Neil Patel

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What role does an investor data room play in fundraising for startups?

A data room is one of the key components of a fundraising campaign, as well as for M&A. While the styles and tools may have changed over the years, along with best practices, this is still core to you securing the financial fuel your venture needs.

So, what is the role of these rooms as you are on your startup journey? What belongs in yours? How should they be managed and optimized?

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    The Purpose Of The Data Room When Fundraising

    Put simply; an investor data room is where you keep important data for potential investors in your startup.

    The data room’s role is to provide the information that prospective financial backers need in order to make a decision on your funding request, gain clarity on what it is you want them to invest in, evaluate the terms of their offer, and be able to justify their decision to those they have a responsibility to, through due diligence.

    You simply cannot, and should not try to fit all of this information into your pitch and pitch deck. Not only for the sake of preserving sensitive information but to be able to deliver effective pitches.

    Those that you hook with your initial, brief pitch deck, and that are serious about taking the next step can be given access to your data room. There they can check the rest of their boxes, and make a decision. As well as acting as a central depository and recourse for due diligence.

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    Virtual Data Rooms

    Data rooms have existed for capital raising and M&A transactions for a long time. Of course, they have also evolved, just as technology and other business practices have as well.

    Investor data rooms used to be physical rooms. There all of the physical paper documents of a business would be held securely for prospective financiers or acquirers to review in person, along with the lawyers and other relevant team members.

    This, of course, is no longer practical today. Many of these documents and their data may not be stored on physical paper at all. We are more distributed and global in business. We’ve had to learn again how to operate virtually and remotely to avoid various disruptions.

    Today, data rooms are virtual. Hosted in the cloud.

    While data rooms are, undoubtedly, the most effective method, there are several other intricacies about how to share information with investors. I have put together a video explaining the critical aspects to focus on. I am sure you’ll find it helpful.

    Options For Hosting Your Virtual Data Room

    Today there are many potential options for hosting your virtual data room. These range from simple and commonly used tools like Google Drive to other more specific hosting and software services.

    These may include:

    • Docsend
    • Ideals
    • Ansarada
    • Digify
    • Citrix
    • Deal VDR
    • Onehub
    • Box

    What’s Important When Picking A Virtual Data Room Solution?

    What factors should you prioritize when picking your data room solution?

    Your data room needs and wants may evolve as your company grows, and you progress through different rounds and stages of business and funding or other transactions.

    In the beginning, you just need to be going fast. In later rounds, you may be targeting investors or partners that have a strong preference for certain features or software. Though, when you are starting out in the early rounds, speed and ease of use should be a top priority.

    This should not be a hurdle that bogs you down. Pick a solution that you can begin using immediately, and which is easy for your team members and prospective investors to use.

    Investing in better solutions can come as you raise more money and you have the profits to invest. Though there are plenty of other expenses and costs to keep your company going and to raise your next round already. Be wary of taking on any additional unnecessary costs.

    Integration and collaboration are important. Your choice should integrate well with your other tools and enable efficient collaboration among your team members. This can make options like Google Drive very attractive. It provides a seamless experience for those already using Google Docs, Google Slides for pitch decks, and Gmail to communicate.

    Other important and desirable features of a virtual investor data room include the ability to control access, monitor activity, and track what’s happening. You should be able to grant and revoke access as needed. As well as to easily share this data with investors, in the least time and hassle for them.

    What Belongs In Your Data Room?

    Put simply, what belongs in your virtual data room is all of the information you need to provide, which doesn’t fit into your pitch deck.

    Specifically, this is the data that investors need to confirm their decision to move ahead with investing with you. Or to get answers to their remaining questions to make that choice. As well as to properly value and evaluate this investment opportunity to formulate their terms and offer. Plus, being able to fulfill their responsibility to conduct due diligence

    How much data and detail you need to provide here can vary by stage. In the early days, you may have very little to show. Friends and family and casual angel investors may not expect a lot.

    However, as you keep developing, and you are dealing with more sophisticated investors, the expectations will rise. You will have more data they want to see. They will want to know far more details about your business, finances, and value.

    Here are some of the common items in a virtual data room.

    Longer Pitch Decks

    Entrepreneurs really flounder and struggle to adhere to best practices for keeping their pitch decks short and simple. Yet, this is an absolute must for selling investors.

