Fundraising 101: Always Have A Data Room
“Do you have a data room?”, asked the venture capitalist.
“Well… not at this moment but we will provide one a few days after we sign a term sheet”, answered the inexperienced founder & CEO.
What the CEO was thinking: “I’m supposed to share a data room for Due Diligence”
What the VC was thinking: “They’ve got no other VC that’s already seriously working on this deal… I guess no one else is very excited… furthermore they’re probably not very well organized… do I want to work with amateurs?”
Having A Data Room is a Signal
If the above is unclear — if you have investors seriously looking at your data, then you have a data room. It follows logically that if you don’t have a data room, no one is seriously interested yet.
Investors like to see other investors interested. Stocks go up when there is someone else willing to buy them at a higher price. The market has a herd mentality, and the fastest / best deals look like a feeding frenzy. As CEO you need to create that sense of urgency, of momentum, and essentially admitting that no one else is serious about you is very counterproductive.
Furthermore, having a well organized data room is a testament to professionalism in management, which is something that investors should expect from founders to either have or be able to quickly develop as their companies scale.
Well Organized Data Rooms Speed Up The Process
To quote one of my smartest colleagues ever, “deals tend to close quickly or fall apart”. Once investors commit, you want to close the deal quickly, as every day that passes increases the risk that you won’t close at all.
A verbal commitment is only a soft yes. Even a signed term-sheet is non-binding and while no VC likes to walk away from one, s*%t happens. Sometimes it’s internal — e.g. uncovering some legal exposure or financial detail that adds risk. Sometimes an externality having to do with the market or the investor themselves trips up a deal. In either case it screws you over — because not only do you have to start the process again with a new investor, but having an investor walk away post commitment is a terrible signal that is often hard to hide.
Getting organized ahead of time gives you an opportunity to review where you stand on the contractual, financial and administrative sides and fix things before they are exposed to an investor or their legal firm. Typically it also puts you (and your administrative or financial team) in a much better position to quickly answer questions / address concerns that rise during due diligence — you can anticipate them and respond immediately, or at least you know where the paper trail is.
The shorter the due diligence process, the more likely you are to close the deal.
It’s Not A Time-suck, It’s Best Practices
The best and cheapest way (from a time spent perspective) for the Data Room to be up-to-date is when it’s really just a reflection of your day-to-day management practices. When you make sure you got your agreements, board minutes, certificates, budgets, financial statements etc. fully executed and properly filed as they are generated, then they are readily available for due diligence.
Spending 10 minutes today to finish things properly (e.g. make sure the agreement is signed and the file saved in the right folder) saves many hours fixing them later (realizing it wasn’t six or sixteen months from today, chasing the other side for a signature, filing it then, dealing with the lawyer / accountant who was looking for it).
In an early stage company, it’s not “the lawyer’s job” or “the accountant’s job”. When these issues that come up in real life they are a problem to you, but just more billable hours for them. Also, they deal with dozens of companies. Do you really think they remember your board meeting from 6 months ago or the IP agreement with you star contractor from 2 years ago? Things are resolved quickly when you know where stuff is, or slowly when you have to seek outside help.
When your company is big enough — you can delegate this to your full-time CFO or COO — and make sure they are accountable. For now — do your job. When your documents are well organized and accessible to you all the time, the Data Room is simply a copy-paste of your existing folders.
As CEO it is YOU who are supposed to know best.
So What’s A Good Data Room Really Like
In this day and age, a startup’s data room is simply a folder structure saved on some cloud provider. You can easily get away with whatever you’re using anyway (e.g. Google Drive, DropBox) or you can use a special-purpose product from the many providers out there who make it easier to manage access by multiple parties and track who’s looked at what.
The Data Room has to cover your financial and legal data — from original incorporation documents, through documents covering each funding round, to all of your contracts etc. This is what the legal team will rummage through. But you will do much better if your Data Room represents your future value and your management practices well, in the form of budgets and forward looking financial plans, roadmaps, marketing materials, press coverage, team bios etc. You really want everything to be covered, complete, and easy-to-find.
For instance, here is a folder structure from one of the companies I work with:
You may also want to consider adding data reports — e.g. from CRM, Analytics etc. that show your brilliant metrics and your great progress over time. Investors are suckers for numbers, so if you have them — flaunt them.
Private vs. Public
Much of your data is confidential, and you can’t / shouldn’t share it with investors before there is a serious commitment (e.g. a term sheet) and lawyers are involved, giving the pretense of confidentiality. But I am seeing companies sharing a “data room” alongside their presentation, early in the process (for instance see Liran Belenzon’s “How to get multiple term sheets for your next funding round within 3 weeks”). This signals seriousness and professionalism.
The secret is simply to separate the private data from the public date. Separate the folders that contain your deck, your marketing materials, marketing coverage, basic bio info and other information that’s available only anyway, from actual confidential information. You can then bundle the link to the “public data room” with your presentation that you share with VCs. And if you use a service that allows you to track activity (who’s read your files), you may gain valuable info about investors’ levels and areas of interest.
What Are You Waiting For?
To increase the speed and the likelihood of success of your fund-raise, get your act together. You’re going to do all this work anyway. You might as well do it up front, with no external pressure, and reduce your chance of failure later.
You can move fast and break things without living in a barn.
Nadav Gur is the principal at NG Vanguard Enterprises in Silicon Valley where he works with founding teams and investors to make them 21% better. He is also the executive chairman at Obi.
Prior to that he was the Founder & CEO of WorldMate (acquired by CWT) and Desti (acquired by Nokia), an entrepreneur-in-residence at SRI Ventures, and an advisor with VCs and CVCs.
