Most early-stage companies don't have much to share in the due diligence process, but a well-prepared data room can build investor confidence, and be a significant contributor to you getting a term sheet.
My team and I raised $2m for Scaled Networks. During the fundraising process one of our investors said our data room was one of the best he'd seen for an early-stage company. This is the structure we used.
Feel free to borrow, steal, and make it your own!
Note: if you're creating a data room like this, using folders, it's a good idea to create a master document, which shows the content of the data room, and where you'll find each item (i.e. which folder it's in).
What are early-stage investors looking for in your data room?
If your company is new, there probably won't be much of consequence to share. This information is mainly to show that you're running a tight ship, and all the business basics are in place.
In no particular order, investors want to know:
- How organised are you?
- Is everything set up as you said it would be?
- Are there any nasty surprises lurking in your client, supplier, and employment contracts?
- Are the company's assets, including IP, properly protected and owned by the company, not the founders?
Get the above right, and have everything in place when your investors ask for it and you'll have taken a giant step towards receiving your first term sheet.
How much should you share, and when?
Although much of this is fairly vanilla, some of it could be classified as confidential or a trade secret. I know some founders are nervous about sharing information that could find its way into the hands of competitors. In the past, I've solved this with the following two steps:
Ask for an NDA before due diligence
There's a right time and a wrong time to talk about NDAs. Never ask investors to sign an NDA in order to hear your pitch. This is a giveaway sign that you're a rookie founder, and no investor will sign one anyway. If there is something truly sensitive, they'll understand why you want to hold that back for later. For starters, just do your pitch without revealing your IP. If they want to know more, the investor will tell you.
If your data room contains trade secrets, it's not unreasonable to ask investors to sign an NDA before proceeding to due diligence. Some investors may still fight this, but if you stick to your guns, you'll soon see how serious they are about making an investment. If they won't sign your NDA, ask them to provide their own. There really isn't an excuse for not signing one before they ask you to give away all your data.
Have an alternative "lite" data room
When we raised money for Scaled Networks, we simply created two data rooms. One was a copy of the other, but without anything we considered commercially sensitive. For example, the lite version contained contract templates, whereas the real data room contained signed contracts. Having this second data room gives you an easy "out" when an investor says they want to look at your data room but won't sign an NDA. It may even be enough. We had several investors who put in multiple $100K cheques without ever visiting the full data room.
Good luck with the raise.
– Magnifying glass photo by Cottonbro Studio.