How to build a data room for investors in your startup?
You may have been hustling away at building your product, finding customers, creating a pitch deck, and networking. Though, if you haven’t created your data room yet, you are not ready for a fundraising campaign.
Data rooms have evolved a lot over the years. Like many other parts of startups, they may be much more simplified and efficient today. Yet, it isn’t something you can afford to ignore if you are serious about raising capital for your startup.
As a founder, it is important to understand and appreciate the role of data rooms, everything that you should include in yours, and be aware of the best practices that can aid your fundraising efforts.
The Ultimate Guide To Pitch Decks
What Is A Data Room In Startup Fundraising?
Data rooms are not a new invention. Though they have changed substantially.
A data room is where a company keeps all of its pertinent data for prospective investors in a funding round. As well as for potential acquirers in an M&A transaction.
The main reason for a data room that you may hear about is for due diligence. After an investor has proposed a term sheet, they will need to verify all of your information. They need to be sure what you sold in your pitch really exists. As well as to dig deeper into the details.
It is how they really understand the risks and value of what they are putting their capital into.
What isn’t talked about as often is that your data room is also frequently an instrumental part of the investor’s decision to commit their funds to your venture. Or even to move further into your funnel and invest their time in formulating a term sheet.
See How I Can Help You With Your Fundraising Efforts
See How I Can Help You With Your Fundraising Efforts
Your introductory pitch deck may be your first impression. Which you need to nail. Though if you blow your second ‘date’, then you can’t expect them to commit to the marriage that an entrepreneur-investor relationship is.
Data rooms used to be physical rooms where people would go and view documents in person. Today, virtual data rooms are the norm.
Creating a data room is just one of the many ways how to share information with investors. If you would like to know more about the additional channels you can use, check out this video I have created. You’re sure to find it helpful.
What Goes In Your Data Room For Investors?
There can be an enormous amount of data and items that can go in a data room. Or very little. This mostly depends on the stage of your startup, and how much information you have.
Among the most important documents you may include in your data room are the following.
Your Pitch Deck
Yes, you may be presenting and sharing your pitch deck in other ways, or hosting it online on its own. This is best for keeping it simple and keeping investors focused.
However, it doesn’t hurt to have your short introductory pitch deck in your data room as well. You don’t want to slow down prospective investors by having them search through their inbox or dive into multiple folders unnecessarily. You could keep it here for easy reference. This is why you should also know how to build a data room for investors.
Your Long Pitch Deck
One of the things that entrepreneurs struggle with the most when it comes to funding is keeping their pitch deck short enough.
Many startups die before they even get a chance because founders simply cannot be disciplined in boiling down their pitch to few enough slides.
This is where you can make yourself feel better about getting in more information. You can upload a longer version of your pitch deck here. One that has more detail, and that you wish you could share if you didn’t have to stick to a format that really works when pitching.
Since your space in your pitch deck is so limited, be sure to include resumes for each of your founders in your data room.
Be sure that they are updated, and relevant, and highlight their business acumen, industry expertise, and ability to stick with it.
If your founding team is a little lean in these areas, you might round it out by including more information on your advisors and department heads.
While your pitch is your sales tool to get investors interested, this is where you get to show that you really have some depth to your startup.
Many things may change along the journey. Though, this document shows that you’ve done your market research thoroughly, know your needs, risks, and strengths, and are thinking forward.
While a one-page business plan has become trendier in recent years, you may want to provide a little more meat on the bone. A voluminous business plan may not be read by anyone. So, try to find a good balance between having a viable plan and showing you know your stuff, versus usability.
If you have a proven marketing and sales system, that can be a huge selling point for investors. They love when you have gotten this part of the business down, or have a unique angle in the market. Even better if you have already ironed out your unit economics, have better than average customer acquisition costs, and have a repeatable process.
If you are not that far along in your business yet, this document will at least show them that you know your industry and what you are doing.
Investor updates are a great way to show how you are making progress, and how your space and business are evolving.
These can be sent throughout the year. In advance of any active fundraising campaigns, as you secure investors for the next round, and throughout the due diligence period.
You can include your most recent update in your data room, so they know where things stand, see that you are still executing, and see your ability to make things happen. So, make sure you know how to build a data room for investors.
One of the most important things that investors are looking for in a fundable startup is a founding team that can really focus.
