As a startup founder, one of the crucial steps in securing investment is providing potential investors with access to your data room. This secure repository holds detailed information about your company, business model, traction, and financials, allowing investors to validate the claims made during your pitch. In this blog post, we will explore the basics of setting up a data room for startups, specifically focusing on Stage 1 data required for creating a term sheet.
If you are reaching out to investors by cold emails its beneficial to have the data room ready and sent along with it, with your Pitch PDF being a part of that data room. Make sure all numbers in the pitch match what is actually calculated and shown in the financials excel sheets.
Data Room Basics
To ensure the security and accessibility of your data, cloud-based solutions like Dropbox / Google Drive are popular choices for early-stage companies as well as Box. Additionally, consider using virtual data room solutions provided by vendors that offer enhanced controls and monitoring capabilities for companies handling large amounts of data, such as DueDash, Intralinks, Dealroom, Ansarada, Datasite.
DO NOT expect investors to sign an NDA before you pitch or send them your data. So don’t use Docusign for this. Investors don’t have time to involve their legal teams to go over an NDA back and forth just to see your pitch or learn more about your financials. If your startup can fail just because someone can access your idea or data room, then that information should not be in publically available. Your idea is not as great as you think it is. Your execution of an idea is what makes your business a failure or a resounding success.
It is advisable to start building your data room early in the pitching process.
While some information will be readily available, other data may require time to collect from lawyers and team members. Organizing your data well and keeping it up to date is essential for creating a favorable impression on potential investors.
You may not have all the information right now, depending on the stage your startup is in, but make sure to collect all the info you do have that validates that your idea is worth pursuing as a startup and is relevant for investors. This should at the very least include detailed information on the problem, market size, your team, solution, pitch deck, business plan, goals, and timeline.
Stages of Data in the Data Room
Data requests from investors occur throughout the deal flow discussions, but they are particularly important at two key stages:
Stage 1: Data needed for an investor to create a term sheet. At this stage, investors primarily focus on obtaining data related to your product-market fit, financial models, and cap table. However, certain aspects from Stage 2 may also be required but in lesser detail, such as the biographies of your top team members.
Stage 2: Detailed due diligence data. This type of data is typically requested after the receipt of a term sheet. It includes comprehensive information about company documents, securities, material agreements, financials, and staff.
It is crucial to provide additional data and data room access only when requested by the investor. Prematurely offering access to your data room may not necessarily stimulate their interest in proceeding to a term sheet.
Stage 1: What to Include
When creating a term sheet, investors require specific Stage 1 data to prepare an investment memo for internal decision-making and subsequently present you with the term sheet. Let’s take a closer look at the information you need to provide:
- Product-Market Fit:
Addressable target market: Include market sizing and specific details about your target market, supported by industry reports from reputable sources like Gartner, Deloitte, or McKinsey.
Problem-solving capabilities: Provide customer data that proves your value proposition and pricing model, such as customer acquisition and retention data, customer engagement levels, customer ROI (for B2B ventures), cohort tracking data, and competitive positioning. - Financials:
Profit and loss history, balance sheet, grant history, and comparable valuations.
Key financial drivers: Highlight gross margins, trajectory of monthly recurring revenue (MRR), cost of acquisition (CAC), long-term value (LTV) quantification, sales pipeline and forecasts, planned usage of funds being raised, and major client or partnership contracts that validate your business model.
Transparency: Clearly differentiate between revenue and MRR, and avoid red flags like dealings with other companies run by the same founders or unclear intercompany assets or IP ownership. - Company Documents and Cap Table:
Maintain a clean cap table to minimize objections from investors.
Include articles of incorporation, co-founders’ bios, profiles of other investors, share options pool, and terms or clauses that may impact the future, such as prior term sheets with liquidation preferences. - Product Roadmap and Competitive Positioning:
Demonstrate your product’s value and market differentiation by providing a product demo link, information about your intellectual property (patents and trademarks), and analyst reports that validate your product. - Team / Staff:
Founders and co-founders’ commitment: Investors prefer founders who are fully dedicated to their startup before seeking funding. If that’s not the case, provide a compelling reason and a plan for transitioning to full-time commitment. Include details about founders, their track records, bios of advisors, and other key executive staff.
What NOT to Share in Your Data Room
It’s important to exercise caution and refrain from sharing certain sensitive information in your data room:
- Code or proprietary information: Do not share sensitive code or trade secrets.
- High-value sales prospects: Keep valuable sales prospects confidential to protect your competitive advantage.
If you want to know more about what goes in a Data Room. Check out this amazingly detailed post.