How to Build a Data Room for your startup – a comprehensive guide for founders

 A well-organised data room serves as the final piece in building a strong brand perception for your startup, and understanding how to build a data room for your startup is crucial for this process.

Virtual Data rooms can feel overwhelming, especially for first-time founders. You might be wondering what a data room is, or how to get yours up and running. The good news is, you’re not alone! Many startups find themselves in this exact situation.

And there is no need for despair – a well-organised data room is no rocket science. We’ll take you through it step by step so that you can streamline your fundraising process.

What Exactly is a Startup Data Room?

In essence, an investor data room (or virtual data room, VDR) is a secure online archive that stores confidential documents related to your startup. This includes financials (such as financial statements, and financial model), business plans (business model), product information, legal agreements, and other materials that provide investors with a comprehensive understanding of your company.

Why Does Your Startup Need a Data Room?

Think of your data room as the ultimate due diligence toolkit for investors. Data rooms play a critical role in early-stage venture deals, providing essential information for the parties involved during the due diligence process. Just like you wouldn’t buy a house without an inspection, investors won’t commit to your startup without a deep dive into its financials and operations.

This secure online repository provides a central location for all relevant documents, fostering transparency and efficiency throughout the fundraising process. Whether you’re in the pre-seed stage or prepping for a Series D round, an organized data room can be a game-changer.

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Top Benefits of Building a Data Room

For founders raising capital, a well-structured data room offers a multitude of advantages:

• • Improved Efficiency: No more back-and-forth emails. Investors can access and analyse information at their convenience, accelerating the due diligence process.
  • Transparency & Trust Building: A comprehensive data room filled with accurate and up-to-date information showcases your commitment to open communication. This builds trust with the parties involved.
  • Information Control: Maintain complete control over who sees what. Secure platforms with permission-based access allow you to tailor the information presented to each investor.
  • Improved Investor Relations: A well-maintained data room becomes a central hub for ongoing investor communication. It is crucial for showcasing business readiness and improving your pitch to potential investors. They can access the latest information without the need for constant meetings or emails.
  • Scalability for the Future: As your startup grows, your virtual data room can grow with it. Whether you’re an early-stage company or prepping for an IPO, an online platform allows you to easily update information and maintain consistency.

Sharing Your Data Room: Timing and Best Practices

• • Timing perspective: So, when exactly do you hand over your data room to potential investors?Your VDR should ideally be compiled before you begin pitching, containing essential documents an investor might need to confirm details or address questions before presenting a term sheet.

Typically, a request will come after a couple of successful pitches or in-depth meetings. This often occurs before any official terms are discussed. The due diligence process itself, which includes a thorough review of your data room, can take anywhere from a few weeks to a few months, with 2 to 3 weeks being most common. During this time, various stakeholders within the VC firm, including industry specialists, limited partners (LPs), and decision-makers, might access your data room. Therefore, a well-organized and user-friendly data room is essential to facilitate collaboration and internal discussions among these parties. Regularly reviewing and managing data room access is crucial as your startup grows and new parties join or existing users’ roles change.

• • Data security: As mentioned above, many parties have access to your data room, so you need to be selective about who has access to it. In addition, you should have a security vault that protects confidential data so that no unauthorized person can access it. There are many platforms that offer strict security protocols, but we will talk more about this topic later.

What to Avoid When Building a Data Room

Let’s explore some common mistakes founders make when sharing their data room with VCs:

• • Requesting a Non-Disclosure Agreement (NDA): If you’ve reached the data room stage, chances are the investor has already reviewed your confidential pitch deck. More importantly, VCs typically see a high volume of pitches and generally dislike signing NDAs. So unless your IP needs a very high level of confidentiality, we recommend not asking for an NDA. Remember, you should also perform due diligence on potential investors to identify any conflicts of interest before sharing sensitive information.
  • Mess: Don’t make your data room a labyrinth of cryptic folders and files. Imagine the golden rule of sales and marketing: “Don’t make the customer work for it.” The same applies to VCs. A disorganized data room can create a negative impression and slow down the investment process. Creating an easily navigable data room with a hierarchical folder structure and standardized document names is essential for a positive investor experience.

Here are some tips for keeping your data room organized:

• • Generic or nonsensical names:  Use clear and descriptive labels for folders and files. Avoid generic names like “10Oct2019-Things” or nonsensical file names like “kahdhj5282.jpg”. 
  • Messy interface: Strive for a clean and user-friendly interface that’s easy for investors to navigate.
  • Lying or Withholding Information: Honesty is always the best policy. VC firms often have a network of experts, legal teams, and advisors who can uncover any discrepancies in your data. Building trust and transparency is crucial for a successful investment relationship.
  • Outdated Content: Take advantage of online data room platforms that allow for easy updates. Keeping your data room current with the latest company achievements (new clients, product improvements, market data, key hires) demonstrates your ongoing engagement and prevents any doubts that might arise from outdated financial information.
  • Information Overload: Focus on quality over quantity. There’s no need to include numerous versions of your pitch deck or irrelevant documents. Keep your data room focused on the most up-to-date and essential information.

