Many of our clients ask us about data rooms, and the types of content they should share with potential investors. It's an important question. Why is building a comprehensive Data Room is so important, and what content should be included? We compiled a short primer to share our insights.
So, your startup is catching on… that’s a good thing!
In the world of entrepreneurship, it often feels like there are more urgent priorities than there are time and resources to solve them. In a fast-paced startup environment, more challenges and issues come up before the initial ones are even resolved. The best business leaders of today focus on being as prepared as possible for both known and unforeseen circumstances. The degree of preparation can often make or break any pursuit, especially if it pertains to fundraising.
Raising money is not the time to cut corners. As entrepreneurs plan to socialize their business model with investors, it’s critical for them to be as prepared as they can be (whether they have gone through this process in the past or not). At this point in a company’s trajectory, there’s usually a working product, sales/bookings are on the rise, and it’s time to bring in new expertise to scale the team so the company can reach new heights.
In most cases, when business leaders are preparing their company for outside investment, it often takes a lot of time and effort away from focusing on the day-to-day operations. Between pitches, networking, relationship development, and negotiations, fundraising is usually one of the most challenging pursuits for entrepreneurs.
Preparing for the “A-Round”
The key question is: What can entrepreneurs do to best depict the current and future status of their business?
In most cases, this is done using well thought out, professional documentation designed to answer both high-level and highly complex questions about the business model. There are often dozens of required documents, including business summary materials, financial statements, sales pipeline info, legal paperwork, human resource plans, and more.
When a company is raising their A-round, it’s often structured very differently than their first series of capital contributions. With a more substantial round, entrepreneurs are typically dealing with larger outside institutional investors as opposed to friends and family. That usually means stakes are higher, rounds are larger and more complex, there are often more stakeholders involved, and it can take much longer, all of which can be very distracting to the business.
The obvious question is, how do you best prepare for all of the due diligence using the least amount of time and resources? At Exbo Group, we believe this comes down to preparing the appropriate Data Room Documents well in advance of the raise.
What’s a data room?
A data room is a secure, cloud-based series of organized folders and documents that help startups best depict the financial, operational, and strategic position of the company. Investors typically use these materials to dive into the details and learn more about the company, business model, product, team, etc. before making an investment. In most cases, different firms build different valuation models using their unique strategy leveraging the available data and information.
What goes in a typical “A-Round Data Room?”
While the specifics may vary slightly between different businesses and investors, there are certain staples that are usually required, which we’ve detailed in Figure 1 for you below.
A well-organized data room can help position the company for a higher probability of a great outcome. Companies are incentivized to raise money with the right capital partners and at higher valuations as quickly as possible, but this process can only begin when investors have access to the appropriate materials in a timely manner. When it is time to attract outside funding, a company’s main goal is to be well prepared to distribute to the correct information to potential investors both quickly and with as much transparency as possible. An organized company will convey a sense of business viability and will help instill confidence in their product and growth strategy, an approach that will ultimately y help drive increased investment interest.
What are the challenges with a Data Room?
Data rooms are complex and dynamic. Different investor groups require different types of materials, including various adaptations/customizations to the existing set of documents. Sometimes the variations can take hours to prepare, which can be a real challenge for management since they should be actively focused on building a more successful business. Often, the fundraising pursuit takes focus away from the day-to-day management of the company, which is where a founder typically should be applying much of his or her focus. This is a risky situation for companies since any slowdown of momentum or misstep can ultimately jeopardize company performance, which is especially concerning during a transaction period.
The risks boil down to two factors: quality and timeliness. Both of which are crucial to show investors when doing a raise. Taking on this responsibility in addition to one’s regular role can be especially taxing, which is why the aid of a third party can be crucial to this process.
Why work with a third party such as Exbo Group?
Those who have previously raised institutional capital before typically recommend leveraging expert, outside help to ensure the best outcomes for the business, especially when a company intends to raise in excess of $1M . The help of a third party allows the management team to focus more exclusively on the business while relying on outside specialized assistance when it comes to creating, adapting, and organizing the information that’s included in the Data Room.
Using a trusted team like Exbo Group for help is safe, secure, and easy. We can often be responsive to investors and other outside parties, even when company management cannot be. Our strategy is to be present, professional, effective, lean, and design-focused, which is what we believe leads to the best outcomes for our clients and also their businesses. We what both our clients and their potential investors are looking for, which is what ultimately helps us maximize the value for entrepreneurs during an early-stage fundraising pursuit.
How do I know if I’m prepared or if need help?
Exbo Group and group of professionals offers entrepreneurs and their teams a free consultation when it comes to Series-A readiness. We enjoy helping entrepreneurs succeed and grow their companies, which is why we started this business. We ourselves are entrepreneurs, consultants, analysts, product managers and investors, which is what makes us most ideally prepared for these engagements. We have the capability and resources to ramp up quickly if needed, so don’t hesitate to reach out to learn more about how we can help make any fundraising pursuit more seamless and effective than ever before.