Looking to get ‘investor-ready’? Here’s why you need a data room.
You only have 7 seconds to make a strong first impression. And maybe marginally longer to impress upon an investor why they should invest in you or your business. A data room enables you to make that strong impression quickly.
In my time in corporate transactions, the trait that has left the best first impression is a startup with its ‘ducks in a row’ — being prepared with what investors want, the way they want it, in a secure data room.
What is a data room?
A data room (sometimes referred to as a deal room) is a secure cloud-based catalogue of all the documents an investor or acquirer may wish to access to understand your business and perform its due diligence.
What are the benefits of using a data room?
Handing information over to an investor on a USB, email attachment or unsecured shareable link is a no-no. As the transaction progresses the information you exchange will be commercially sensitive and maintaining control over who has access to different documents is important. A data room which meets leading security, compliance and regulatory standards with document-level encryption gives you peace of mind that your sensitive information will only be accessed by preauthorised people.
A well-prepared data room can create substantial time advantages for both you and the potential investor. As management consulting experts, we have often seen cases where a data room has not been prepared prior to a due diligence checklist being sent out on behalf of the investor. The lack of a data room can potentially unveil unwanted surprises such as overdue tax lodgements, unsigned IP assignments and errors in shareholders’ agreements. Not only is this a reflection of a lack of organisation in the company’s management when reaching out to investors, but it creates a significant roadblock in the investment process while you seek to rectify these issues.
Creating a data room encourages you to consider what information a potential investor would likely want to see from your business, encouraging you to commit to documenting your key plans and ideas which previously only existed as mere thoughts in their head. Having a well-prepared data room which keeps track of the systems within a business provides a solid foundation for the scaling of the company. Additionally, when the time comes to eventually exit a company, having a data-room in place means that an easily accessible resource already exists for an acquirer to refer to.
How do you set up a data room?
A good place to start is creating a Dropbox or a Google Drive folder and simply copying in key company documents. This list of documents can be guided by a due diligence checklist and can include incorporation documents, legal agreements and contracts, intellectual property, tax filings, HR documents, product planning and strategic plans.
A company should have prepared two types of data rooms, with each being shared with stakeholders at different stages throughout the investment process. The first data room should include documents at a higher level which can be distributed to any interested parties. These documents can include pitch decks, product plans, or strategy documents. The second data room should incorporate a larger folder composed of more detailed and sensitive documents such as legal agreements and HR documents which should only be shared with investors once a term sheet is signed.
These folders should be tied together with a reference document that includes hyperlinks to all of the documents that are stored in the data room. This has the effect of further creating a convenient resource for investors to refer to in gaining insight into a startup company.
Collecting, securing and presenting the information an investor, acquirer or other significant stakeholders may need during significant transactions is best done through a data room. However, we are not yet seeing startups utilise this option as they focus heavily on their business offering or are unsure how to navigate setting one up confidently.
We provide management consulting advice on the integration of a data room into your business for potential investors or other stakeholders. If you have any questions, get in touch with us at email@example.com.