Does your startup need a data room to complete a fundraising due diligence?
In what way can a data room for startups be strategic for your business?
If you’re running a startup company and looking to better understand the data room for startups, this article is the perfect for you.
In this article, we will look at how to build your startup data room, the benefits of having a well-organized data room for your startup operations, what to include in your data room, when should you give your investors access to your data room and for what type of startup activities can a data room be helpful.
This article is divided as follows:
- What’s a data room for startups?
- Build your data room before going reaching out to investors
- Benefits of having a well-organized data room for startups
- What should your startup put in a data room?
- Get a term sheet before you give access to your data room
- How will an investor analyse your data room information
- Activities a startup can manage with a data room
- Data room for startups takeaway
Let’s get started!
1- What’s a data room for startups?
A data room for startups should represent a detailed representation of what you summarily presented to investors and VC firms in your pitch-deck and preliminary company information disclosed.
An interested investor will ultimately want to see evidence and concrete proof of the material, information and data you used to provide them with your projections, market analysis, product description and so on.
Investors and VC firms will have a specific and unique due diligence process.
They will have their own checklist of things to look for and questions to ask you.
The information you will share in your data room will make or break your financing deal.
Make sure you put the right amount of time and attention to get this right.
2- Build your data room before going reaching out to investors
Don’t get caught off guard by not have data room
As a startup, you need to be prepared when reaching out to investors and looking for financing.
You spend a lot of time working on your pitch-deck and presenting a compelling narrative about your company to generate interest from prospective investors.
All of a sudden, an investor shows up and says they are interested in investing in your company and need access to your company data. Oops!
You did not set up your data room and now you are scrambling to put all the relevant information together to share with your investor!
Don’t put yourself in that situation!
Make sure your data room is ready to go
Your data room should be locked and loaded in case an investor gives you a term sheet or needs access to your company data.
The last thing you want to do is to delay a possible investment in your company.
You want to appear fully organized and ready, this is a good sign for the investor.
You should find the right virtual data room provider and make sure their platform offers you the right security features along with easy-to-use document sharing functionalities.
3- Benefits of having a well-organized data room for startups
You send positive cues to your investor
Having a well-organized data room for startups will send positive cues to your potential investor.
With organized data, you will save your investor time and make the process easier for all involved.
You will show your investor that you are an organized person able to manage your company well.
You show that you take the investment process seriously
You demonstrate that you take the investment process seriously and that you’ve spent time to prepare yourself and make the process a successful one.
By having your data organized in a central place, you will not have to look over and over for the same file in different directories and network drives.
You minimize the chance of releasing inaccurate or irrelevant data that could jeopardize your financing deal.
You will have your company data organized and centralized in a main repository where you can easily access the information you need quickly and share with an investor on an as-needed basis.
4- What should your startup put in a data room?
Startup founders are asked a lot of questions
Typically, a startup is looking to raise funds by engaging with investors, venture capitalist firms, angel investors, banks, friends or other potential investors.
With that being said, an investor is interested to see the true potential of your startup company.
What does your company do? What problems are you solving with your product or service? How much did you generate in revenues? Your profit margin? Your addressable market? Your future projections? Your management team? And the list goes on!
Any startup founder knows that there will be a lot of questions asked and you will need to have the answer for most of those questions, if not all!
Things to include in your data room
Your best bet is to ensure your data room picks up all the points you raised in your pitch-deck and information you shared with your investor prior to the signing of a term sheet.
The following categories are essential to be put in your data room:
- Your company documents
- Details about your product or service
- Your industry, market size and addressable market
- Your business model
- Your sales
- Your technology
- Your differentiator
- Your competitors
- Your marketing plan
- Your team
- Your traction
- Your financial statements
- Your financial projections
- Your past financing activities
Essentially, you are providing concrete evidence and material to support your pitch-deck and how you came to your conclusions.
Your company data should be complete, useful and relevant to the investor.
5- Get a term sheet before you give access to your data room
It’s pretty much useless to reach out to investors without having a plan to share detailed information about your startup.
Nobody will invest in your company based on your promise or good looks!
You need to share your company data, that’s a reality.
When should you give your investor access to your sensitive company data in your data room?
The best practice is to ensure you have a formal term sheet signed from the investor.
