“How you do anything, is how you do everything.”
We see a ton of data rooms at MATH as investors. Sometimes it’s to support our existing portfolio as a sanity check and most often it is when we evaluate new opportunities. Founders tend to overlook the importance of the data room, the place where you keep all of the critical documents for an efficient due diligence process. Nailing the pitch is the first step, the data room can be one of your most powerful “closers” when it comes to fundraising.
I want you to have your stuff together as an investor. This tells me that you are focused on the details, care about transparency with your future partners and, most importantly, that you are running a professional process for fundraising. As an investor, there is nothing like competition on a deal to get us to move with urgency.
Confidentiality
First of all, you need to ensure you have an email from a potential investor that confirms they won’t share the data room with anyone outside of the investment process. No one will sign an NDA, but the fact that there is an email out there makes it less likely that folks will act out of line. Your data room will clearly have confidential information in it and it is meant for new investor eyes only. Even if the investment team is planning to share it with a 3rd party for validation, they should check with you first.
Don’t be afraid to be explicit, there are bad actors out there and somehow they believe it is in their best interest to share your data room with their competitive investments. At the same time, do your homework and make sure there is no conflict of interest between you and your new investor. Look at their portfolio and their past investments. (Even better if you got the intro from a superfounder!)
That being said, tools that make your data room harder to download will never stop someone with bad intentions. You are basically making life harder for everyone by making your data room not available for download - stop doing this. Ensure that the data room doesn’t break (no google docs!) when offline.
The list of required documents below is LONG. It’s a huge effort to pull all of this together right when you start to fundraise. It gets significantly worse if you are just starting the process when a fund asks for one. I firmly believe that the best data rooms aren’t put together from scratch, they are maintained over time. I recommend that you create these folders in your shared folder (use box, dropbox, drive, etc…) and simply update them as you go along. Wrote an investor update? Simply save a copy in there. Made a new hire? Make sure all of their agreements are duplicated in the appropriate folder.
Make the saving part in the data room simply part of the process of doing these tasks, and simply expect that your organization meets these expectations. The best data rooms almost “build themselves”, it’s simply documenting what you already do in your startup.
Now that the best practices are out of the way, let’s take a look at what goes inside this data room.
We compiled the list below to help founders have a quick guide on what they need to include in their data rooms. We know that you are an early stage startup, so there is a good chance that you don’t have all of these items. Think of it this way: the more you have the details, the better it is for you down the road. A quick diligence process means a quick close on your round of financing. Moreover, good discipline during fundraising will make your life a whole lot easier when you are gearing up for an acquisition. When done right, and M&A data room is basically the same thing as your due diligence data room with minor updates.
There are two kinds of data rooms that you need to have ready - before and after receiving a term sheet:
Pre-Term Sheet Data Room:
These are the basic documents related to your fundraising round, think “Startup 101”. There are competing schools of thought whether you should provide access to this prior to the pitch meeting or right after as a follow up, but the general idea is that after reviewing the materials the investor should have a surface level understanding of the context of your startup.
There are three main buckets to this stage:
Pitch Deck: This is the pot of gold - our grand vision that we want you to be a part of.
Self-explanatory, your 5-15 slide pitch deck that outlines what you do, the market you are operating in, the team that is going to execute and the amount of money you are raising. Check out this article on the various approaches for the pitch deck. Most investors will stop reading the rest of the data room if this doesn’t impress them at first glance.
Financials: This is how we are going to execute on our vision.
You should have historical financials and a forward-looking financial model built with Levers in mind. Even better if they are part of the same document that you regularly use to measure progress in your business. This same document will also tell the story of what you are going to do with the capital when you close your round.
If the pitch deck is the vision, then the financial model is how you are going to make that a reality. Even without a model or detailed financials, a simple document that outlines how you have spent resources so far is extremely helpful. Moving forward, this makes your life easy for board level reporting as well. Here’s an article and a video series from our very own Troy Henikoff on how to build a financial model from scratch for your startup.
Investor Updates: This is how we will communicate with you if you become an investor.
This is often overlooked, but perhaps the greatest leading indicator of fundability. Even if you don’t have any investors currently, you can demonstrate the clarity of your objectives and actions for your startup via transparent updates. I highly recommend these articles for written updates, or even better, video updates that are easily digestible for future investors. The clearer the objectives, challenges, and progress, the easier it is to say yes to a founder.
Cap Table: This is our current ownership structure.
Outline the current ownership structure of the company. Even if you have been bootstrapped and own all of the equity so far, this is still critical. Bonus points if you already use a solution like Carta to professionally track all issued shares for employees, investors, and advisors with details on historical funding. You’ll need more details the more you have raised capital in the past, but a cap table is a must have.
That’s it - those are the table stakes. Now let’s take a look at what the next phase of your data room needs.
Due Diligence Data Room
Once your meeting goes well, and you are discussing terms, the fund may ask for access to the “deep” data room. Simply ask the fund to commit to rough terms and a timeline to a term sheet prior to giving them access. The objective of the following set of documents is to confirm what the fund already is assuming to be true about your startup - due diligence shouldn’t lead to a different decision unless the founders are stretching the truth during the investment process.
There are always exceptions to the rule, for instance, if you are selling to enterprise customers and only have a handful of contracts, your investors will want to know who they are. If you have thousands of customers, likely not. It’s OK to share pieces of this data room as context for follow up meetings, but always follow Alex Iskold’s timeless advice: Ask for a Term Sheet.
As mentioned, there are a lot more details in here. If the sections don’t apply to your startup, simply skip but have an answer to why you don’t have those details. “I didn’t have time to pull that data” is not a good excuse! The rule of thumb for the level of detail is the following - the more you are raising, the more you need to provide in the due diligence data room.
Sales & Traction:
This is where you demonstrate your current traction and your confidence in your future sales. Think about any documentation related to your customer acquisition strategy - this is where they live. It’s important that this mirrors what you look as an operator regularly, the goal is to build confidence in an investor for future sales.
Pipeline data: Any funnel information, preferably downloaded directly from your CRM system such as Salesforce.
Current Sales data: For B2B sales, any signed agreements between you and your customers. For B2C companies, think user data, total transactions, any data that shows how much you have sold your product.
12-24 month Forecast: Based on your pipeline and current sales, where you think your sales are going to be in the next two years. Give the investor confidence that things are going to grow a lot more!
Historical Performance Data: From day 1 of you selling your product, what have been the daily/weekly/monthly sales volume? Try to point out things like seasonality to make this easy to understand.
CAC/LTV calculations: What is the true cost of acquiring new customers? This section should demonstrate that your investment in new customers will be profitable over the long term and how it has trended over time.
Market Data:
You need to demonstrate with clear facts that you are going after a massive market. This market can be a new one (although creating one is always harder), but when all is said and done your startup needs to solve a massive problem in order to have a great outcome in the end. Example documents are:
Market size: Through tops down or bottoms up data, calculate the size of your market and why it is going to grow over the time. The best versions of this document both have credible source data along with original commentary by the founding team. Here is a resource to help you do that. Try to have quantitative answers to:
Size of economic activity: How much are people currently spending in this space? Is it growing? You are claiming that success means your startup will service some of this demand.
Size of pain: How much is the lack of a solution costing in waste dollars? This is always harder to build a business around, since your current customers haven’t made a purchasing decision around your solution. That being said, you will have less competition and have potential to create a market from scratch.
Board Updates:
Startups should have boards the day they start operating. Brad Feld and Mahendra Ramsinghani explore the reasons why here - think of this as the example you are setting on how disciplined you will be as an operator. Your board decks and memos tell you everything you need to know about the operating cadence of the company. The pros take this very seriously - the tighter the board decks, the easier it will be to have conviction about the operating team’s ability to deliver results.
Funding Documents:
This is where you keep information about the current raise and ownership structure. Again, even if you haven’t raised any funding so far, have a spreadsheet that shows the ownership breakdown between the founders and early team members. Investors hate chasing down details or finding surprises about the ownership structure before they invest.
Cap table: Preferably from an automated system like Carta where you keep all of your shares. Seriously, if you have raised a single dollar as an investment, I highly recommend graduating to a professional service instead of an error-prone spreadsheet.
Term sheet: If you have a signed term sheet for the round, include it here.
Past financing documents: If you have raised capital in the past, include all of the term sheets and signed closing documents.
HR:
Basically, all of your documentation around your current employees go here. If you are working with a payroll provider like Justworks or Rippling, you likely are in good shape. This also forces you to have discipline around having countersigned documents across the board, reducing the risk for a potential headache with a problem employee down the road.
Employment agreements (IP, confidentiality): These sets of documents basically demonstrate that your full time employees transfer their ownership of all of their inventions to the company, and have agreed to keep company intellectual property confidential.
Stock agreements: If you have awarded stock to your employees, this is where you document them. This should also confirm the details you have in your cap table.
Contractor agreements: If you don’t have full-time employees, you still need to document that you are above board with them and have proper documentation around their responsibilities.
Organizational Chart: The rule of thumb is if you have more than one manager in the organization, you should have a clear org. chart that lays out the structure. Bonus points if you incorporate your post funding hiring plan in an updated chart.
Corporate Documents:
This is where your articles of incorporation and bylaws go - all of these are likely standard and your lawyer should help you put them together. Ultimately, this is the documentation for the company which your new investors will own a piece of. The simpler the better, aim for a C Corp based in Delaware unless you have a really good reason not to. Stripe Atlas is a great tool to simplify the process for founders if you haven’t incorporated yet.
Contracts:
This is the last piece, but it’s potentially the largest folder. Any agreement that you have ever signed as a company should go here. Think licensing agreement, consulting agreement, non-disclosure agreements - basically anything that legally binds you to do a certain thing or pay a certain amount. This is critical, and the goal is to avoid surprises for your future shareholders.
That’s it! Anything missing that you noticed? Please let us know in the comments or on Twitter. If you like these kinds of resources, please follow @mhi and @math_V_P on Twitter!
