The deal room, or data room, is where important information about a startup is housed. It's an information exchange hub between the startup team and their potential investors. It calms the nerves for both entrepreneurs and investors during a due diligence process; and since it's put together by the startup team and their advisors, mentors, lawyers, it is supported by their strong support system. It’s all in one place, so convenient to share, edit, add to, and point to. Most due diligence processes these days, especially with a heightened sense of risk in the innovation markets, take a bit longer, are a bit more arduous. The use of data rooms / deal rooms where the startup will post many documents that contain useful *and confidential* information about the startup and its people allows for the due diligence process to be more efficient, less time-intensive, and streamlined. Note: I will be referring to the data room / deal room from now on as the “Deal Room” for ease.
A Deal Room is a space used for storing information about a startup company (legal, financial to patents) with the intent to share that information in a secure and/or confidential fashion with others (such as with a potential investor).
A data room can be physical or virtual.
Time is of the essence, so the faster and further a startup can cast its net to potential investors in a professional manner, there is the increased likelihood of receiving funding and closing the fundraising journey. For later-stage startups considering M&A, typically a VDR (virtual data rooms) is set up for storing and sharing sensitive corporate information. So start now to create a process and repository for all your startup information.
I know, there has been controversy over the years around the Deal Room being truly “necessary” for fundraising, and yes, it is a “nice to have” instead of a “must have”, like the pitch deck, but it’s an “extremely effective and efficient nice to have” alongside that snazzy “must have” pitch deck.
Let me be clear, this newsletter topic is super specific, but the why, how, what of the deal room has come up in at least a dozen meetings/events I have been a part of in the last 2 weeks, that I just HAD to dive in and not just share “the list” of folders of the deal room, but go into the insights around the WHY, some action items around how to set it up and of course, the WAY you can leverage it to streamline investor relations in your startup journey. For investors, this is a resource for you to point your founders to so that they can set it up correctly and for you, too, to build awareness of the WHY from my perspective so you can build a more relational investor relations process with the companies you are advising/finding so that the request can come off as a benefit for the entrepreneurs, not a chore.
IMPORTANT:
In full transparency, this advice and structure is primarily for the SEED / SEED+ stage startup seeking funding from individual angels, angel groups, syndicates and some seed-stage VCs. I will be updating this list and content as I get more information & examples, so keep on coming back for more 🙂 These are recommendations from an active angel investor / VC and do NOT replace the need and review of lawyers, seek legal help if needed.
Deal Room Folder Structure
1_Business Overview
Documents that support the overall startup to showcase the structure, strengths, and investment opportunity.
- Pitch Deck. You can include (and clearly mark) a short deck and a longer deck. It is up to the entrepreneur, but you can include your technical tech in this section. As mentioned in the “Don'ts” section below, you don't have to include everything in the Deal Room.
- Executive Summary. A reminder that platforms like Gust can automatically format an executive summary for you to get an idea of the format.
- Q&A document. This is something that a dear VC colleague of mine recommended recently to entrepreneurs, as you are pitching, competition in pitch competitions, going through due diligence, start a document with some of the questions that investors are asking you with your responses. You are already doing the work in countless emails, so just create a doc (scrub it of course), then add it to your deal room.
2_Team Bios
In this section, it's all about just placing all of the bios and/or resumes of your team so during due diligence with investors, they are in one place.
- Resumes of the leadership team. A reminder that you can download your resume from Linked In automatically for ease.
- Summary Document of team, board & advisors. I always like it when a founder has a document like this. I typically create one or snag this one for an appendix for a due diligence report I am writing. It includes a short bio of each person on the leadership team, a short bio of any other employee, and then a list of the board members and advisors. You can leave it as a list or add a short 2-3 sentence bio of each. You are essentially connecting the dots for the investor in WHY these people are on the team.
3_Contracts & Agreements
This is simple, any pertinent contracts and agreements that you have with customers. This is a perfect place to add Letters of Intent from future customers (especially in the life sciences). For super early-stage startups, this might not have any information in it and that is OK. I prefer for an entrepreneur to just place a document, labeled “see me first” explaining why this is empty.
- Pertinent contracts/agreements with customers (of course, scrubbed if needed)
- Letters of Intent (LOI's for short)
4_Products & Solutions
This is the perfect folder to showcase your product and a *sometimes* a product roadmap.
- Product pictures & explanation. Include, if you know it will be useful, screenshots, pictures, a document with a couple of pictures explaining each product.
- Research. Any research conducted around the product, just add the PDFs of the published article.
- White Papers. This is a perfect place to just add white papers written by the tea or partners. If it's not clear why you are adding the white paper (you are not cited because you contributed data, etc, I would add a cover page to the PDF explaining the connection)
- Market Data. You could add market research data your team has conducted in this section.
