Securing investment for your startup is extremely rewarding but it can also be a long and frustrating process if you’re not prepared. Founders who are ready to complete due diligence with a pre-populated data room are most appreciated by investors and present themselves as more professional and investment ready.
What Is A Data Room?
A data room is a secure online space used to house, organise and share data among parties involved in a strategic business transaction.
“If you’re a founder looking to raise funding for your startup or scaleup, an investor will need to perform due diligence (DD) on you and your business,” shares Tristan Latcham, Investment Analyst at Sprint.
“The documents an investor may require to carry out due diligence can be stored, organised and shared by founders via a secure data room.”
When Do You Need A Data Room?
A serious investor will have a robust due diligence process to get to know your business, your opportunity, and your capability to deliver. This process is likely to include:
- Your investment pitch
- An initial scan
- Detailed due diligence & follow up questions
- An offer and negotiations; and if you’re successful in securing funding
- Executing the funding agreement
Throughout this process, you and your potential investor will need to exchange highly sensitive materials, including trade secrets, financial performance and forecasts, intellectual property documentation and shareholder information.
Such information should be securely stored as part of your operations, so in essence, you can create a data room as you build out these assets.
Why Do You Need A Data Room?
Sure, you could simply share each document your investor asks for individually, but you’ll likely drive your potential investor – and yourself and your team – mad with emails.
A data room collects all the required information in one central location, then manages the permissions of authorised access to a granular level.
“A data room with tracking enabled will also tell you who’s accessed which document and when,” says Latcham, “It’s helpful data that indicates your progression – or lack thereof – through due diligence.”
Do I Need To Buy A Data Room Subscription?
There are several established and trusted providers of data room tools including Ansarada, Intralinks and Securedocs.
While often considered the “gold standard” of data rooms, these tools come at a substantial cost and suit users who are raising or managing frequent investments or mergers and acquisitions.
Primarily SaaS offerings, the main benefit of these data room solutions is their level of granular permission control, including at the document level such as the ability to redact specific information; version control and access logs; and the ability to automate workflows and set time-based alerts and revoke permissions. There are definitely extra smarts built into these solutions.
It’s perfectly OK, however, to create a data room using a securely hosted folder structure like Google Drive, Dropbox, Box or 0365 Sharepoint.
When using these self-managed tools, it’s important that you:
- Manage who has access to each folder and file with attention to detail – share links in a way that prohibits sharing outside of the authorised users
- Create separate data rooms for each investor and funding round
- Update your documents – implementing a consistent date + version file naming convention helps to keep track of versions
- Review who’s accessed your documents
What Documents Do Investors Expect In The Data Room?
Each investor will have their own due diligence process as part of their unique governance model, so overall, documentation may vary. However you should expect to include the following core documents which will be required to complete due diligence:
- Pitch deck
- Your business strategy including growth/marketing plan, product roadmap, operational plan, risk management and staffing plans
- Corporate group structure (if the company is associated with 1 or more entities)
- Your Intellectual property strategy and any supporting documentation such as:
- IP register listing the company’s IP assets, including all trademarks, patents, copyrights and domain names
- IP filing documentation with relevant government entities
- IP assignment contracts
- NDA and licence agreements (if applicable)
- Key financial statements:
- Current year and any past year income statements
- Balance sheet, and
- Cash flow statement
- List of current and prospective hires, their salaries and locations
- List of company directors and confirmations of their registrations as directors
- Competitor analysis report/matrix
- Insurance documents
How To Organise Your Data Room
Want to look extra slick to investors? Organise your data room into folders that reflect the funding round and the stages of due diligence and engagement, such as:
- Pitch deck
- Due Diligence
- Clarification Questions
- Offer docs
- Executed agreement
This won’t be the entire list of required documents shares Latcham.
“Don’t be put off by an investor that asks for more or different documentation – remember, the process of raising funds is an open exchange between you and your potential investor. Each business is unique and you want your investor to understand your goals and be excited about – and committed to – the journey ahead of you.”
You should be confident in asking questions of your investor too! The ultimate aim is to build trust and secure the right investor for your business.