You want to avoid those investors that are merely looking to find out more about your niche or your company without having a real plan to invest.
Prior to signing a term sheet, your investor may ask to see your startup data room and you need to carefully manage that.
You want to be helpful and answer your investor’s question while making sure you get a term sheet before you give full view access to your company data.
Look at the particulars of your negotiation cycle, your timelines, the investor interest, number of investors looking to invest in your startup and make the best decision possible to grant access to your data room prior to signing a term sheet or after.
You’re now in business, and this may very well be one important business decision for you to make!
6- How will an investor analyse your data room information
An investor will look at your company data to validate what you told them was true.
They will also run their own calculations and assess your startup potential.
Investor’s objective analysis
Here are some elements that investors are particularly interested in:
- Number of users
- Your churn
- Your average revenue per use
- Annual contract value
- Recurring revenue vs one-time revenue
- Profit margin
- Addressable market
- Cash on cash payback
- Quick ratio
- Short-term liabilities
- Long-term liabilities
- Liquidity ratio
- Current ratio
- Quick ratio
- Leverage ratio
- Total debt ratio
- Debt-equity ratio
- Equity multiplier
- Cash conversion ratio
- Efficiency ratio
- Inventory turnover ratio
- Receivable turnover rate
- Asset turnover ratio
- Profit margin
- Return on asset (ROA)
- Return on equity (ROE)
The financial information made available to your investor will allow them to run any of the above ratio and financial analysis of your startup.
This is a very mathematical step and highly objective.
Investor’s subjective analysis
The other thing an investor will do is to analyse what’s more subjective like your company potential, market size and management team and so on.
Depending on the sophistication of your investor, this subjective analysis could vary greatly from one investor to the next.
It may be difficult to precisely predict everything an investor may ask from you but you can target some areas that you know will be most certainly assessed by your investor.
Consider things like:
- Management team skills
- Market changes and technological disruptions
- Consumer behaviour changes
- Competitor capacity to enter into your niche
- Your speed of execution
- Your knowledge of the market
- Your customer acquisition capabilities
- Potential risk in your industry, business model or other
By preempting what your investor may ask from you, you could make sure you have your data room prepared accordingly.
7- Activities a startup can manage with a data room
A startup company can find many useful ways to leverage a data room.
Managing internal confidential information
You can use a data room to manage your startup confidential information.
A startup company is constantly in a delicate situation as they need to share sensitive information to investors to raise capital but sharing sensitive information can be detrimental to the business.
You want to use a data room for your startup company to keep control on the information you make available to external parties, what information you share, when you share it and how it’s viewed and accessed.
Protecting your company data is crucial.
Sharing files with interested investors
Your startup data room will be primarily used to share your company information with investors and potential financial partners like VC firms, angel investors, banks or other.
Having a well-organized data room where you have curated your company information carefully to cater the needs of an investor is crucial to increase your chances of getting the funding that you need.
Performing a due diligence
Typically, when an investor provides you with a term sheet, that’s when you will share all your company material giving them a deep-dive access to your company material to validate their investment decision.
A virtual data room is the standard tool to make this due diligence process manageable, secure and effective.
Keeping control of your fundraising process
As your investor shows more and more interest and you achieve specific milestones, you can provide deeper and deeper level access to your startup company information.
When the investor signs a non-disclosure agreement, you will give more information than what you had previously shared.
A data room is a useful tool to help you control your fundraising process especially if you are dealing with several prospects at the same time.
There may be many investors involved, many individuals who may need to access your data and you need to keep track of that.
A data room gives you a log and history of what was shared, who accessed your files, for how long and so on.
This is very useful to see what documents your investors are looking at more often and for a longer period of time.
8- Data room for startups takeaway
To give your startup all the chances possible to raise financing and successfully complete an investment due diligence process, you will surely need a well-structured data room.
Having a data room will help you organize all your startup company data in one central repository where you can easily find what you need and share it with external parties while protecting the confidentiality of your data.
In this article, we’ve look at how to build your startup data room, the benefits of having a well-organized data room for your startup operations, what to include in your data room, when should you give your investors access to your data room and for what type of startup activities a data room can be helpful.
We hope that it was useful for you.
Did you have a startup for which you had to set up a data room? How was your experience? We would love to hear from you. Drop us a comment!