May 05 ‘22 12 min read
An investor data room is an absolute necessity for startup founders, regardless of their market and industry. Data rooms allow early-stage companies to navigate the complex due diligence process, gather and organize documents, and ultimately find the right investors.
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What is a virtual data room for startups?
Data room technology has been around since the last century. However, in the last decade, virtual data room solutions completely took over the corporate market, simplifying deal processing for companies across all sectors.
Virtual data room is a cloud-based software for storing files, managing business, and processing deals. These virtual spaces that serve as document storage with an option to communicate, process various transactions, access and collaborate on files remotely, and more. Startups on the lookout for investors use data rooms to organize and present their documents to secure the necessary amount.
Due to their advanced security capabilities and feature sets, data room technologies are traditionally recognized as software for M&A and other due diligence reliant processes. But data room potential stretches out well beyond that.
A well-structured fundraising data room can become a versatile, multi-purpose for any startup. At first, it serves as an instrument to reach and impress investors. Then, once the investor has been found, a data room turns into a solution for running operations and ensuring further growth.
Fundraising data room benefits for startups
Startup founders have a lot on their plates apart from fundraising. Any young business is constantly searching for an edge over competitor companies and solutions to secure sensitive documentation. All this is mixed with the challenges of managing a forming team and visualizing the long-term goals for the company.
- Insight: Virtual data room vs. generic cloud storage. In some cases, when startup founders don’t have experience with data room software or operate with extremely low budgets, they decide to use public access platforms like Google Drive or Dropbox. But while these solutions allow storing and sharing documents, their functionality and data safekeeping mechanisms cannot compare with an investor data room.
Data rooms offer instruments for anything a startup might need, including secure channels for investor communication. And the data room software cost ultimately translates into the best tool to impress potential investors without compromising information safety.
Below is a summary of the advantages fundraising data room access offers to a startup.
Data leaks protection
A data leak can cost a company a lot of money and effort and ultimately destroy a startup. That’s why reputable virtual data room providers protect both the storage and data transfer methods with reliable encryption methods.
The combination of security protocols allows monitoring the access to data, limiting the ways investors interact with it and ensuring human error is ruled out with the tools like digital watermarking and read-only rights.
Additional instruments that help startups secure their intellectual property and other confidential documents include:
- Multi-factor authentication
- Granular permissions configured for each user or investor
- Automatic NDA agreements
- Activity reports
- Remote access revocation
Improved investor outreach
A data room offers regulated but effortless access to an organized collection of relevant and recent data. By leveraging centralization and online communication tools, startup founders will quickly find effective approaches to interest and engage the investors.
It is also possible to create a separate space to personally deal with a lead investor, provide more data, and facilitate negotiations.
Startup data room features that come in handy in this case are:
- Versatile file format support
- Built-in Q&A manager
- Integrated video conferencing
Business executives who make investment decisions are constantly showered with market opportunities. A startup has to present an interesting idea and deliver the information in a logical, professional manner. Investing time and effort to create an organized data room will always put a startup team in a good light.
With the right provider, it is possible to make the data room share the same colors and logo with the company site, giving a unified feel to the whole fundraising process. A startup can also customize each document in the due diligence list to match the brand and imprint the image in the prospective investors’ minds.
Some tools that assist with making a good first impression are:
- Color, logo, and language customization
- User-friendly interface
- Easy navigation between documents, including preview and full-text search
Gathering and organizing all the due diligence documentation and other sensitive information beforehand can significantly speed up capital raising. Investors need to access a lot of data during any funding round, from the seed stage to C-series. And the faster an investor can review the required documents, the faster they will make a decision.
Fundraising data room features that speed up deal processing for a startup include:
- Pre-configured due diligence checklists and templates
- Automated indexing, sorting, and labeling
- Bulk uploading
- Built-in individual and group chats
As mentioned earlier, any young business faces many challenges, from facilitating the investor outreach process to managing the team. Data room administrators must actively ensure the documents are secure by monitoring data room access by internal users and investors.
Activity reporting and automated analytics allow data room admins to gather insights into who accessed each file and how long they have interacted with it.
For example, the startup founders can use the reporting tools to:
- Assign tasks and check their completion progress
- Evaluate interest levels of multiple investors
- Make on-the-spot organizational adjustments
How to choose a virtual data room for a startup
Founders have a very important mission to find fitting investors and secure funds for their startup. An investor data room is irreplaceable in this process as it allows focusing on a larger picture rather than on organizational specifics.
Not all data rooms are equally suitable for startups. The following four factors will help to filter out the providers that will assist in the capital raising without hurting the budget or requiring too much time.
