding round. That's because having a data room ready to go before even having a single fundraising conversation will save you and your funders a lot of grief.
Start-ups lack the experience of their more established peers. As a result, early-stage enterprises may be scrutinized more closely by investors. All of the information they require is arranged in a single location, making crucial information accessible.
The act of putting together a data room forces you to think like an investor. This method will assist you in documenting areas of your business that were previously solely in your head, such as product development and customer acquisition strategies.
Both of these actions can help to clarify your efforts.
Whatever virtual data room you choose, your main goal should be to organize the proper information so that the right individuals have easy access to it.
In the same way that you just have a few seconds to capture someone's attention with your investment pitch, if your virtual data room isn't well-organized, you risk losing a potential investor's interest eventually.
We at FirmsData deal with a lot of businesses looking for funding, thus we recommend organizing your docs like this:
Create a user-friendly folder structure that allows investors to quickly retrieve the materials they need without having to ask any questions.
Use read-only rights to protect your documents. This safeguards not just their privacy, but also their safety. It also has an impression of professionalism about it.
Keep the data up to date. No one wants to look at records that are two years old. It informs them that you have been unable to secure money for the past two years.
It's important to note that an investor data room differs from a due diligence data room. At this point, your goal is to demonstrate that your organization has a winning business plan backed by a strong management team that can virtually ensure a return on their investment.
That means you won't require the normal due diligence materials. Articles of incorporation, minutes of board meetings, and voting agreements are only a few examples.
The following documents should be included in your investor data room in order of importance:
Investors are likely to have seen some of these documents already, but they are the most important and should be included. Nothing in the documents should contradict anything else in the data room.
Intellectual property isn't something that every business has, but if you do, it's likely to be one of the first things investors look for. It has to be here if it offers value to your business and helps it stand out.
Granted and filed patents
Intellectual property strategy
This could be the most important item on the list. If you're a loss-making company with a big idea, don't worry. Slack and Uber are, too. The most crucial thing is to have financials that are clear and open. Make sure there are no mistakes here.
Sources and uses of funds
Income statement, cash flow statements (3 years max), and balance sheet.
Pro-forma statements for next year
Details of outstanding debt
The sales and marketing strategy is ultimately what determines your company's future success. Investors are searching for traction, thus all of your sales and marketing efforts, as well as the results, must be detailed here.
Marketing research conducted
Current sales pipeline
Details of the sales process
Customer acquisition cost (if applicable)
The (projected) average revenue per customer
"Every firm is a technology company," as the phrase goes, therefore describe your company's technological expertise or capabilities here.
Overview of the technology stack
Details of APIs, integrations, and system architecture
The phrase "investors invest in people, not businesses" may be overused, but there's a reason it keeps coming up. Show investors that you and your team are someone they can trust with their money by putting your best foot forward.
In contrast to the brief list of objects to include, the list of items to exclude is lengthy. Your office may look great, but investors aren't interested in knowing. It's also crucial not to exaggerate your qualifications on your resume.
As a general guideline, don't reveal too much information about your IP or plan. Your company's strategy is, in some ways, an informal IP. You can't reveal what's in your secret sauce to everyone. Allow just enough information to be shared, but maintain a more detailed picture of the approach for due diligence.
Setting up two separate investor data rooms could be a good idea. You can then divide document accessibility according to necessity. Investors who have expressed interest in backing your startup but have not yet made a solid commitment can gain entry to the first room.
Strategy documents, pitch decks, and product plans are typical items found in this room. For more serious investors, the second chamber will contain more sensitive information including legal agreements and HR paperwork.
Create an index to show readers what files each data room contains, making it easier to locate a given document. This can save you a lot of time while also improving your organization.
If you believe your organization still needs a data room, FirmsData is a great place to start and offers a free trial. For your 30-day trial period, simply follow the procedures below: