How to create the perfect fundraising data room for your startup
In the world of fundraising, a data room is a veritable treasure trove of information for potential investors. Crafting an effective data room and having it ready to share with interested investors is the key to streamlining the due diligence process so you can get from first pitch, to term sheet, to funds wired faster.
What is a data room, and why do you need one to raise funding for your startup?
Simply put, a data room is a secure online destination that allows startups to share all salient information with investors, such as financial documents, legal documents, and other relevant pitch materials. Most data rooms are shared as a password-secured folder sent via Docsend, Microsoft Sharepoint, Google Drive, Dropbox, or similar file-sharing software.
By providing a centralized location for all of this information, a data room streamlines the due diligence process and allows investors to quickly access the data they need to make informed decisions about whether to invest in your company. In this article, we’ll dive into including how to set up a data room for your startup, and what it should include.
As an entrepreneur seeking investment, it is crucial to curate a comprehensive and effective investor data room. Data rooms are also required for later-stage startups exploring mergers and acquisitions (M&A) and/or engaging investment banks. This virtual “room” serves as a repository for all the information that potential investors will need to evaluate your company and make informed decisions about whether or not to invest. So what exactly should be included in your data room?
How to create an investor-ready data room: what to include
A fundraising data room should contain all the salient information necessary for help investors understand your business and make an informed decision. This includes financial statements, market research, customer data, and any other relevant documents. Additionally, it should organize this information in such a way that it is easy for investors to grasp the highlights of the opportunity and reconcile that with the corresponding data. Generally speaking, a fundraising data room should include the following:
Your investor presentation (commonly referred to as a pitch deck) is the crux of your fundraising efforts; you will typically have already shared your pitch deck prior to investors requesting access to your data room. Nevertheless, including your deck in your data room is good form to ensure everything is easily accessible in one place. Your data room should include your most recent pitch deck (tailored to a generic investor). While your pitch deck serves to present your company’s data in an easily digestible format, the data room is intended to serve this information in an “all-you-can-eat” format, so prospective investors can dig into the details. Designing an eye-catching and compelling pitch deck is the prerequisite to getting investors interested in seeing your data room, so don’t skimp on creating your investor presentation — leveraging professionally-designed templates is one way to create a cutting-edge deck, or you may consider hiring an expert.
The executive summary is also called the investment one-pager or teaser, which is usually a single page overview of your startup. A well-crafted executive summary is an invaluable tool for pitching investors. This document should summarize the key points of your business in an easy-to-read format, and should include an overview of the company’s history, current operations, and future plans. Unlike a pitch deck, an executive summary is often not a confidential document, so investors are welcome to share this document with their partners or other firms to consult about the investment. The executive summary can be thought of as a simple summary of the high-level details of your pitch deck, condensed to one page. Although the typical executive summary is more text-heavy than a pitch deck, you can still design it to be visual & engaging (for instance, by using one of our one-page executive summary templates).
Many companies (ie. Rippling, Airbase) choose to include an investor memo, which is effectively the fundraising equivalent of a cover letter addressed to potential investors. Investor memos often take the form of a formal letter outlining the details of your fundraising efforts and highlights of the opportunity. This can serve as a powerful tool to communicate a company’s fundraising narrative in a written document laying out the strategic vision, investment rationale, and growth expectations. Any VC firm that wants to give you a term sheet has to write an investment memo internally to convince all the stakeholders; founders can expedite this by writing a memo to ensure their story is being told the way they want. The Rippling investor memo (which raised $45M) offers a helpful starting point for founders who may struggle with where to start.
Above all, including the most up-to-date financial information (both historical and projections) in the data room is critical. This includes your balance sheet, income statement, and cash flow statements. When an investor is ready, they will be interested in analyzing your financial model in detail. Most will expect at least one to three years of projections, depending on the stage and maturity of the startup. Typically, an investor or VC firm will analyze a variety of aspects of your financial model (ie. testing the assumptions and resilience to market volatility). Many firms will estimate your valuation by running a discounted cash flow analysis, so be sure to check and validate your assumptions. There’s still no better tool than Excel (or Google Sheets) for creating a financial model — the versatility of spreadsheets always trumps any fancy software, and there are plenty of customizable, professional-grade financial model templates available.
Due Diligence Data
Apart from the above, investors will also want to see the underlying data behind the assumptions in your financials and the claims made in your pitch materials. The supplementary due diligence data should include all the information that investors will need to make an informed decision, such as legal documents, customer and supplier contracts, intellectual property information, market research, financial performance, cap table, management team and more. It is important to make sure that this data is up-to-date and easily accessible in the data room — including a separate “Due Diligence” folder with sub-folders for IP, contracts, legal, and research is one common way to organize this information. Be careful to validate and clearly attribute the data you include, and include the appropriate legal disclaimers as recommended by your counsel.
Summary: What should be in a fundraising data room for investor pitches?
When pitching investors, having the right information in a data room can make or break your fundraising efforts.
To summarize, below is an essential list of items that should be included in any data room:
- Pitch Deck: A concise presentation of your startup, used to capture the attention of investors.
- Executive Summary: A one-page document that summarizes the key points of your business in an easy-to-read format.
- Investor Memo: A brief written document or letter to investors outlining the details of your fundraising efforts and highlights of why investors should be interested.
- Financials: Historical and projected financial performance, including your balance sheet, income statement, and cash flow statements.
- Due Diligence Documentation: All supplementary information that investors will need to make an informed decision, such as legal documents, customer and supplier contracts, intellectual property information, and more.
Originally published at https://vip.graphics on January 30, 2023.