Security is essential for a startup data room, and there is not a lot of space for compromise. However, it is still possible to navigate between different extents of safety advancements. To ensure the deal processing is convenient for each investor, and at the same time the confidential information is not compromised, a startup needs the following features:
- Physical data centers in a secure location that undergo regular third-party audits
- Multiple levels of data room access rights
- 256-bit SSL encryption applied to files at-rest and in-transfer
- Watermarks and NDA alerts for extra sensitive documents
Startup founders do not require too many virtual data room features at early stages. For example, customer-managed encryption or enterprise-level workflows won’t apply to the fundraising process, and there is no reason to pay extra for them.
To create an equipped yet straightforward business environment for the company and potential investors, the data room has to offer tools such as:
- Intuitive solutions for uploading and organizing documents
- An option to sort team members and their access privileges into groups
- Unlimited guest visitors
- Activity analytics
An early-stage startup typically does not have a lot of operational capital. Therefore, startups should aim for data room solutions at a transparent and affordable price.
One of the crucial factors to consider is that some data rooms charge based on their market experience and reputation. They do not necessarily offer the most practical user experience or unique features. The simple fact of being around longer allowed them to attract other large names and charge significant checks.
Another thing to keep in mind is that every virtual data room provider has a distinct approach to price formation. For instance, long-term subscription contracts or fixed plans with extensive user and storage allowances aren’t suitable for a startup.
The pricing models that will work best for startups are:
Fundraising is a single project that doesn’t typically require several data rooms. Investors and startup representatives will have enough room to communicate as long as the provider offers sufficient storage space and guest users.
A fundraising data room will have a relatively limited amount of company documents, so the final cost shouldn’t be too high. However, it is worth mentioning that per-page pricing can quickly get out of hand if the company grows or acquires other businesses.
Text documents don’t take a lot of space, which makes per-gigabyte payments logical. But in case the data room will need to accommodate more data formats, such as videos or audios, the bill will increase significantly.
This approach is perfect when there are not too many team members. As long as the investors can participate in the process through free guest access, the founders will not need to invest a lot.
Free trials are extremely helpful for testing any specific data room from the perspective of startup requirements. Administrators and users can use the trial period to practice using the software, reenact presenting to Investors, and outline document organization layouts.
- Note: A free trial is not the same as a free demo. Trial periods mean access to the platform’s functionality for a certain period without any compensation obligations. And a demo is a provider-curated introduction to the software features, typically via a video call.
Before settling with an investor data room, the startup must explore all the available feedback across independent review platforms. The most valuable reviews will include opinions from either investors or past fund seekers and feature information on the software usability, features, and customer care quality.
Other aspects of a fundraising data room that can be evaluated through reviews include customization, affordability, and adaptability to market changes.
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What to include in a startup data room
An investor data room is the face of the startup. The founders must work with the team to feature all the relevant documents, press-release articles, market overviews, several-format pitch decks, and more.
- Insight: A perfect pitch deck. A compelling pitch deck is more than a cap table with a logo. The investors have to understand the company’s mission and vision, as well as find ways to relate to its culture. To catch the attention of specific investors, it can be helpful to study their portfolio companies and pick up on design and purpose tendencies they share.
As for the documents that will be essential, here are a few universal document groups:
- Investor rights agreement
- Restated articles of incorporation
- First refusal and co-sale agreements
- Board of directors’ summary
- Market research
- Profit and loss financial statements
- Financial updates and projections
- Past investor updates
- Growth reports
- Financial models
- Intellectual property information, including patents trademarks
- Onboarding documents and hiring process structure
- Employee contracts
- API documentation
- Domain name ownership.
An experienced investor data room provider would offer a complete list of the required documentation for streamlined due diligence.
Startup data room key takeaways
An investor data room helps startup founders streamline and navigate the fundraising process. The company can utilize limitless methods to approach and engage investors, build pipelines for future operations, and protect sensitive data.
The most important aspect of raising funds remotely is finding the right virtual data room. This search process should always be tailored to a particular startup’s requirements and focus on the utmost safety and convenience. You can find the best data room solutions for your startup on our main page.
A data room for startups is more than a secure storage for confidential documents and a safe way to share them. A data room for startups is also a way to impress an investor and thus increase the chances of raising capital. When you use VDR, the investor gains confidence in your transparency, organization, and serious intentions.
Typically, investors look for the following things in a data room: an overview folder with critical startup data, financials and cap tables, market data and research, incorporation docs, past investor updates, customer references, IP information, etc.
The best way to use virtual data rooms for startups is to collect and structure relevant data in an efficient way to offer investors a secure, transparent, and seamless due diligence process. Some data room providers deliver virtual workspace branding, which is also a great way to make a startup more recognizable and reputable.