Investor data rooms help startups seeking fundraising collect and manage information and company documents to be shared with investors and also help investors gain insights into their prospective investments.
Investor data rooms provide a centralized location for files and documents and a place to communicate during due diligence, fundraising, and beyond.
Investor Data Room Rules Successful Startups Follow in 2023
When managing investor data, startups need to manage document permissions for each venture capital investor and have access to analytics to view who is looking at what, the total time spent on each document, and the number of views and views downloads. Startups need a data room to handle large amounts of data and users without additional fees.
The data room must be user-friendly so investors can navigate it with little training and be equipped with security structures that meet the necessary standards to protect sensitive information.
The first step in combating the above challenges is following these six rules to facilitate a smoother due diligence process of startup fundraising, establish investor confidence, and increase the chances of receiving funding from VCs.
The second step? Signing up for FirmRoom’s virtual data room solution to solve these challenges entirely.
Rule 1: Choose the Right Data Room Provider
Choosing the right data room provider can be beneficial for startups in a wide variety of ways. With an investor data room that is efficient and easy to use, the processes involved with investor communications, fundraising, and due diligence can all be completed in one central location, accelerating the raising capital timeline.
Some factors to consider when choosing a data room provider include the following:
- How much storage do you need?
- What kind of files and documents will you be storing?
- What is your budget?
- Which team members will be using the data room?
- Will the VDR be used to store docs or serve other purposes?
- Will the use of the data room affect workstreams?
- Which features and functionality are the most important for your startup?
For an all-inclusive comparison of the top investor data rooms in the industry, check out this comparison of data room providers.
Rule 2: Organize Documents Properly
Investor data rooms are utilized to compile data about a startup or a company in one location and need to be accessible to prospective investors and those working at the startup alike. By organizing documents properly in a structured manner and creating an easy-to-navigate folder structure, startups can make sure that critical components are emphasized, and investors can easily access the information that they need to make decisions. Cost-effective investor data rooms also typically include unlimited users, so startups can invite as many investors as they need into the room.
The best practice for organizing documents in a data room involves using a data room index.
This provides a guide as to how the data room is organized in a structured outline. This makes the investor data room easier to use and ensures that the startup stays organized during the due diligence process.
Locating files is easier, and the time spent searching through every file in the data room is eliminated.
Specific data room examples of different folders to include in a data room’s table of contents include:
- Corporate Governance, Including Articles of Incorporation
- Claims and Disputes or Litigation
- Finance and Financial Projections
- Your Cap Table
- Government and Regulations
- Human Resources
- Intellectual Property
- Technology and Roadmap
How you organize your investor data room from there is up to you!
Some investor data rooms, like FirmRoom, provide premade room templates that startups can import, so they have an organized data room.
Rule 3: Control Access to Information
Virtual data rooms allow for easy, centralized, and secure file sharing. However, when adding potential investors from different companies and different users within your own company, it is essential that they only have access to what they need for their portion of the deal.
Access controls or permissions features can be set in place by designated administrators to ensure that the correct data lands in the right hands. The best investor data rooms allow for different levels of data room access based on what should be shared with whom. With expiring links, watermarking, password protection, and granular permissions, startup teams are in control of the fundraising process and can lead strong investor conversations.
Rule 4: Keep Sensitive Data Secure
When handling and storing financial documents about companies and confidential information regarding deals and potential funding opportunities, ensuring this information is kept secure is the highest priority.
Data should only be accessible by the right parties at the right time and should be encrypted and protected with multilayer security features.
This will reduce the risk of accidental disclosures and protect all companies involved before, during, and after a deal.
Some features to look for in a secure VDR provider include the following:
- ISO 27081 Compliance
- FINRA Compliance
- File Backups
- Secure Operation and File Maintenance
- Strong Encryption Methods
- Digital Watermarking
- IP monitoring
- Single Sign-On Integration
- Inclusive Reporting
Rule 5: Use Data Analytics to Gain Insights
Data analytics are detailed reports showing all users’ activity, including who has accessed what, which documents are being accessed the most, if documents are being downloaded, and which data may need to be brought up in conversations with investors.
File access analytics allow startups to gain valuable insights, lead stronger conversations with the investors they are working with, and tailor their conversations. Not only is this insight helpful for deals in progress, but it is also helpful for future deals. A data room’s analytics can also be utilized as a security measure to ensure that only the intended recipients have access to the information in the data room. Thanks to this feature, startups no longer have to guess who is looking at their pitch decks and can be better informed moving forward.
Rule 6: Be Transparent with Investors
Transparency establishes trust, leading to more investors wanting to work with you and more informed decision-making. Also, transparency creates a feeling that everyone is working on the same team. Investors can experience what it would be like to be a part of the startup’s team, making them more likely to invest their time or capital. If you are transparent with your investors, they will likely provide you with more informed feedback.
Some best practices for being transparent with investors in a data room:
- Be clear and concise with the information you share, and ensure everything is organized within the data room. This way, investors won’t feel like they’re missing any pieces that make your startup what it is.
- Ensure accuracy. Provide information and metrics about company performance.
- Be accountable. Discuss business operations and revenue generation with new investors, so they understand all the moving parts, not just the big picture.
- Focus on sustainability. Include an overview of your long-term business strategy to prove that you are successful and will continue to be in the future.
- Don’t overpromise on future performance. This sets your startup up to fail and can negate the effectiveness and belief in the information provided in the investor data room.
By following the above rules, your startup can maximize the benefits of an investor data room to the highest potential. FirmRoom has considered all of these components to create the most intuitive virtual data room on the market.
FirmRoom has been in the investor and fundraising space for decades. We know what works. All that know-how is now yours. FirmRoom will enhance your investor relations, impress investors, and create success in fundraising and beyond.
This article was written by Marsha Forester From Firmroom