Choosing the Perfect Platform for Your Data Room

Now that you understand the importance of a well-organized data room, it’s time to select the right platform to house it. Several online options cater to startups, each with its own set of features and pricing. Here are some key factors to consider when making your choice:

Online data rooms offer cutting-edge security features such as multi-factor authentication, read-only permissions, and digital watermarks, making them ideal for secure document management.

• • Security: This is paramount. Your platform should offer robust security measures to safeguard your confidential data.
  • Tracking & Analytics: Gain valuable insights into investor activity within your data room. Track which sections are most viewed and for how long to understand what piques their interest.
  • Ease of Updating: A user-friendly platform allows for effortless updates, ensuring your data room stays current with the latest information.
  • Accessibility: You and your investors should be able to easily navigate the platform. Look for an interface that’s intuitive and user-friendly.

Popular Virtual Data Room Platforms

Let’s explore some popular virtual data rooms frequented by startups:

• • Dropbox: A familiar and proven option, Dropbox excels at document management and organization. It offers user-friendly file sharing and permission controls.
  • HubSpot File Manager: A great fit if you already use HubSpot’s paid plans. HubSpot boasts excellent file-sharing trackability features, including document opens and clicks. You can even integrate it directly into your website with a gated access page.
  • Google Drive & Docs: Google Drive is a solid option if your team already utilizes Google Docs internally. It offers familiar file sharing and permission controls similar to Dropbox.
  • SharePoint/Office365/OneDrive: Similar to Google Docs, we’ve found Microsoft’s suite to be a bit complex, especially when compared to other options. While they offer file sharing and permissions, adding external users can be problematic.
  • Docsend: Ideal for those seeking in-depth analytics on document views, clicks, and other engagement metrics. However, Docsend can be expensive.
  • Box: Another established player, Box offers features similar to Dropbox, making it great for managing multiple files and folders. Box goes a step further with advanced sharing, collaboration tools, e-signature options, and enhanced security features.
  • Carta Launch: Built specifically for startups fundraising from angels, VCs, and other investors, Carta Launch offers a comprehensive solution. Beyond data room functionalities, Carta allows you to manage your cap table, issue equity and SAFEs, and track ownership. They even have a free plan for early-stage founders.
  • Website Builders (Webflow, etc.): Content Management System (CMS) website platforms like Webflow offer surprising flexibility for building data rooms. These platforms often have features like gated content, mobile access, and tagging systems. The advantage of building your data room on your website is familiarity with updating files and a centralized workflow. 
  • Fundraising-Specific Platforms (Visible VC, Dealroom): These platforms, like Carta Launch, cater specifically to the needs of growing startups seeking investment. Visible VC offers comprehensive dashboards to manage more than just your data room, while Dealroom is known for its user-friendly interface and security features.
  • Additional Options: While we haven’t personally vetted all of these, other virtual data room platforms frequented by startups include FounderSuite, HelpRange, Intralinks, Dock.us, Firmroom, ShareFile, Anduin, Caplinked, Onehub, Secure Docs, Capboard, Firmex, and Digify.

Building Your Data Room: A Step-by-Step Guide

Now that you’re armed with the knowledge to choose the perfect platform, let’s walk through the process of setting up your data room:

• 1. Platform Selection: Carefully consider the factors mentioned above and choose a platform that aligns with your needs and budget.
  2. Document Gathering: Start by gathering all relevant documents in one central location. This could be a simple folder where you (or your team) can dump everything related to your company, product, financials, market, and more (see the list below for reference). Gather critical financial documents such as balance sheets, income statements, and cash flow statements to provide a comprehensive view of your company’s performance.
  3. Organize your documents: To achieve optimal organization, we recommend numbering your folders and files. In addition, you can create subfolders for categories such as financial statements, legal documents, product information, and company structure. 

How to Structure your Data Room?

We recommend using the Ternary Numeral System to organize your data room folders. Unlike traditional physical data rooms filled with filing cabinets, modern data rooms are digital and offer greater efficiency and security. This system assigns numbers to folders, allowing you to guide investors through a curated narrative. While they can still explore freely, numbering creates a clear hierarchy for them to follow initially.

Let’s explore the essential folders you should create in your data room:

00. Table of Contents

• • (Document or Webpage with Links): Provide an easy-to-navigate roadmap for investors, allowing them to find the information they need quickly.

