Your startup is actively fundraising, so you are on the pitching roadshow - presenting pitch decks, shaking hands, and answering technical Q&As with investors. A few of those handshakes have turned into multiple conversations! Congrats!
It's all smiles until the dreaded request for your startup's data room comes up. If this query gives you a little anxiety (either because you do not have one, do not know what a data room is, or are embarrassed by your data room's current state), you are not alone.
Many startups come to us with a data room for investors consisting of folders and files labeled 10Oct20-Sales or ksuxhskusnks32l.jpg. Many funds come to us requesting to clean up their portfolio or potential portfolio's startup data room because they just can't bear wasting time trying to dig through the current state.
It's easy to prevent this chaos by creating an initial data room for investors that is organized and continuing to update it over time. Read Aleberry's comprehensive guide to a startup data room for investors.
Why does your startup need a data room for investors?
Creating your Data Room is a vital part of the fundraising process because it gives investors technical, financial, and other insights into your company prior to writing you a check. You would not purchase a home without getting a full inspection, and certainly not enter into a business deal without doing due diligence. By the way, we also recommend startups do due diligence on investors. You can read Investor Due Diligence here.
Data rooms provide transparency and efficiency during the due diligence phase of a startup's fundraising process, regardless if you are Pre-Seed, Series A, B, C, D, or prepping for an exit by sharing detailed (often confidential or otherwise not public) information about your company.
Top 5 key benefits of a data room for founders
If well done, investor data rooms can be advantageous for startups fundraising. A few key benefits are:
- Enhanced Efficiency. Data rooms can streamline the due diligence process, getting you to close the funds sooner. A centralized location for all relevant documents means both founders and investors can save time going back and forth with specific inquiries. Investors can access information and evaluate a company at their convenience.
- Transparency & Building Trust: Providing a comprehensive overview of your company with accurate and up-to-date information shows investors you are honest and have open communication, building trust and a good foundation for an ongoing relationship. An organized data room also shows you care about how you run your business and manage important documents.
- Information Control: As a founder, you have control over who can see what sensitive information. A permission-based, secure platform combined with a tailored and organized data room allows you to curate the confidential information provided to investors.
- Better Investor Relations & Communication: Keeping your startup data room current can serve as a centralized and efficient tool for ongoing investor relations & communication. You can forego the multiple emails, meetings, and other inquiry methods to address investor questions because all current information is already accessible to investors.
- Scalability and Future Use: As your startup grows, you can adjust your data room for investors accordingly. Whether you are seed-stage or prepping for an IPO or M&A deal, using an organized and easy-to-update online data room allows you to evolve the information stored, while keeping all your company's current information consistent.
What is a startup data room for investors?
A data room or virtual data room (VDR) is a virtual/online repository of sensitive and detailed files, assets, spreadsheets, and other documents about your startup's business model, product, financials, board meetings, and other company information that will give an investor insight into your company. Data rooms are part of the due diligence process for investors during fundraising.
Your startup data room for VC fundraising should be organized, and accessible via a secure-online platform (more on that below).
When do you send your data room to an investor?
This centralized hub should include anything that a venture capitalist, angel, or other investor may want to confirm or get answers to before handing you an official term sheet. It will typically be requested of you after a couple of pitches or in-depth conversations & meetings, but before any terms are discussed.
A full due diligence process from a VC, which will include a review of your startup's data room can take a couple of weeks to a few months. We typically see this process take about 2-3 weeks. During this time, industry experts within the fund's network, along with other LPs and decision makers may review your data room, so an organized data room is key for collaboration, internal reviews, and internal discussions by these multiple parties.
Data room faux pas when fundraising to VCs:
Asking for an NDA.
If you've already been asked for the data room, chances are an investor has already gone through your confidential pitch. More importantly, VCs (& honestly many service providers) see hundreds of decks and absolutely hate being asked to sign one.
As we have mentioned many times, it is on you as the founder to do a bit of due diligence before pitching. This investor due diligence includes ensuring the investor is not already in a relationship with a competitor or other conflict of interest. This should also ease your mind on file-sharing.
Don't be this company. Our founders' advertising professor always enforced two principles: "Don't make the client do the math" and "Don't make the client do more work to pay you". Aleberry lives by these mottos across all business aspects. Adding additional hurdles, whether in marketing & sales or investor relations, increases the barrier to entry & reduces the chance of a quick yes.
An organized startup data room is important to show your investors that you run your business in an organized and professional manner. In many cases, this will be the first time you give investors an in-depth view of your company.
Label / rename your folders & files properly.
If you have to open up the file to see what it is, it needs to be renamed. This means no folders called 10Oct2019-Things and no files called kahdhj5282.jpg.
Your data room for investors should be tidy, accessible, and ready to impress.
Lying or Hiding Information
Guess what, you will be found out. Deceiving investors is also illegal. Every fund we work with often has a network of industry experts, legal teams, entrepreneurs in residence, or portfolio founders they go to for some extra diligence & review. If your key investor does not sniff you out, one of their partners will.