A short action plan with a few bullet points demonstrates this to investors. It can also be used to show your next milestones, and indicate what their money will be invested to achieve.
As your startup progresses you will amass more and more legal contracts. Eventually, investors are going to want to see these in the due diligence process.
This may include:
- Employee contracts
- Vendor and supplier contracts
- Customer contracts
- Software licenses
- Office and equipment leases
These reveal your true financial obligations and assets, as well as areas of strength and weakness, recurring revenues, and liability.
Business Licenses & Insurance
Depending on what industry you are in, your product lines, and where you are doing business, you may hold various licenses. These can be great assets that add value to your startup.
Insurance can also be important. Especially, so that investors know their investment is covered, or any claims arising from previous activities may be covered, without putting their capital at risk of loss.
Articles Of Incorporation
All your corporate documentation may be included as well.
This may include items such as:
- Voting rights
- Cap table
- Operating agreements
- Investor rights
- Partnership agreements
- Board meeting minutes
- Any amendments to previous documents
As a brand new, pre-revenue startup, you should still at least include your financial projections. Here you have a little more room than in your pitch deck and can back up your assumptions with references to authoritative sources.
If you have them, then it is common to include:
- Cash flow statements
- Income statements
- Balance sheets
- Valuations and appraisals
- P&L statement
You may wish to streamline the due diligence process by additionally including your tax information, and historical tax returns. Work out how to build a data room for investors since you’ll include all this information.
IP is one of the great assets that angels and VCs are interested in investing in startups for.
It is easy to make claims about IP in pitches. This is where it needs to be backed up. Show your patent numbers, patent filings, trademarks, and other IP assets.
Do this, even if they may not be directly relevant to the main product you are working on right now. They can still have great value.
Does All Of This Really Need To Be In My Data Room?
Clearly, we’ve covered a ton of information that can be included in your data room. Much of which you may have not yet created or gathered.
Some of it you may be more than happy to share. Other information you are probably wary about giving access to.
It is sometimes surprising what information entrepreneurs have gotten away with not disclosing. This is to be clearly laid out in your term sheet and legal agreements. Otherwise, you may be compelled to provide it or forego the funding.
At the same time, the more detail you can get into your data room in advance, the faster and easier your due diligence will go. This can go a long way to eliminate the risk of the deal falling apart, your investor backing out, or the environment changing. It can make a difference of months in the process of getting the money in the bank. Which may make or break your company.
Even before that, investors may need a lot of this information to make the decision on whether or not to participate or issue you a term sheet. You certainly don’t want to be the roadblock or to slow them down. They have plenty of other pitches to hear.
Still, you can choose to throttle this information. You may restrict some, and have multiple levels of access. This will enable you to give them enough info to keep moving forward. While protecting your sensitive information until you’ve also vetted them, and know that they are serious.
When Should You Load Your Data Room?
Your data room should be loaded as soon as possible. You don’t want to hold your own fundraising efforts back.
It would be a shame to start pitching and land an interested investor, only to have to say you are not ready because you don’t have these basics prepared.
It can be a great place to begin to collaborate with your team on creating some of the materials that need to be put together. It also brings together what you and your leadership team need access to on a regular basis.
At the latest, you want your data room populated and polished before you consider hitting send on your pitch deck.
Keep in mind that in fundraising, storytelling is everything. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (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 is being used by founders around the world to raise millions below.
Where To Host Your Virtual Data Room
There are many different software and platforms for hosting your VDR.
This includes the likes of:
- Citrix ShareFile
You can even simply use Google Drive to get started. When learning how to build a data room for investors, you’ll also train to use these tools.
Key Features You Want In A Virtual Data Room
It should be highly functional. Meaning easy to use. It should be easy for your team to pick up and start using immediately. You should be able to master it very fast. It ought to be agile for adding and editing your data, as well as sharing it and navigation for investors.
Of course, security is also a concern. Especially if you have uploaded very sensitive corporate information.
You want to be able to grant access, see who has viewed it and rescind access. Other options may include restricting what can be done with your documents, monitoring if they are shared or downloaded, etc.
A data room is a very critical part of fundraising for startups. There may be a lot more that can be included in your data room than you’ve thought of until now. What’s important is that you get started, and get it organized so that you can streamline the funding process. This is why learning how to build a data room for investors can be a critical step in your fundraising.
You may find interesting as well our free library of business templates. There you will find every single template you will need when building and scaling your business completely for free. See it here.