As a trusted partner for many intermediaries performing due diligence, the team at FirmRoom is often asked for advice on what to include in the investor data room.
This article addresses this question and how those documents should be organized. It also addresses a further question that intermediaries too often fail to ask, despite being just as important: “what shouldn’t I include in my investor data room?”
Do you even need a data room?
It’s only honest of us to say that you may not need a data room. How do you know whether you need one or not?
Let’s put it this way: The greater your need for confidentiality, the greater your need for a data room.
In the highly unlikely event that there’s nothing confidential in your business plan or pitch deck, there’s nothing that could raise eyebrows in your financial statement, or there’s nothing that you’d want industry rivals to see in your company strategy documents, you should be absolutely fine without a data room.
Setting up your investor data room
Whichever virtual data room you opt for, your overriding goals should be the same: organizing the right information so that the right people can easily access it.
In the same way that you have a few seconds to catch someone with your investment pitch, you can lose the interest of a potential investor very quickly if the virtual data room is not organized properly.
We at FirmRoom often face with startups looking for investments and suggest to organize your documents as follows:
- Create an intuitive folder structure that allows investors to access the documents they want to see without asking any questions.
- Ensure that your documents are protected by read-only rights. Not only does this protect their confidentiality. It also exudes professionalism.
- Update the data regularly. No investor likes looking at two year old documents. It tells them that you’ve been unsuccessful in looking for funding for two years.
In this article on DealRoom you can find a checklist of the items that should be included in due diligence. We will now look at some of these and discuss which of them should be included in your investor data room.
Prioritizing Documents for Your Investor Data Room
Remember that an investor data room is not the same as a data room for due diligence. Your goal at this stage is to show that your company has a winning business model backed by a strong management team that offers a virtual guarantee of a return on their investment.
That means that you don’t necessarily need those documents that are more typically associated with due diligence. For example, articles of incorporation, board meeting minutes, and voting agreements.
At this stage, these will only serve to distract the investors from what is relevant.
In order of importance, here are the documents that you should include in your investor data room:
1. Business Plan and Marketing Materials
Why? The likelihood is that investors will already have seen at least some of these documents but they’re the most important of all, so should be included. It should go without saying that none of the information in the documents should conflict with information elsewhere in the data room.
- Teaser document
- Pitch deck
- Business plan
- Investment memorandum
2. Intellectual Property
Why? Not every company has intellectual property but if you do, the chances are that it will be one of the first things that investors want to see. If it adds value to your company and makes it a unique proposition, it has to be here.
- Granted and filed patents
- Intellectual property strategy
3. Financial Statements
Why? This could easily be number one on this list. Don’t worry if you’re a loss making company with a big idea. So are Slack and Uber. The important thing is to have clear, transparent financials. Ensure that there are zero errors here.
- Sources and uses of funds
- Income statement, balance sheet, and cash flow statements (3 years max)
- Pro-forma statements for next year
- Details of outstanding debt
4. Sales and Marketing
Why? The sales and marketing plan is ultimately what underpins the future success of your business. Investors are ultimately looking for traction, so all your sales and marketing efforts and results need to be outlined here.
- Marketing research conducted
- Current sales pipeline
- Details of sales process
- Customer acquisition cost (if applicable)
- (Projected) Average revenue per customer
Why? As the saying goes, “every company is a technology company,” so outline whatever your company’s technological prowess or capabilities here.
- Overview of technology stack
- Details of APIs, integrations, and system architecture
Why? The expression, “investors invest in people not businesses” may sound trite, but it comes up again and again for a reason. Put your best foot forward and show investors that you and your team are somebody that they can trust their money with.
- Detailed resumes of key management
This list is succinct enough to provide everything that an investor requires to make an informed decision on the investment opportunity. It doesn’t overwhelm them with information or use a scattergun approach to providing data (which can also suggest a lack of focus on your behalf).
What Not to Include
If the list of items to include is short, by contrast the list of items to exclude is extensive. You may like the new fit out at your office, but investors don’t want to know. It’s also important not to overstate your credentials on your resume.
You may think you’re a visionary. Investors won’t.
As a general rule, avoid disclosing too many details about IP or strategy. In a way, your company’s strategy is a kind of informal IP. You can’t let everyone know what’s in your secret sauce. Disclose just enough, but keep a more detailed view of strategy for due diligence.
How to set up an investor data room with FirmRoom
If you believe that you still require a data room for your company, FirmRoom is an excellent place to start and offers a free trial. Follow the steps below and enjoy full access for your 14-day trial period:
- Start a free trial.
- Create your folder structure and upload the relevant documents.
- Create a group for investors and set view-only permissions to the files.
- Invite investors to view your data room.