You belong in the room

Not every business is data-driven. But investors certainly are. Data rooms are a resource that investors use to make data-driven investment decisions. We’ll explore what these are in this issue.

1. What is a data room

A data room is a folder of important company documents. Investors often request to see a company’s data room when they are considering an investment in that company. This process is called due diligence, but we’ll save that topic for another day.

Data rooms are probably more for investors than they are for the companies creating them. But they do provide many benefits to the company along the way.

The best way to do data rooms are early and often. Regularly updating a data room can be a forcing function for companies to stay focused and organized.

Investors often don’t even care so much about the data. They aren’t looking through these files for insights. They really just want to know if a company is professional, organized, and serious.

Startups can signal that they are these things by ensuring that their data rooms are:

1. Organized - You want your investors to have a good user experience. Companies should make sure that their data rooms are structured in a way that makes it easy for the investors to find what they need for their due diligence process.
   

2. Consistent - When your financial statements says one number but your pitch deck says another, that’s a red flag. It’s critical that your numbers match across all your documents.
   

3. Just Enough - You want to have a healthy balance between too much and too little data. You don’t want to provide so much data that investors know more than they need to. You also don’t want to provide too little data that makes it look like you’re hiding something.

What goes in a data room?

A not so helpful answer: it depends. It depends on how far along your company is, and what your investors care to see.

But more than likely, investors will want to see

• A pitch deck - For many startups, this is what gets the data room conversation started. A good pitch deck and a compelling pitch will capture the attention of investors. If they’re interested to learn more, then they’ll ask to see your data room.

• Cap Table - A topic worth covering on it’s own. This tells your investors who is already invested in the business and how equity is allocated across the ownership of the business.

• Incorporation Docs - Documents that prove you are registered to do business and have a tax ID.

• Financials - An income statement or Profit & Loss (Also needs its own TCOY issue).

• Metrics - Will discuss more in the next section. Could range from Sales funnel efficiency to product usage data.

Some investors may want to see more, including team bios, investor updates, and market analysis. But it is a balance. You don’t want to include too much information, especially if you’re not confident in it.

For example, you don’t want to include market analysis that may overestimate the size of your market. This will reduce trust from your investors.

2. Data in the data room

What’s the role of data in data rooms?

Probably not as big as you’d think. Most of the “data” in data rooms are a bunch of documents that actually don’t have much to do with the “data” that data professionals are familiar with.

That said, metrics are definitely an important part of the data room that data teams can help with.

Data teams can be most helpful to their fundraising team by making sure they are aware of the metrics that investors will care about, and making sure that they have the data to provide those metrics.

The sooner you can help your company prepare for this, the better. If you are at a venture-backed startup, it’s likely they will need to raise funds again. Reliable metrics will help to ensure a successful fundraising round.

If you are unsure which metrics are important for your business model, this post from a16 is a helpful resource. These metrics are probably important for your company to monitor regardless of whether they are raising funds.

3. Why data rooms matter to the business

If you are a bootstrapped company, then data rooms may not be necessary.

That said, the practice of creating a centralized folder for all of your important documents is probably a good one for any company. It’s also worth noting that if a company intends to sell at any point, then they will certainly need a data room then too.

What data rooms help companies do, regardless of their financing or exit strategy is:

• Get organized

• Keep track of important decisions

• Monitor key health metrics

That last one is important. Any metric that investors care about is probably a metric that business owners and executives should also care about.

At the end of the day, the people operating a company are managing an investment vehicle. Metrics help operators make sure that the capital that has been invested into the business is on track to get a reasonable ROI.

If you know your business is going to need a data room for fundraising or an exit, then you’ll want to start early. Figure out what metrics are going to be most scrutinized during the due diligence process, and work with your data team, engineers, or a consultant to make sure that you have that data available as early as possible.