Even Ifar Fossland from the Fundraising For Startups program on the value of a DD Data Room
What is a DD Data Room — and why should you set aside time for making it? Even Ifar Fossland from Startup Norway guides you through some of the reasons why a proper Data Room can mean all the difference to your startup.
How do you decide on whether or not you should make a big purchase? Making the right choice often involves a great amount of research, and also the confession that the available products might not suit your purpose that well after all. But not buying is better than buying the wrong thing: What is your process of doing research before you buy a new phone, car, or a house? Many of us are ‘investing’ in products even before we start considering ourselves as proper investors, but the various processes of research are nevertheless comparable.
So what is the process of doing research prior to investing in a startup?
The two real estate agents
Even Ifar Fossland is the Startup Manager of Startup Norway, and is involved in the Fundraising For Startups program. Every year he is directly involved in guiding hundreds of startups on how they should shape their innovations and DD Data Rooms, in an effort to make sure these startups appeal to the investors.
Fossland says that for a startup, making an effort at creating the most informative Data Room possible is not only a lot of work — but also essential for a business that wants to create value.
Due Diligence Data Room is the long version of DD Data Room. Think about when you bought your first house, your first car, or hired your first employee. Let’s say you went to two open house viewings, and the real estate agents were slightly different.You would of course ask for the prospect of the new apartment you were looking for. You ask both real estate agents, “Can I see the prospect?”, says Fossland.
But they will not give you the same resources in this experiment, although both will agree to sending you the prospect.
One of the real estate agents answers: Yes, I have the documents *somewhere*, but I need to find the latest version. A few hours later, you receive one document, in an email, — and then two more documents. The only you can keep the documents organised is if you download them and keep them on your computer.
Although this real estate agent doesn’t show an impressive level of organising their resources, at least you get everything you need. Or do you? And what about the second real estate agent?
The second real estate agent also answers “Yes!”. But she shares an index folder where you can track everything from who has owned the apartment since it’s first owner, to every upgrades both in the building in general and in your prospect apartment. You can easily look into whatever you want (as there should be no secret in real estate, but in your DD-data room there should not be open for public). And see what documents that are available to read.
Now let’s get back to your company. The real estate agent is you, and the customer is a new investor who wants to do a due diligence.
Which of the mentioned examples would you like to be?
But what is a DD Data Room, really?
A DD Data Room (full name ‘Due Diligence Data Room’) should include all your important documents, and history of things you have done as the founder of a company (and previous companies you have founded). Look at it as a CV — would you like to see everything whenever you hire a person?
“Due diligence is an investigation of a business or person prior to signing a contract”.
You can read more about the ‘due diligence process’ in this article — which is based on Angel Challenge investor Ketil Wig’s session on the importance of proper due diligence.
The matter of convenience (a tidy Data Room is better than scattered documents) is of course obvious, but could the lack of a Data Room have fatal consequences for your startup?
Well, the worst-case scenario for a startup without a Data Room would be that the investors lose interest in your startup. You don’t have to work much to create a bad impression, and not having the correct documents will quickly make you look a bit unstructured and unprepared to receive investments. Keeping your Data Room up to date is your homework, and you must do it to get the best grades, says Fossland.
For many young startups, the very first investors are people from their network and inner circle. Is this a problem?
We use the expression FFF — Friends, family and fans (not fools!) to describe the first investors. They are the ones often investing in the startup before things get “really” serious. The time for FFF is the time when you don’t have any good traction yet, but you need money to test your assumptions. The next step (after getting the first small investments) is often called the pre-seed, and are with ‘angels’ aka early-stage investors.
Getting investments from people in your close network is a good support, but that does of course not mean you can do it without signed contracts — or by revealing too much about your startup. You should keep your Data Room hidden until you know for sure whether or not an investor truly is interested in making an investment in your startup.
Do not share everything on your first date! It’s not something you just share around to everyone, but rather something you share with interested investors. And remember, no investor will sign a NDA at the first date either. Commitment takes time! It is comparable to going on a date with a potential partner, going to open house viewings, or applying for a new job — and an investor will probably not want to ‘seal the deal’ right away, says Fossland.
Sync with your investors, and keep them longer
Providing the right and necessary information will probably take a long time (remember: You must update your Data Room regularly too!). So can you really ever expect to see your Data Room ‘done’?
It’s basically never done! We often get this question from startups: “How can I be done as quickly as possible?” Well — your DD Data Room will always be a “work in progress” type of room. Think of it as a continuous project: Although updating it might take away from other important tasks, there is a potential for great investments when you have the sufficient information readily available.
Syncing regularly with your investors can mean the difference between getting a one-time investment, and building a solid relationship that is built on mutual trust and knowledge. Just like with any other friendship or relationship, your investors want to be kept in the ‘loop’ of what you are doing, and have done.
Many of us think it is challenging to ask for more information from our friends, or be strict with someone we get along with well. And the same can probably said for several (especially inexperienced) investors. Many of the best startup-investor relations are after all based in a kind of friendship. So how can an investor avoid this tricky (and probably uncomfortable) situation, where they have to ask for more information?
Well, one basic advice is to avoid making deals with companies that have insufficient DD Data Rooms.
Yes, there can be “elephants” in the room, especially if there is a cap-table that has some red flags (‘50–50 shares and a marriage, with no plan if they split up’ is a big red flag). And with a proper DD-process, also from the investor’s side, where the investor has a “checklist” (either in their head or an actual checklist), you will minimize the risk of finding the “selections in the startups” too late. There will always be risk — that’s what it is like to do investments!
