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Investor Data Room Best Practices & Guide (Startup-Friendly)

Kison Patel
Kison Patel

Kison Patel is the Founder and CEO of DealRoom, a Chicago-based diligence management software that uses Agile principles to innovate and modernize the finance industry. As a former M&A advisor with over a decade of experience, Kison developed DealRoom after seeing first hand a number of deep-seated, industry-wide structural issues and inefficiencies.

CEO and Founder of M&A Science and FirmRoom

For the modern company considering M&A or raising capital, the data room is not so much of a management decision as a strategic necessity.

Potential investors, buyers and sellers, and even intermediaries now use virtual data rooms as standard, so the issue then becomes understanding which one works best for you, and how to build it for better outcomes.

FirmRoom has developed what we believe to be the most intelligent and user-friendly virtual data room available on the market today.

In this article, we look at how new users should approach data rooms - be that FirmRoom’s own solution or any other - and show exactly how virtual data rooms create significant value for investors.

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.

How do Investor Data Rooms Benefit Startups?

A common misconception among those who have never used virtual data rooms is that they offer a kind of glorified storage system.

Safe data storage is just one part of a much larger story where virtual data rooms are concerned.

For startups, there are a host of benefits in using data rooms, such as:

Increased efficiency and efficacy

most innovative dataroom provider review

Think of an intelligent virtual data room system as an office manager specialized in M&A. Like a good office manager, a virtual data room enables processes (especially administrative processes) run more smoothly. However, it does so at a fraction of the cost of an office manager.

Enhanced security

Virtual data rooms enable users to create user hierarchies, control entry settings (e.g. NDA-approved users only), and ensure that no documents are copied (through screen grabs) or downloaded. None of this is possible when sharing physical documentation containing sensitive information.

User friendly

The name ‘intelligent virtual dataroom’ might scare away some users. The intelligent essentially means that the best modern systems have been designed with end users at top of mind; and with FirmRoom, we even provide checklists for due diligence regardless of the size, transaction type or industry sector of your deal.

Accurate information

A well organized data room enables a user to provide third parties with every piece of relevant information through the click of a button. No more duplicated files, endless email threads, or outdated copies sent in error. They receive the accurate, up-to-date information they need as they request it.

How to Leverage Data Rooms for Startups

Aside from the benefits outlined in the previous section, a virtual data room endows its users with another benefit: It signals professionalism, showing potential investors that you’re putting together an institutional-quality package.

Make it easy for them: The most sought-after investors are already short on time and won’t appreciate having to chase you up for documentation.

This means putting together a virtual data room as soon as you’ve made the decision to begin the fundraising process.

Leverage your data room as follows:

How to Leverage Data Rooms for Startups‍

Ensure the data room is where relevant information is stored

Along the way, you’ll continually add, remove, and update documents. Keep the most updated versions in the virtual deal room, giving you the flexibility to show investors where you are at any given point.

Provide links to executive and non-executive directors and advisors

Ensure that every time a document is added, everyone is seeing what’s going on. One of the best ways to leverage a virtual data room is as a centralized points of sharing information. The more often your advisors see what’s going on, the more they’ll provide value adding feedback.

Tell the company’s story

Remember that the data room is functional but that’s only half of it: Leverage it to tell the company’s story and to put your company in its best light. Investing in the virtual data room is an excellent first step. To really make it count, ensure the information there closes the deal for your company.

Investor Data Rooms Best Practices

Ensure structure from the outset

A virtual data room, much like the physical ones that preceded it, needs structure to be really valuable. Make sure that this is in place from the outset.

Create clear divisions between sections - a section for financials, legal documents, HR documents, etc. Make it such that a user who has never entered before would know where to find what they’re looking for from the structure you’ve created.

You can replicate our recommended data room structure get your free data room index template here.

Continuously update

An old document is usually not only a sign that you’re not updating enough (e.g. last year’s financials rather than this quarter’s), but also that you’ve been looking for investment for a long time and haven’t been successful yet. Continuously update documents in the virtual data room. We cannot stress this enough.

First time walk throughs

Good practice is to hold the hands of investors on their first view of the virtual deal room. This way you can avoid them getting lost, ensure that they’re looking at your information, and they can enter and navigate the system on their own. It also shows a level of care that will likely stand you out from the pack.

What to Include in Your Investor Data Room

What to include in the data room is one of the things that confounds many startup users who assumed that a teaser and a pitch deck was all that they required to achieve millions of dollars of funding. It’s going to take a little more than that. Below, we’ve outlined some of the broad headings that you should consider including the data room offering for investors.

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.

  1. Teaser document
  2. Pitch deck
  3. Business plan
  4. 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.

  1. Granted and filed patents
  2. 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.

  1. Sources and uses of funds
  2. Income statement, balance sheet, and cash flow statements (3 years max, and no requirement to be audited)
  3. Company valuation based on 2. above.
  4. Pro-forma statements for next year
  5. Details of outstanding debt
  6. Tax returns (if available)
  7. Cap tables, showing positions of all existing shareholders and investments to date

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.

  1. Marketing research conducted
  2. Current sales pipeline
  3. Details of sales process
  4. Customer churn (and how it’s being addressed).
  5. Customer acquisition cost (if applicable)
  6. (Projected) Average revenue per customer

5. Technology

Why? As the saying goes, “every company is a technology company,” so outline whatever your company’s technological prowess or capabilities here.

  1. Overview of technology stack
  2. Details of APIs, integrations, and system architecture

6. The Team

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.

  1. Detailed resumes of key management
  2. Employee information (resumes, roles within the company, remuneration)

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).

7. Press Releases, Endorsements, and Testimonies

Why? Including this information gives the onlooking investors a kind of proof of concept that will stand your company out. Showing how your SAAS product works in the pitch deck is all very well(and necessary), but if you have a Fortune 100 company willing to sing it’s praises, suddenly you’ve got a whole new investor proposition. The same could also be said of good reviews in press clippings or media. Note: This does not include PR Newswire.

8. Regulatory and Compliance

Why? Including this is another signal to investors that you’re on top of things. They’ll probably skip this by until the due diligence phase, but that doesn’t mean it shouldn’t be in the virtual data room from the start. This could include documents such as the company’s necessary operating licences, environmental impact assessments, or other forms of documentation that show your company is compliant (answering a question for investors before it even comes up).

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 Choose the Best Data Room for Startups?

The range of features that the best virtual data rooms offer users mean that researching the solution that suits your requirements best is a valuable use of your time.

DealRoom has put together an objective review of what we believe to be the best M&A virtual data room solutions available on the market, showing issues as cost, features, deal management, collaboration and reporting capabilities.

It’s worthwhile spending some time mulling over your options here and considering which solution fits your needs best.

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 30-day trial period:

  1. Start a free trial.
  2. Create your folder structure and upload the relevant documents.
  3. Create a group for investors and set view-only permissions to the files.
  4. Invite investors to view your data room.


Utilized well, the virtual data room can be the hidden champion of your M&A or fundraising process.

It adds significant value, not just to its users, but to third parties including investors and intermediaries. At every stage of the journey, it provides more accurate information, increased transparency, and ease of access to information as it is required.

This can be of significant benefit to companies even when they’re not actively fundraising. The best advice any company with growth ambitions could receive is to make the investment in a virtual deal room as a platform to achieve that growth.

Frequently Asked Questions (FAQs)

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Key takeaways

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