Deciding to launch a startup is both an exciting and daunting venture. With so much to do, you must simultaneously build your product and your team, all while working with limited resources. To expedite the process, many founders embark on their fundraising journey shortly after launching their startup.
While founders often initially focus on perfecting pitch-related elements, such as pitch decks, elevator pitches, and presentations for pitch competitions, it's important to remember that the pitch is just the beginning. Once you pique an investor's interest, the next thing they may ask for is access to your data room.
At the Accelerator at WGU Labs, we come across countless pitches and have made 25 investments since 2019. The companies that stand out have a compelling pitch and are accompanied by a strong data room.
The data room represents a golden opportunity to convince investors that your startup is the right partner for them, particularly for pre-seed or seed-stage companies with limited market traction. Building an easily navigable and compelling data room is a great way to showcase your company's potential, especially when you've only been in business for a year or two.
The Basics of a Good Data Room
First thing’s first: What exactly is a data room?
A data room is essentially a repository containing all the information related to your business that an investor would want to review during their due diligence process. During the due diligence process, investors tend to look at everything from your financials to your customers, team, and business plan. In my experience, the data room has everything you would find in a business plan and then some — because the business is now active and (hopefully) making money.
Having a well-structured data room is crucial not only because investors expect it to determine if their potential reward is worth the risk of investment but also because it allows you to showcase the hard work you've put into starting your business. This is especially relevant for pre-seed and seed-stage companies that might not have all the metrics and information that later-stage companies do.
While your business continues to evolve, the data room can spotlight everything that is true about your business and market in the moment. It helps prove you have a thorough understanding of your business, product, and market, which can inspire confidence in investors — even if your business is relatively new.
Crucial documents to include in your data room:
- Pitch deck
- Financial statements
- Cap table
- Team bios
- Customer contracts
- Market research
- Intellectual property (IP) documentation
- Legal documents
These documents form the foundation of your business, demonstrating that you are a legitimate and investment-worthy entity. They also provide deeper insights into your customers, finances, market, and previous capital raises. If any of these documents are missing from your data room, investors are likely to request them.
I want to take a moment to talk about financial statements. Financial statements, including revenue, cash on hand, and expenses (burn rate), are particularly vital. Even with only a year or less of revenue, investors want to see how you view the trajectory of your business and how you are spending your capital. While financial projections are not written in stone, they should be ambitious yet realistic for the next 2-3 years. Make sure these statements are presented in a format that investors can easily download and manipulate to run their scenarios with the numbers.
Taking Your Data Room to the Next Level
In addition to the essentials, consider adding these documents to your data room:
- Product roadmap
- Marketing plan
- Sales pipeline
- Customer feedback
- Traction metrics
- References (customer, investor, advisor, etc.)
- Exit strategy
These supplementary documents can provide valuable insights into your startup's growth potential, customer satisfaction, and overall strategy. The sales pipeline and references can be especially important. The sales pipeline allows investors to envision what future revenue growth could look like, as well as how you are progressing with product market fit. The references also serve as a way for investors to get some more qualitative data about you and your business.
Pulling it All Together
Investors appreciate a well-organized and easily navigable data room because it saves them time. Categorize your documents logically, creating sections for key areas like financials, legal documents, product information, and market research. Ensure each document is labeled clearly and concisely. If an investor can quickly locate the information they need, they are more likely to stay engaged. Additionally, if you receive the same question or request from multiple investors, consider adding it to the data room.
Your data room should be hosted on a platform that is easily accessible to investors, yet secure. Platforms like Visible, Carta, Notion, or Google Drive are popular choices. Remember, the data room serves as a resource not only for potential investors but also for your team.
Do not be intimidated by the task of putting together your data room. View it as an opportunity to showcase your team and your business. Although it may seem like a lot of work initially, it will yield significant returns in the form of investor capital to fuel your business's growth.