The ability to update your startup docs is a nice added bonus for using an online platform. It's important to keep your data room updated, especially with any positive wins for the company (new clients, improved product capabilities, stronger market numbers, strong key hires, etc.).
An updated data room shows VCs you are actively engaged with the company's latest materials, and it can help prevent any distrust that may build from only showing financial projects from a year ago.
Quality over quantity. Don't hoard all your files in the data room. A data room for investors should be comprehensive, not cluttered.
You do not need 8 versions of your startup pitch deck. Keep your data room's files and folders to the most relevant, up-to-date, and comprehensive version of each file or topic.
Virtual Data Room Platforms: A round-up of where to set up your startup data room for investors
The five key benefits to look for in a platform for your data room are: security, tracking, analytics, ease of updating, and accessibility.
There are many online options for where to set up your data room that range in price and features. Our recommendation is to use what works best for you and work where you already are. We also highly recommend using a trusted & proven platform. A platform that you are comfortable with and already use can reduce expenses and timelines to set up & organize your data room files, and ensure you will update the data room regularly with ease.
Startups at different growth and fundraising stages will have different needs. An earlier pre-seed, seed, or Series A startup may not need the complexities that a Series D or exiting company needs.
Here is a list of a few of our favorite virtual data room platforms for startups fundraising, along with their pros & cons:
- Dropbox: Very common and definitely proven. Great for lots of documents, easy to use for organization, file-sharing, and permissions.
- Hubspot File Manager: Great if you already are on one of their paid plans. Hubspot file-sharing has nice trackability, including showing you opens & clicks. We have integrated this directly into a client's website (on a gated page with a request form or login).
- Google Drive & Google Docs: If you already use Google Docs internally, it works great. It is also very common and proven. You can control file-sharing and permissions the same way as Dropbox. We personally find Google Docs a little cumbersome to organize, but if you already have an internal system in place, it works great.
- Sharepoint/Office365/OneDrive: Like Google Docs, we find the Microsoft suite of services surprisingly cumbersome (kind of like Teams). These have file-sharing and permissions control like other platforms, but we have noticed some hiccups when adding folks outside your organization, particularly with Sharepoint & Teams.
- Docsend: Great for analytics on views, clicks, and other engagement metrics. Docsend can be pretty pricey, so unless you are already on a plan with them, you will be adding to your costs.
- Box: Very common and proven. Lots of features like Dropbox that are great for managing multiple files & folders. Box has some added benefits like advanced sharing, collaborations, e-signature options, and security.
- Carta Launch: Carta is a platform that was built for startups that are growing and fundraising from venture capitalists, angels, and other investors. Carta gives you the added benefit of also being able to issue equity and SAFEs, track ownership, and manage your cap table. There is a free platform on Carta for early-stage founders as well. Aleberry is a Carta partner, so feel free to reach out for a hookup.
- Webflow, or your current CMS website: CMS website platforms like Webflow are incredibly robust. We have built intense and robust data rooms, content, and resource hubs, and media kits on Webflow with features like Gated Content, mobile access, and tagging systems. The nice thing about building your site is you already know how to update files, and you can work in one place. You can also always set up a system to link out to specific files on one of the other platforms (like Dropbox, Hubspot, Google Docs, etc.).
- Visible.VC: Like Carta, Visible VC's tools and platform were built specifically for startups growing and fundraising. Visible VC has lovely dashboards to manage more than your data room as well. It can be a little pricey, and a free option is not available even for early-stage founders. However, if you are looking for a platform to manage many of your metrics in addition to a data room, Visible VC is a good option as an all-inclusive platform for your startup's fundraising needs.
- Dealroom: Dealroom is a commonly known player in the startup data room game. It is secure, easy to use, and built specifically for this purpose. You can respond to requests, have control over accessibility, and use their native document viewer, all with analytics & data on activity.
Some other platforms we have seen around but are not vetted by Aleberry are: FounderSuite, HelpRange, Intralinks, Dock.us, Firmroom, Share File, Anduin, Caplinked, Onehub, Secure Docs, Capboard, Firmex, Digify
Setting up your Startup Data Room. Walk before you run:
Select your platform.
See the above list. Remember: security, tracking, analytics, ease of updating, and accessibility.
Gather ALL your documents in one place.
You can start with a single junk folder and dump (or have your team dump) all related files about your company, product, financials, market, etc. (see list below). It is much better to have everything in one place and then remove duplicates, unnecessary/irrelevant files, and dated versions than it is to go backward. You don't want to waste time hunting down specific files or getting confused about which file is the most recent or correct.
Once you have removed all duplicates, unnecessary, and dated files, do a double-check. Open each file to ensure they are not corrupt or have missing fonts or assets (PDF what you can or want to).
Remove any internal notes or comments. Keep your files clean.
Rename any files that would otherwise not make sense to an outsider. I see you Image-January-09-2024-notblue or alkd8jskshsk.jpg.
Create a folder for each of the Numbered items below.
