Crucial Mistakes To Avoid When Creating Your Data Room

What are the crucial mistakes to avoid when creating your data room? When leveraging data rooms for your fundraising strategy, you’ll understand the value of this tool in your arsenal. You’ll use it to share in-depth information with investors, thus streamlining the due diligence phase.

Considering how critical data rooms are to securing funding, you’ll ensure that you manage them efficiently and update them regularly. Treat the platform as a dynamic resource that upgrades to keep pace with the company’s growth and success.

Any errors you make reflect on the startup’s credibility and impact the trust you evoke in investors. The data room should be an extension of the pitch you deliver. It’s the logical next step when they are ready to evaluate the company and offer a term sheet.

Read ahead for some of the crucial mistakes founders make when developing the data room and how to avoid them.

Crucial Mistakes to Avoid When Creating Your Data Room – Choosing the Wrong Platform

When you start to search around, you’ll come across multiple companies offering founders specialist data rooms. If your startup is still in its early stages, investing in proprietary data room software may not be advisable. Instead, you’ll opt for options like Dropbox’s DocSend, Notion, or Google Drive.

DocSend ensures seamless access and functionality across all platforms, integrating smoothly with various operating systems (OS) and email providers. GDrive also works well, but many organizations are averse to using Google.

When it comes to Notion, it enables intelinking and toggling, and offers the same functionality as GDrive. Other options include OneDrive and Microsoft SharePoint, though these platforms are notorious for login issues and an outdated interface.

As the company progresses to the higher growth stages, consider investing in advanced data room platforms. They may offer additional functionalities that help organize the information into folders and subfolders for a better user experience.

Making Accessibility Complicated and Cumbersome

When sharing your data room with investors, stress on allowing them to access and open the files quickly without issues. Enable users to click on links to open folders and documents without having to log in or request access separately. Eliminate the need to open a new account with the platform to enter the room.

Your objective here is for them to start working on files without any hurdles that can disrupt the flow. Users understand that the platform will capture their email for security reasons and accept it.

Disabling Downloads Because of Security Concerns

Security is mandatory, and not implementing robust measures is one of the most crucial mistakes to avoid when creating your data room. You’ll want to protect your company information from being accessed by unauthorized users. The threat of data leaks is always present.

Founders may choose to prevent users from downloading files without prior permission. However, this measure can create additional hurdles for investors who want to share the materials with their teams. Due diligence is an intricate process, and they hire specialists to review different aspects.

For instance, after sending the term sheet, investors may want to confirm ownership of your patents and intellectual property (IP). For this, they’ll likely hire lawyers trained in IP law who will want to examine the titles. And that’s just one aspect of the due diligence process.

You can get around this problem by using discretion when giving access to the data room. You’ll allow access only after building a relationship of trust with them and receiving a term sheet. Confirm that they are genuinely interested before sharing confidential information.

You can also include watermarks and remarks in the footers, reminding readers that the materials are confidential. If you do have particularly sensitive information in the data room, like proprietary designs and blueprints, you’ll add password protection. Users who want to view them can request access.

To reiterate, you want to make the due diligence streamlined, and having non-exportable materials and a locked-down data room creates hurdles. Top-tier investors understand the importance of securing information and cannot risk their reputation by leaking it. Rest assured.

Integrating Annoying Tracking Tools

Many founders integrate tracking tools into their data rooms for various reasons, and security is only one of them. Monitoring users helps them evaluate investor interest and make predictions about how the due diligence is progressing. The information tracking tools compile helps streamline fundraising.

However, make sure your tools aren’t intrusive and annoying, and convey the impression that every click is being recorded. Never send out emails that comment on how much time a user spent on a specific section. Or, if they have more questions about it. Let investors get back to you themselves.

Instead, you can add unobtrusive notes and comments to explain specific points in detail. This move indicates that you’ve thought out the questions investors might ask and have responses ready for them. You can also include links to other documents and sections to facilitate a streamlined review.

Experienced founders also advise engaging investors by collaborating on shared documents. Invite them to add comments and send out emails with questions you can quickly answer. Using techniques like asynchronous communication helps build relationships with investors and their teams.

Most importantly, you’ll speed up the due diligence process and get money in the bank quicker.

Having Standardized Data Rooms for All Investors

If you’re trying to encourage collaboration and interactive communication, having a single data room for all investors might not work. It’s another of the crucial mistakes to avoid when creating your data room. Instead, consider building a dedicated room for each interested investor.

Customize the information in the files according to the ongoing discussions you’ve been having with them. As the negotiations and due diligence progress, you can drop more details to address their questions and concerns. This strategy enables you to limit the information as per the investor’s interest.

At any point, if the negotiations fall through, you can cut off access and secure the room. At other times, you’ll keep track of the questions asked with an FAQ page.

Keep in mind that storytelling is everything in fundraising. In this regard, for a winning pitch deck to help you here, take a look at the template created by Peter Thiel, Silicon Valley legend (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.

Remember to unlock the pitch deck template that founders worldwide are using to raise millions below.

