Often times growth-stage companies are so heavily focused on scaling and validation that business functions like document collection and management are pushed to the side. But when it comes to preserving those precious few months runway, a prolonged due diligence process is the last thing a venture needs.
What is a Data Room?
A data room is an online repository of all company files required for the due diligence process. Businesses typically need a data room when raising capital, selling their company, forging a strategic partnership, facing litigation, filing for an IPO, etc. Effective data rooms provide transparency and a complete picture of any given venture to the other party. Data rooms also have uses outside of the due diligence process, like ensuring little to no hiccups in operation if there’s a transfer of management from illness or legal action.
What Goes into a Data Room?
The contents of a data room vary based off the industry and stage of a company. The categories below generally outline the contents of any given data room.
- Corporate Records
- Shareholder/Securities Information
- Financing Documents
- Financial Information/Records
- Employees and Management Details
- Sales & Marketing Efforts
- Physical Asset Documentation
- Intellectual Property Records
- Environmental Concerns, Compliance, and Records
- Regulatory Filings
A data room will amount to hundreds if not thousands of individual documents – many of which must be updated on a quarterly basis. The size of your data room will grow in direct correlation with the size of your company and the size of the transactions you negotiate.
When Should You Create a Data Room?
You might think you can wait until you start raising capital to create a data room, but this is a false assumption. Building out a data room is often a multi-month long process. Your data room needs to be completed before any transaction and before fundraising begins. If you expect the fundraising process to take 6 months, then you should generally start building out your data room an additional 3 months in advance.
The exception of course is when you’re pre-Series A and the due diligence is minimal. But even at this stage, it’s wise to go ahead and build out a data room and keep it updated on a quarterly basis. By starting out small and expanding upon your repository as necessary, you’ll avoid a lengthy build-out process that presents a higher chance of missing things. You’ll also have the added bonus of being able to view essential documents on the fly whenever and wherever.
The power of a well arranged data room cannot be understated. While not a guarantee, we’ve had multiple clients receive additional investments or higher acquisition offers in response to the immediate presentation of their data room when asked. It’s the final piece of trust in any major transaction, you might be able to display a competent management and authoritative communications, but it’s your data room that will allow them to understand your inner workings.