Time kills all deals and there’s one sure fire way to slow a deal down: not having a data room ready for investors when you approach them.
In my time with both Transition Level Investments (Steve Baxter’s startup investment portfolio) and Full Circle VC, I’ve noticed that there is one thing that most efficient and enjoyable deals have in common: a well-structured data room that has been prepared in advance of fundraising meetings.
A data room (or deal room) is simply a collation of documents to help a counter-party, such as a potential investor or acquirer, get an understanding of your business and satisfy their due diligence.
Why you need to be thinking about a data room from the very start
Having a data room prepared in advance of any fundraising discussions will help you regardless of what stage you’re at in your startup. There are three main benefits this will bring to your startup:
Approaching an investor without this information at the ready will cost you precious time while you scramble to put things together. It’s often the case that companies who haven’t prepared a data room prior to a raise are disorganised in other respects of their business. For example, when a data room doesn’t exist and we send our due diligence checklist, we find they’ll often have overdue tax lodgements, and unsigned IP assignments and shareholders’ agreements that then need to be rectified. Not only does it show poor form on the part of the company – it means that the investment will be delayed while these issues are rectified.
The act of preparing a data room will help get you in the mindset for fundraising by forcing you to ask what will an investor want to see. This process often prompts founders to document areas of the business that have previously been kept in their head such as future product development and hiring plans.
Getting ready to scale and eventually exit
Every good business is built on systems. Without documenting these systems, scaling without the wheels falling off will be near impossible. And when the time comes, should you finally get to an opportunity to exit you’ll need to show the acquirer everything that an investor wants to see and probably more.
Aside from these reasons, having a data room is simply best practice and a key differentiator between the brilliant companies and the not so good ones.
How to build a data room
It is never too early to start your data room. In fact, the best founders will already have one in place from day one.
It’s not rocket science. Here’s how to set one up in three simple steps.
- Create a folder structure in Dropbox or Google Drive that contains key company documents. This should include all documents relating to incorporation, legal agreements, contracts, Intellectual property, tax filings, HR documents, product planning and strategic plans. If you don’t know what to include, here’s a copy of our basic due diligence checklist that may help.
- With a clean file system in place setting up the data room is simply copying the relevant documents into a new folder ready for sharing. Have two shareable types of data room, one that contains a set of ‘higher level’ docs, such as pitch decks, product plans, and strategy documents that can distributed to any interested parties during the investment process. The other should be a larger more detailed folder that is shared post signing of a term sheet. This second file usually contains more sensitive documents such as legal agreements and HR documents.
- To make it easy to navigate these folders create an index or reference document to show the reader what documents are stored and where (pro tip: hyperlink the index to the documents). This small step makes a huge time difference when searching through all the documents to find one file.
Since a data room is usually an extension or compilation of your existing file structure, if you’re organised and on top of your record keeping, setting up a data room is a quick and simple exercise. Leave it too late and you’ll be scrambling to put something together and it won’t look good to potential investors.
Rowan Grant is Partner at Full Circle VC and cofounder of SmartBooks Online. He has helped shepherd over 25 startup investment deals through due diligence in the past two years.