01. Company Summary

• • (General Pitch Decks & Overview Documents): Showcase your company’s value proposition with the latest version of your pitch deck and concise overview documents.
  • (Top-Level Financial Projections and Key Performance Indicators (KPIs)) Provide a high-level overview of your projected financial performance and showcase key metrics that measure your company’s success.
  • (Founder Story & History): Share your company’s origin story and the passionate founders driving its success.

02. Sales & Marketing

• • (Customers List & Sales Collateral): Demonstrate your traction with a customer list (past, active, and pipeline) and include samples of contracts and letters of intent (LOIs) to showcase sales capabilities.

03. Products & Technology

• • (Product Images & Specs): Visually represent your product with compelling images and detailed specifications.
  • (Demos & Future Milestones): Provide access to product demos and a roadmap outlining future development milestones.

04. Market Analysis

• • (Competitive Landscape & Market Opportunity): Outline your competitive landscape and the substantial market opportunity you’re addressing.
  • (Market Research & Data): Support your claims with relevant market research and data to demonstrate the market potential.

05. Financials

• • (Past Financials, Pro Forma, & Taxes): Provide a clear picture of your financial health with past financials, projected financials (pro forma), and relevant tax documents.

06. Intellectual Property & Legal

• • (Intellectual Property): Outline your intellectual property portfolio, including patents, trademarks, and copyrights.
  • (Legal Documents): Include key legal documents such as incorporation documents, shareholder agreements, and any relevant contracts.

07. Compliance & Regulatory

• • (Certifications & Industry Standards): Highlight any industry certifications or adherence to specific standards (e.g., ITAR) that demonstrate your commitment to compliance.

08. Human Resources

• • (Team Members & Org Chart): Introduce your talented team and showcase their expertise with team member bios and an organizational chart.

09. Advisory Board

• • (Board Meeting Documents): Organize board meeting documents by quarter and year to provide transparency into your governance structure.

10. Corporate Governance

• • (Banking Info, Insurance, Lease, & Previous Entities): Demonstrate responsible business practices by providing details on your banking relationships, insurance coverage, lease agreements, and any relevant information about previous entities.

11. Investor Relations

• • (409A Valuation, Cap Table, Funding to Date, & Use of Funds): Provide transparency for potential investors with your latest valuation (409A), cap table, details on funding received to date, and a clear explanation of how funds will be used.

Sharing Confidential Information Strategically: Teaser Data Rooms and Beyond

There’s a delicate balance between transparency and protecting your startup’s confidential information during fundraising. This section explores different approaches to sharing data with potential investors, from teaser data rooms to post-term sheet considerations. A well-prepared data room serves as a secure repository for sensitive information, ensuring that only authorized parties have access.

Teaser Data Rooms: A Light Appetizer

Not quite ready to dive deep with an investor? A teaser data room can be a good middle ground. Data rooms play a crucial role in early-stage venture deals by providing essential information to investors during the initial stages of the investment process. This is a stripped-down version of a full data room, ideal for situations where an investor requests access early on in the conversation.

Here’s what a teaser data room typically includes:

• • Top-Level Financial Projections: Provide a high-level overview of your projected financial performance.
  • Key Performance Indicators (KPIs): Showcase key metrics that measure your company’s success.
  • Market Data: Demonstrate your understanding of the market landscape.
  • Product Tech Specs: Offer a glimpse into your product’s technical specifications.
  • Extended Confidential Pitch Deck: Share a more detailed version of your pitch deck, potentially including confidential information not included in the standard version.

Sharing Selectively After a Term Sheet

Even after a term sheet is signed, you might not be comfortable sharing everything. Here are some strategies:

• • Negotiate Data Sharing: Discuss and agree upon which data will be shared and when. Certain highly confidential information, like client names or proprietary technology details, can be shared later on an as-needed basis.
  • Regularly Review and Manage Data Room Access: Regularly reviewing and managing data room access is crucial to ensure that only authorized parties have access to sensitive information.
  • Anonymize Client Information: For traction purposes, include general client information in your data room. Instead of real names, use labels like “XYZ Public Pharma Company” or “Top 5 Aerospace Corporation based in the US.” This demonstrates traction without compromising confidentiality.

Optimizing Your Data Room for Security

Here are some tips for optimizing your data room’s security:

• • Convert to PDF: Consider converting some files to PDF format. This prevents unauthorized editing and ensures file compatibility across different devices.

Online data rooms offer advanced security features such as multi-factor authentication and digital watermarks to protect your sensitive information.

Building a data room can feel like a big task, but don’t worry! We’re here to help. If you have any questions or need a hand setting up your data room, feel free to reach out to us. We’d be happy to guide you through the process.