Asking for an NDA

Many investors hesitate to work with founders who request an NDA before sharing their data rooms. Understandably, you’ll want to secure sensitive company information and secrets. However, investors review hundreds of applications regularly, and navigating NDAs is not a practical option.

Dealing with non-disclosure agreements is time-consuming and cumbersome, not to mention the potential for conflict and liability they entail. This is why investors prefer to disregard a proposal that focuses more on security than execution.

As mentioned earlier, top-tier investors have a reputation to uphold. They expect trust to be the cornerstone of their relationship with the company. NDAs can instead result in unnecessary delays when making investment decisions.

In any case, you’ll provide access to the advanced data room only once you receive the term sheet. The information you might want to secure with NDAs is only relevant during the due diligence phase.

Not Segregating Data into Tiers

As your fundraising consultant will advise, you should segregate the information in the data room into tiers according to sensitivity. In this way, you’ll share data using a progressive approach according to the specific stage of negotiations.

For starters, you’ll have the Tier 1 data room that contains non-sensitive materials that junior analysts can also review. Tier 1 is designed for investors who have expressed interest in the first meeting and have requested access.

For instance, you’ll share three to five-year financial models, product prototypes, go-to-market (GTM) strategy, team bios, and competitor analysis. Also, include any other information investors may have specifically requested. You’ll also include a note informing them that more details have been added to Tier 2.

The Tier 2 data room contains sensitive information like company secrets, unpublished patents, and other data that you’ll want to secure with an NDA. You’ll ensure that this room has all the relevant info investors may need to make an informed decision.

Many founders opt to establish a Tier 3 data room, which typically includes documents related to legal and governance matters. For instance, employment contracts, insurance policies, rental agreements, deeds proving IP ownership, and more. Investors typically focus on this section during the final due diligence.

Glossing Over Metrics

If your startup is still in the seed stage, you may not have impressive metrics to entice investors. Avoid the mistake of trying to mislead them by concealing negative growth or numbers. Remember that you need to build credibility, and glossing over data sends a negative signal.

One of the most crucial mistakes to avoid when creating your data room is misleading investors. They may get the impression that you lack experience and don’t fully understand the risks associated with the company. Presenting incomplete documents and data won’t help either.

Be upfront about your valuation since investors expect the company to accelerate growth with the infusion of capital and expertise. Don’t be concerned about excessive dilution. If you’re not satisfied with the terms and conditions an investor offers, you can always scout around for alternatives.

Also remember to conduct multiple checks on the data room to ensure that all the information is accurate and error-free.

Sharing your data room and answering questions that investors may ask is part of navigating the due diligence phase. If you need additional guidance on how to do that, check out this video I have created.

Including Unnecessary Information

When creating the data room, you’ll want to make it comprehensive. But the reverse is also true. Remember that investor due diligence is about uncovering any potential downsides that take away from the investment opportunity being viable.

With the assistance of an expert fundraising consultant, you’ll include only that information that investors and their analysts absolutely need. If you do miss out on vital details, you can always add them when asked. Avoid a deluge of irrelevant information and keep the data room uncluttered.

Here’s some of the information that need not make your data room:

• Excessive projections: Early-stage startups often include 3 to 5 years’ worth of projected financials and industry benchmarks to compensate for the data they lack. That’s one tactic of competing with established companies that have financials dating back up to three years. Investors understand that, but they are more interested in your projected milestones and the roadmap for achieving them. You can include goals for the next 12 to 18 months, along with the capital needed to attain them.
• Minutes from board meetings are of no interest to investors, though they might be interested in board decks. If they have questions, you can provide them with answers.
• Team background information: You need not add detailed resumes and bios about the core team and top management. Mentioning their names along with a brief description of their roles and responsibilities is sufficient. Instead, you should add links to their LinkedIn Profiles.  Investors consider them more credible.
• Market Size and Industry Data: Your data room should only contain information relevant to your company, not the industry in which you operate. Leave out sector-specific data like market projected growth and size. Investors are better informed and prefer to do their own research.
• Tax returns and audits: Again, not essential. Investors will request them if needed.

Not Having the Data Room Ready Before the Fundraising Campaign

Founders may overlook creating and populating the data room before the fundraising campaign begins. In fact, you should set up the room simultaneously when designing the pitch deck, which is essentially the concise version.

Even as you’re compiling data and metrics for the pitch, add the information in detail to the data room. When investors ask for access, you should have it ready and good to go, segregated neatly into different tiers.

Another of the crucial mistakes to avoid when creating your data room is to make investors wait. That delay–of even a few days–can be crucial, since it can result in your losing momentum. Investors have hundreds of proposals to evaluate, and delays like these can push yours to the bottom of the pile.

Fundraising is a highly challenging task, and founders must deal with multiple “nos” before hearing a “yes.” But once you get that “yes,” you should be ready with a well-formatted and structured data room for investors.

Have all the relevant information ready for sharing and analyzing so they can make an informed decision quickly.

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