At some point during your fundraising process, an investor is going to engage in some form of due diligence. Depending on a variety of factors (maturity of your company, deal size, investor style) this could be more or less protracted and complex.
However, by and large, any fundraising process will involve potential investors reviewing all the information on the company and will be more or less complex depending on your company stage, the size of the round and the level of detail that the investor will require, as well as the level of information available.
Given that a diligence process, no matter how detailed, will involve sharing data with potential investors, you might want to consider collating this information upfront. This exercise will also be helpful to develop your equity story, refine projections, and prepare for questions that you might face later down the line.
The task of gathering, organising and preparing data can be demanding and is not always the best use of a founder's valuable time. It often involves coordinating with colleagues from key business functions and other members of your team to identify, update and prepare a collection of accurate information that will best depict the company to an investor.
Therefore, knowing what an investor might want to see is critical to expedite this process. It will also be helpful to present this information and data in an attractive way to an investor while still being accurate and truthful.
Doing this will create a positive first impression, reduce the risk of venture capital funds losing interest during the due diligence phase and could potentially save your team a significant amount of time.
What should I be aware of when gathering data?
Not all information is created equal and here are some considerations you might want to bear in mind during the data-gathering stage:
- Some documents will be irrelevant - knowing what to share will avoid having to gather data that investors will not need
- Think about confidential documents - some information will be confidential and will either need to be redacted or it will have to be shared towards the end of the process only with selected investors
- Share the right information - some data might attract additional questions from investors. Too much data or the wrong data could slow down the decision-making process
- Present data in the right light - you may need to overlay analysis on some data, in order to tell the full story (for instance a bad quarter of trading might be caused by a specific reason have been impacted by circumstances out of your company's control)
Every document should be analysed in order to present an attractive and accurate picture of the business. Doing this will create a positive first impression and increase the chances of securing investment funding.
When gathering and preparing information, remember that a data dump is not always the best way to share information. Being on the front foot and sharing investor-ready information, will help speed up the pace of the diligence and reduce the drop-out rate amongst investors. This will also allow you to better control the narrative and ensure that investors are looking at your business in the right way.
While this exercise is important, it is also extremely time-consuming. Our specialists help companies in:
- Discerning the information that investors want to see, from less relevant data
- Prepare and overlay analysis and narrative when sharing information with investors
- Redact confidential information
- Stage the timing and release of data with your counterparties
But, perhaps most importantly, our experts will help you save a considerable amount of time, so you can focus on running and growing your company.
Providing access to information
Once you have the information at hand, you will also need to provide this to each investor. If you are interacting only with one or two other parties, you might be able to make data available via email or file-sharing tools. However, this is not the most practical way and will likely slow down the diligence process.
On the other hand, if you are interacting with several potential investors, a data room might be the most functional way for you and your team to share data with all the counterparties involved in the process.
If you use an investor data room, you should try and have this continually monitored throughout the due diligence process, to ensure that any document requested and any answer provided is made accessible to all counterparties, directly within the data room.
What are data rooms? Virtual and physical data rooms
Before digital platforms were available, investors and founders would rely on physical data rooms to share sensitive information with counterparties. A physical data room is a physical space in which investors could get hold and analyse all the information shared by the company in the form of physical data.
Today, traditional data rooms have undergone have been digitised and are provided online in the form of virtual data rooms. Investors can now enter these digital repositories of information and review all company documents, rather than having to go to a physical data room.
When is a data room needed and what to include?
Startup founders often are not sure whether it is a good idea to prepare a data room and when to do this. There is not a one-fit-all answer and the reality is that this will come down to the dynamics of the transaction and how many parties are involved.
However, it is often in the best interest of the company to have at least some form of internal data room ready. Even if for an early-stage startup an investor data room might not be indispensable, you will likely need one in future.
The best thing to do is to build a data room on an internal drive or on a solution like Google Drive, monitor this and update it periodically. This way, when needed you will be in a position to upload it to an investor data room space whenever needed.
What to include in a data room for investors?
Some of these documents are highly sensitive documents and you might only want to provide these in more advanced stages - this is true in particular of commercial documents and of certain HR documents.
Below is an example list of data, as a starting point, that you will almost be asked to provide during the due diligence process.
Company documents
- Company articles (including restated articles)
- Shareholders' agreement
- Cap table
- Ownership employees and stock option plan
- Board meeting materials (including board minutes, board resolutions, board consents and actions)
- Records and details about previous processes and fundraising, including past investor updates
Strategy documents
- Investor presentation and company one pager
- Other company marketing materials
- Market research and competitive analysis
Financial documents
- Profit and loss statements
- Financial model or projections
- Management accounts
- Pro forma statements
- Audits and audited accounts
- Working capital analysis
- Asset register
- Details of financial liabilities
HR documents
- List of current employees, titles and salaries (sensitive documents)
- Employee forecast (this can be addressed in your financial model)
- Employee contracts (including intern contracts and consultant contracts)
- Past HR proceedings (dismissals, discipline procedures, etc.)
- Office lease
Marketing and Sales documents
- Marketing strategy (including plans and budgets)
- Marketing spend and data (preferably by channel)
- CAC analysis (blended CAC analysis, CAC by channel, etc.)
- Sales strategy and presentations
- Customer pipeline
Commercial Documents
- Key customer contracts (sensitive documents)
- Key supplier contracts (sensitive documents)
- Partnership agreements
IP and legal documents
- Domain name registration
- Patents Trademarks
- Legal disputes records
Technology and product documents
- System architecture diagram
- Product overview (e.g. existing products screenshots)
- Product roadmap (e.g. release map screenshots)
- API details
- Details of large integrations
Virtual data room providers - how to choose
Not all investor data rooms offer the same functionality (often reflected in the provider's cost).
A startup interacting only with a few other investor parties and with a contained amount of information to share, will have different requirements from a large enterprise preparing for an IPO or a sale.
More sophisticated virtual data rooms will have better security features, better UX, customer assistance service and a range of functions to facilitate the flow of data to investors and make the Q&A process easier.
There is a multitude of virtual data room providers from which to choose. If you are a startup in an early-stage process and want to keep the cost down, avoid paying for a premium data room. Instead, you can consider using a solution such as Dropbox, Boxx or Google Workspace.
How Ithaca can help
Loading documents up to virtual data rooms is only one aspect of a due diligence process. The exercise of gathering all the information and data needed, analysing it and making it investor ready is where you might find the bulk of the work.
Our experts can support all aspects of the due diligence process. From helping you to prepare all the relevant information to loading documents into the data room and monitoring investor requests, to providing a timely answer to investor questions, an Ithaca specialist can be a great resource in helping you save time and resources.
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