    Your data room can provide the opportunity to satisfy your own urge for a longer pitch deck. Use your short one to grab their attention and pull them in. Then you can include your longer deck in your data room if you feel you must cram in more info.

    If you are struggling to make a short deck, put your long one up, and then have someone else use that as the basis to consolidate it and create a more effective short deck to send out to investors and take with you to pitch.

    Financial Statements

    Financial statements are one of the key components and most important parts of most data rooms.

    You cannot fit all of this information into an effective pitch and pitch deck.

    Even as a brand new pre-seed stage startup, you may expand on your financial projections here. Including sourcing data, you have referenced and used as assumptions for your calculations.

    If you’ve already been operating, then you will also usually include your financial statements showing your current status and historical performance. Including your YTD P&L, cash flow statements, etc.

    Product Details

    You really only have one slide and a sentence or a couple of bullet points for your product in your pitch deck. Your data room is where you can provide more detail on your product, and product roadmap if you need to. Don’t unnecessarily bog down investors in technical details if they don’t need it. Though if they do, or this is where your real disruption and competitive edge lies, you may provide more info here.

    Do differentiate between providing enough info to prospective investors that haven’t made a hard decision or committed yet, versus those that are in, and are just wrapping up their due diligence.

    You want your data room as accessible to as many people as possible, without giving away crucial company secrets.

    Cap Table

    Who are the owners of this business? How much do they own?

    Resumes Of Key Team Members

    The team is the most important factor in investing in early-stage startups for most investors. Yet, you only have room for a one-line bio and one highlight on your team slide in your pitch deck.

    Use your data room to include better resumes on your founders. Demonstrate your relevant capabilities and value, tenacity, and domain expertise.

    You may also round this out, and fill in the gaps by including resumes of your other key team members, executives, and department heads who are not cofounders. As well as the same for advisors you have brought on board.

    Business Plan

    Every business needs a plan. This is not a document you want to use in place of a pitch deck. Though investors want to know that you have a plan. One that gives you direction, and shows that you’ve thought through and researched this business.

    You may use a simple one-page business plan. Or a short five-page plan instead of delivering a traditional, voluminous business plan that may bog them down and create more questions than it delivers answers.

    You may also include a brief bullet-pointed action plan of your next steps and milestones that you are focused on.

    Articles Of Incorporation

    You can also streamline your due diligence and provide clarity to investors by including your articles of incorporation and shareholder agreements in your virtual data room.

    The more you can have for them upfront, the faster and easier they can make a decision and provide a term sheet.

    The most desirable investors are incredibly busy. Don’t expect them to take the time to ask instead of moving on to their next choice of investment opportunity.

    Also, remember that the longer due diligence takes, the greater the risk the deal will fall apart, or the terms may have to be changed to your detriment. Keep these factors in mind when designing your investor data room.

    Important Contracts

    Eventually, in the due diligence process, sophisticated investors are going to want to see all of your paperwork. Including leases, loan agreements, and employee and customer contracts.

    This can be a nightmare to pull together later if you are not organized in advance.

    Investor Updates

    Your investor data room is also a great place to host your ongoing investor updates. The updates you normally email and circulate to current and prospective investors.

    Hosting them here will ensure they get the most up-to-date information easily. Even if they missed your emails. As well as helping you to avoid updating all of your other documents constantly.

    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.

    Maintaining Your Data Room

    Your investor data room should be loaded and organized well in advance. It should also be constantly updated.

    This should be done before you start sending out your pitch deck or pitching potential investors. You want to provide an efficient, professional, and seamless experience. Otherwise, you will lose interested investors because you are simply not prepared.

    This can take time and work. Make sure that your team members are clear on the responsibilities for doing this, and delegate it.

    Should I Require A NDA Before Granting Access To My Data Room?

    Ideally, you want a data room that can be viewed by the maximum number of possible investors. You may need a very large funnel of prospects to get to one yes.

    While you may have sensitive data and true company secrets that you don’t want to be stolen or leaked out into the world or to your competition, having barriers like NDAs can eliminate many of the best potential investors before you even get started.

    So, you may have two levels of access to your data room. One which you are fine with the whole world seeing. Then a more detailed room with sensitive information that is only reserved for investors that are serious, you have vetted, and when they are ready to move into due diligence, after getting a term sheet.

    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.

     

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    Neil Patel

    I hope you enjoy reading this blog post.

    If you want me to help you with your fundraising, just book a call.

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