[Updated for 2024 by Robert Hokin, Greenbackers Managing Partner]. It is well recognized that data rooms are indispensable in the M&A process. They create just as much value to start-ups raising capital, so you should be ready-to-go with your data rooms BEFORE pulling the trigger to start your fundraising. Not convinced? Need some reasons why? Here are seven:
1. Enhanced Security
When sharing a pitch deck with investors, how confident can anybody be that they’re not going to distribute it among their competitors? The answer is not very. In the worst case scenario, that can mean that your company’s business plan – often its competitive advantage – can fall into the wrong hands. With a data room you can control who sees what, by restricting their levels of access and thus limiting the chances of unwanted data leaks.
2. Lower Costs
The cost of a data room can vary depending on your service provider (more on this later) and the level of your requirements. But while the costs can rack up, it still compares favourably with its physical equivalent. Likewise, while it may seem like an unnecessary cost and effort for a cash-strapped start-up, the reputational and financial costs emanating from a data leak will look insignificant by comparison.
3. Faster Decision Making
Time is of the essence in the fundraising process and data rooms not only speed things up for investors, but speed things up for you as well. By allowing investors to see all of your information in one place, there’s less of the back and forth associated with e-mails and telephone contact. Decisions can be made significantly faster, which also leads to…
4. Faster Feedback
The ultimate aim of any funding round is to generate sufficient funds to grow your start-up. However, it’s not unusual to speak to a few dozen capital providers before finding one willing to invest. Where possible, you should be using any rejections as an opportunity to gain feedback about how to improve your business. The fact that your data room provides for faster decision making by investors also means that it allows for faster feedback for your start-up.
5. Enhanced Due Diligence
The fundraising process is far more than a pitch deck. It’s just the beginning of a process, of which due diligence is usually a significant component. Also, feedback received from each investor can be used used to improve your due diligence documents. The more you add to it, the more likely it is that the next investor will have everything they need for a faster decision.
6. Transparency with Investors
Closely related to the enhanced security is the issue of transparency. Having better data protection gives your start-up the ability to be more transparent with the investors that matter. This transparency can also create a positive feedback loop that should lead to the investor providing you with more informed feedback. There’s very little that scares investors away more than a lack of transparency.
7. Edge over Competition
Finally, having a data room gives you an edge over competing start-ups who didn’t put in the work to provide one. It’s remarkable how many start-ups don’t opt for a data room with one eye on minimizing short-term expenses or time spent. It’s common and it’s also an oversight. For all of the reasons outlined above, a good dataroom will allow you to gain an edge over companies in your space. When capital providers are looking at start-ups, having a one is one way to help ensure that your start-up wins out on the small margins that influence their decision making.
SETTING UP YOUR DATA ROOM BEFORE YOU START FUNDRAISING
There are a number of key things to keep in mind when setting up your data room:
- If you do not have a dedicated area, we recommended to use Google Drive, Dropbox or other secure, externally accessible shared area. There are other options as well, but they can be costly and both Google Drive/Dropbox have intuitive, free versions.
- Create a folder structure that is clean and easy to navigate. Investors time is valuable, ensure your structure is as simple as possible.
- Important: allow read-only rights! You do not want 3rd parties downloading/editing your company data.
- Consider creating separate data room access for each investor so you can tailor the content. Depending on investor, you may want to target some of your messaging.
- Create an update cadence. Once a month, once a quarter. Whatever your goals are, make sure documents are fresh.
Here is a TICK List of items below to include in your data room regardless of the type of company you operate or stage of funding (you can also download the list in excel HERE):
Company Documents
- Amended and restated articles of incorporation.
- Voting agreements
- Investor rights agreements
- First refusal & co-sale agreements
- Capitalization table
- Any documents/details on previous raises (if any)
Board of Director Materials (Governance)
- All board meeting minutes
- Board consents and actions
Financials
- Profit and loss statements
- Pro-forma statements for next year
- Projections
Marketing Materials (or link to Greenbackers Showcase)
- One-pager
- Pitch deck
- Any branding guidelines and/or vision
Intellectual Property
- Granted and filed patents
- Trademarks
- IP strategy
Market Research
- Market studies
- Competitive analysis w/ features & pricing
- Testimonials and/or case studies and external validation
Sales Projections / Financials
- Sales process
- Sales pipeline
Staff
- List of all current employees, titles and salaries
- Employee agreements
- Future critical roles and hires
- List of contract workers and firms
Technology
- System architecture diagram
- API documentation
- Details on any large integrations
- Product backlog export and release map
- Screenshots of existing products
Q & A area (for frequently asked questions) Greenbackers are big fans of FAQ sections and most investors we speak to are too. Creating a FAQ (Frequently Asked Questions) section for investors can provide several important benefits for startups. Here are some reasons why we think every startup should consider having one:
- A well-prepared FAQ answers common investor questions upfront, reducing the need for repetitive explanations. This frees up time for both the startup team and potential investors.
- It streamlines the communication process, allowing founders to focus on high-value conversations and personalized discussions rather than answering the same basic questions repeatedly.
- An investor FAQ shows that the startup has anticipated questions and has thought through key aspects of the business. It signals that the founders are well-prepared and understand what investors typically look for.
- When investors can quickly find answers to their questions, it speeds up their decision-making process. This can be critical for early-stage startups seeking to close funding rounds efficiently.
- FAQs provides a clear and concise overview of the business, helping investors assess fit and potential without having to wait for meetings or additional documentation.
- During the due diligence phase, investors often have a lot of questions about financials, market size, competition, and exit strategy. A comprehensive FAQ can address many of these topics early on, making the due diligence process smoother.
- It shows that the startup has a well-thought-out plan and has already considered common investor concerns.
Importantly, an FAQ section can serve as a reference point for the entire startup team, ensuring that everyone is aligned in their responses to investor questions. This helps maintain a unified and professional front during investor meetings and communications. Hope that helps. Get cracking!
