Preparing for the Fundraising Process Part Two: The Data Room is your Secret Weapon

In our last post, we discussed that despite how overwhelming the fundraising process can seem, the more that early stage companies understand about what information investors will require, the easier and faster raising money will be. In this second part of our two-part series, we’ll share the secret weapon to smoothing the fundraising process: the data room.

A data room is a secure online environment to store large volumes of confidential data necessary for fundraising, mergers, acquisitions, or other kinds of transactions. Data rooms allow companies to securely share data amongst multiple parties, both internal and external to a company.

“Time kills all deals and there’s one sure fire way to slow a deal down: not having a data room ready for investors when you approach them.”
Rowan Grant, Partner, Full Circle VC

Always be fundraising ready.

We talk about “always being fundraising ready” a lot. Why? Companies who embark on fundraising or exit activities, who are not ready, will create a significant amount of disruption when they have to pull their managers off business operations to assist with gathering data, providing analysis, and compiling updated information to go into the due diligence process.

We see time and time again how the mad scramble to get data and documentation prepared for a transaction can delay deals and disrupt day-to-day business operations. Not having critical due diligence documents prepped and organized could also send negative signals to a potential investor about how organized companies are in other aspects of the business – ranging from unsigned agreements to IP assignments and even overdue tax filings. This will hurt a growth company’s credibility with investors.

Preparing and maintaining a data room also helps reinforce an always fundraising ready mindset by prompting “brain dumps” and documentation of areas of the business, such as product roadmaps, hiring plans, and sales goals, that may still be in the heads of key leaders. 

“When a startup is prepared with their due diligence folder ready, due diligence is much faster and smoother than if a company is gathering all of the information for the first time. As due diligence is fairly standardized, a startup can actually preemptively complete 95 percent of the questions they will get during due diligence. Apart from just saving you a lot of time, doing this can have a number of other important advantages”
Katherine Hague, Founder, Female Funders

The what and who of a brilliant data room.

Data room technology has come a long way which gives companies a lot of flexibility when it comes to customizing the structure and providing safe, efficient, and permission-based access to documents to all the parties. Depending on what stage you are in the fundraising, M&A, or exit process, different parties will need access to different information. We recommend a simple but comprehensive six folder structure to your data room that will give the right people the right access at the right time in your deal:

1. Products, Technology, and Operations

• What’s in it Product architecture, roadmaps, details of IPRs held and used, policies and procedures for development, operations, and support teams. You will also want to keep a log of licensed IPR and open source software used, in addition to proof of compliance.
• When it’s needed: Early on, potential investors will be interested in the roadmaps and architecture to get a sense of your product direction. In the full due diligence, they will want to dig deeper into your policies, procedures, IPR, and compliance.
• How often it’s updated: Product architecture diagrams, IPR details, and policies and procedures should be updated quarterly. Other parts that will be changing more frequently as part of business operations, such as your product roadmap and customer satisfaction surveys should be updated monthly.
• Who has access: Technical due diligence advisors.

2. Organization and Human Resources.

• What’s in it: Overview of the company, org chart, staff costs, management contracts, as well as organizational policies and insurance.
• When it’s needed: In the early stages of due diligence, investors will be looking at things like management contracts. As due diligence proceeds, investors will want to see that you have policies and insurance in place and are meeting government/regulatory requirements.
• How often it’s updated: The company overview will be constantly changing and being refined, so this should be updated for the funding/exit round. Redact employee names until required (for example, in the later stages of a merger or acquisition). Employee lists and organization charts should be updated monthly. Policies and procedures should be updated in the data room in parallel with updates for the company.
• Who has access: Legal advisors.

3. Customers, Sales, and Marketing

• What’s in it: This is one of the most important sections of your data room. Investors will want to see KPIs for your sales, pipeline, marketing, customer base, plans for sales and marketing strategies, and major customer contracts. As noted above, this forces startups and growth companies to have better processes and documentation, particularly around managing customer contracts. 
• When it’s needed: In the early stages, investors will want a view into your growth strategy and pipelines. As due diligence progresses, more detailed information on your pipeline, forecasts, and customer contracts.
• How often it’s updated: Most of this information will need to be updated at least monthly. Ideally, you will have the information here connected to your CRM system to the updates can happen automatically. Until you reach the later stages of due diligence, customer names should be redacted.
• Who has access:If engaged, the commercial due diligence advisor. Otherwise, the corporate finance advisor.

4. Finance and Taxation

• What’s in it: The most important element of this section is the business plan, financial model, historical financial data, and compliance documentation.
• When it’s needed: Financial models and data will be needed fairly early on in the process. Compliance documentation will be required in the later stages.
• How often it’s updated: The business plan/financial model, management accounts, and related data should be updated monthly. Annual statutory accounts and other compliance should be updated annually.
• Who has access: Corporate finance advisors.

5. Legal, Regulatory, and Contracts

• What’s in it: Certificates of incorporation, certificates of name changes, and articles of association.
• When it’s needed: These will be checked and verified during the early stages of due diligence.
• How often it’s updated: These documents would only need updating when data changes e.g. if you have a name change, when you submit annual returns, or if you register a trademark.
• Who has access: Legal advisors.

6. Shareholders, Capitalization, and Funding

• What’s in it: Investment history and cap table.
• When it’s needed: These will be accessed early in the process as it will form part of the negotiations. Investors will want a certain proportion of the shareholding to make sure they get a high return on investment.
• How often it’s updated: These typically only need updating on an ad hoc basis, e.g. at the end of each funding round, for any changes in the shareholders.
• Who has access: Corporate finance and legal advisors.

Avoid the “one and done” trap.

Many companies fall into the “one and done” trap of setting up a data room for a fundraising round and not touching it again. This is a huge waste of the time and effort that goes into creating reports and analysis for due diligence. documentation like KPIs and analysis prepared for investors during due diligence is critical information that management teams should be reviewing often, not just during a fund raise. Aside from helping the management team know how their business is performing, these reports will give them insight into how an external investor will see their company and will help you know what to expect and keep tracking those metrics to make sure you can easily sell your story during the next round.

One of the ways to always keep your data room up to date is to have a mechanism to integrate sections with your finance and operational systems. InfiniteCFO has integrated virtual data room technology into our platform so that key pieces of information can automatically be pulled from finance, CRM, HR, and other systems, to minimize the manual effort as much as possible. This enables our customers to always be fundraising ready as well as ensure they present and organized and credible business to the investor community.

By leveraging that upfront hard work and keeping key pieces of information up to date, companies can quickly and easily accelerate their due diligence preparation for their next transaction and avoid unnecessary disruption to their business – and always be fundraising ready.

We created this handy infographic as a quick guide to show some best practices in organizing your deal room.