Create a folder for each of the Numbered items listed below. If any of the subletters (a, b, c, etc.) have multiple documents, create a subfolder for that topic as well. Specifically, I like doing this on Board & Financials because you often have multiple items within a single year or quarter.
What should be in a startup data room for investors?
The Aleberry data room is a proven system that gets our clients positive feedback from investors around the world. In all seriousness, our startup clients do get tons of compliments due to the ease of use, comprehensiveness, and clearly labeled folders & files.
We treat a data room like a well-organized closet or website with excellent UX.
The first thing we do is organize folders based on the Ternary Numeral System. Numbering your folders allows you to curate the narrative, much like the order of a pitch deck. Of course, investors will click around, but numbering the folders allows you to organize what you want an investor to see from a top-level, and in what order.
Here is our general checklist and order.
*Note: just like our deck checklist, this is open to adjusting to fit your company and investor's needs. You can also combine or exclude items where it may make sense. For example, sometimes we separate IP into its own folder if it is a bigger part of the business model, or we combine Legal, Compliance, and Regulatory into a single folder.
00. Table of Contents (document or webpage with links)
01 Company Summary
a. General Pitch Decks
b. Overview Documents
c. Founder Story
02 Sales & Transactions
a. Customers List (Past, Active & Pipeline)
b. Sales Collateral (Sample Contracts & LOIs)
03 Technology & Products
a. Product Images
b. Product Specs
d. Future Milestones (Roadmap)
04 Market Analysis
a. Competitive Landscape
b. Market Opportunity
c. Market Research & Data
a. Past Financials
b. Pro Forma
06 IP & Legal
a. Intellectual Property
b. Legal Documents
07 Compliance & Regulatory
b. Industry Standards (ITAR, etc.)
08 Human Resources
a. Team Members
b. Org Chart
09 Advisory Board
a. Board Meeting Documents (organized by Q+Year)
10 Corporate Governance
a. Banking Info
d. Previous Entities
11 Investor Relations
a. 409A Valuation
b. Cap Table
c. Funding to Date
d. Use of Funds
Recent trends and optional considerations for creating your startup's data room
Creating a teaser data room.
If you are not quite ready to get into a deep relationship with an investor, or if you feel they are asking for the data room earlier in conversations (not even close to a term sheet), sending a top-level teaser data room can appease both you the founder and an interested investor.
A teaser data room can include top-level financial projections, KPIs, market data, product tech specs, and an extended confidential pitch deck (one you may have already pitched with anyway).
It is normal to feel a little iffy about sharing ALL your data with an investor, no matter how far you are in the fundraising process, so we do not typically recommend a teaser data room unless you have a good reason or strong gut instinct (or high founder-anxiety) to do so. See the note above about adding additional hurdles to the process.
Interested investors will end up having to ask more questions and for more data, whether or not they invest in you.
Sharing some company data after a term sheet.
You can also refuse to share specific data until a term sheet is signed. Some information like client names or detailed proprietary tech that may be too confidential to release is ok to share later or on an as-needed basis. You can include client general information in your pipeline or traction folder by labeling a company "XYZ Public Pharma Company" or "Top 5 Aerospace Corporation based in the US" and removing any logos. We do this on startup pitch decks regularly for clients as well because it shows you have real contracts without divulging confidential information.
Only do this if you have a good reason to and can explain to an investor why (for example legal agreements, IP, etc.). Otherwise, it can come across as you hiding information.
Some clients like to PDF every file in the data room. While it can be time-consuming to do this at the beginning, it can prevent file-opening issues or editing capabilities by non-company members who have access to the files. The latter is rare but may give your startup some peace of mind.
Generally, your files will be in document formats that are standard on most Windows, Mac, and Linux devices (Word, Excel, PowerPoint, JPEG/PNG, PDFs). If your file's format is not standard (for example Keynote can not be opened on Windows easily, or any CAD files), PDF it.
Data Room Variations:
As your startup grows, your data room needs may shift. We see this as companies are preparing for an exit. Hopefully, you get here one day! In these cases, you may want to look at more enterprise-focused platforms or plans for security purposes.
M&A (Mergers & acquisitions) data rooms are primarily for a buyer to review, analyze, and evaluate your business. These virtual repositories allow a buyer to think through strategy and evaluate a seller's advantages, risks, and potential opportunities & partnerships. A buyer can assess a company's true value.
IPO (Initial Public Offering) data rooms are typically for underwriters, regulatory bodies, and investor communication.
Go Secure that Term Sheet with Aleberry's Help!
We know that was a lot of information, but we hope it helps you impress investors. You are asking for an investment into your business, so you should put effort into looking professional.
Creating, organizing, and updating data rooms can be a time-consuming process. If you want to alleviate some of that burden, Aleberry can help you with investor relations, including data rooms. We'll even perform an initial audit to get you moving.
Have more more questions or interested in an initial audit of your data room? Let's talk!
Questions? Confused? Need to grab a beer after all that? Send us a note, a happy hour zoom invite, or a pic of your puppy! We're always into puppy photos.