5_Sales & Marketing
- Customer case studies
- Marketing plan
- Brand guidelines
6_ Risk Management
- Risk management approach of the startup
- Topics of deeper discussion/documentation: web security, HR, supply chain
- This is more for a later-stage company, but you might need this sooner than later. Be prepared!
7_Financial Information
- Financial projections (earliest stage)
- Cap Table
- P&N, Cash Flow, Balance Statement (revenue-generating)
- Taxes (later stage)
- Bank documents
- Insurance Information
8_Legal, Environmental & Regulatory
- Patents – only those available publically at the USPTO
- Summary of all environmental considerations
9_User / Customer Research
- Customer discovery document (Persona, summary of customer discovery interviews)
- Information about users, downloads, user interaction data
10_Press / Media
- List of press references
- Press Releases
I found the Cooley GO resource especially helpful in this topic, even if they focused mostly on deal rooms when you are considering an IPO or M&A.
The Do's:
- Review before posting. Scrub documents, reviewing the content and structure by sending to your trusted internal resources, like your advisory board, board of directors, team, and *if needed* lawyers before posting documents to a data room. This allows for you to double-check if there is sensitive information being divulged and uncover any gaps in information before sharing it with potential investors.
- Correctly label your documents to help make them searchable. The deal room is a resource for not only potential investors to have an easy system to reefer and grab information, but also your team to have one place where all of the most recent information is located, checked by many for sensitivity & correctness. Effectively labeling will allow for investors & your team to find the documents any time they are needed.
- Control access. All forms of deal room platforms, from simple Google folder systems to platforms like Docsend or DealRoom (more for later-stage companies considering M&A) can limit access to certain people to the information contained in the deal room.
- Limit time. If you are pitching to an angel group or going through due diligence after a pitch competition, consider limiting access for a certain amount of time. The deal room is a snapshot in time, so giving people access for a limited amount of time allows for you to retain control. As a reminder, take advantage of other restrictions that the platform you are using has like not allowing files to be downloaded or printed.
- Watermark it. Add a marking to all pages with a “Confidential” watermark. *highly recommended*. You can also go a step further and date the documents so that they are clearly marked as being confidential from a particular date in time.
- Keep it updated. I cannot emphasize this enough. When you set up a deal room, you will be referring to it a ton, so keep it as updated as possible. Not every single variation of your pitch deck needs to be there, but keep it updated with any new designs or a new slide that was created in a better way from feedback from advisors and investors. You don't want an investor to watch you in a pitch competition, consider investments, ask for deal room access, and then see a different pitch deck in your first folder. That decreases trust.
- Be careful with e-mail. Unless you are password protecting or encrypting files, almost anything you send by e-mail can easily be forwarded to other parties.
- If you can track, TRACK. I believe that only the platform you have to pay for allows you to track, so this is a NICE to have, but if you can track to see who is viewing, downloading, and uploading specific documents, that will help you track what documents are the ones interested by investors and also who is actually reviewing your documents so that you can follow up accordingly.
The Don'ts:
- Do not post everything to a data room. You are creating the deal room so that your team and investors can have a great place to store & share pertinent company information. You will probably receive a long due diligence request checklist from angel groups or individual angel investors or VCs for documents needed. Keep in mind you don't have to post everything in the deal room. From Cooley GO, “For example, if you have government classified information, do not post this. And remember that it is possible to breach a contract just by disclosing its existence. If the information is crucial, there are other even more secure means available to share.”
- Do not post a trade secret to a data room. You can speak about the high-level trade secret that your company has as a competitive advantage to build a larger barrier to entry in investor meetings, but don't post it to the data room.
- Do not post highly sensitive information. Review, redact, edit the information and post a summary of it in the data room for verification of existence or to increase trust during the due diligence.
A bit about NDAs
One of the biggest questions I get between setting up a deal/data room and pitching is if professional investors sign NDAs. I absolutely love this statement from Cooley GO, “Most VC’s (other than perhaps those in the life sciences space) will not sign an NDA with an entrepreneur looking for funding in the US.” They have an article HERE that describes the nuances between TRUST, REPUTATION, and EXPENSE.
Deal room platforms:
- Google Folders (safety: Medium)
- Dropbox (Safety: Low). However, their new service, Docsend has increased security and tracking
- DealRoom (Safety: High). Ideal for later-stage companies considering M&A)
- SecureDocs (Safety: High)
I really hope that this is helpful, useful, and informative. It is not exhaustive, but realistic for startups considering fundraising and actively pursuing due diligence with investors. If you have any questions or comments to add to this information, please do not hesitate to contact me through Linked In messages for a time to talk.
