Fundraising is both an art and a science; it’s a cliche, but true. Much of the art is in what information you choose to share, with whom, and when. An entrepreneur’s data room, a file with confidential company documents, plays a big role.
Share enough information to answer questions, but don’t give away so much that you push an investor to say no to the deal. Nurturing VC relationships takes months, but once you’re in full-on fundraising mode, remember:
- First Meet: Aim to share a short-form pitch deck. Now is a good time to gather the investor’s initial questions and probe for any reservations they have about your business.
- Partner Pitch: You’ll likely share your long-form deck and a data room. Use the investor’s questions and reservations shared at the first meet to shape your materials. The guidelines in this article focus on a deal room at this step in the process.
- Post-Term Sheet: Once you sign a term sheet, you’ll go through deep legal diligence. Counsel should guide you through the process, but it helps to prepare materials ahead of time.
Between each of these steps, you’ll undoubtedly get follow-up questions from investors.
Startup Secret: Keep your deliverables for these responses in a separate folder in your investor data room, and leverage them across investors if they ask for the same materials.
Deal Room Best Practices
Here’s where we get into fundraising “science.” Keep these best practices in mind while preparing important documents for your data room.
1. Aesthetics Matter
VCs see materials from many companies each week. First impressions matter. Take the time to clearly articulate your story through a professional set of materials. Put together an organized data room. Pay attention to spelling, grammar, headers, and footnotes. Perhaps hire a designer for your deck.
“I assume you run your company like you run your deal room,” says Richard Dulude, Co-Founder and Partner at Underscore VC. “Are you clear and professional, or careless and sloppy?”
2. Maintain Internal Consistency
Your materials should “hang” across the data room and be internally consistent, says James Orsillo, Underscore’s Operating Partner. “Do not have inconsistent data—it’s a red flag.” Triple-check your materials. For example, if your pitch deck says your cash-out date is December 2023, your financials should support that.
3. Pick a Platform
Box, Dropbox, and Google work for an early-stage fundraising data room. We recommend setting up folders for each VC. Grant them access, and then shut off access once the process is over or they are no longer conducting diligence. This helps you maintain control over your materials.
4. Avoid Adjusting Data
A fundraise is not the time to be changing forecasts, fundamental operating metrics, or business plans–and you certainly don’t want to be making significant changes after you receive venture capital.
“Dramatically changing critical information in the middle of a fundraise is a clear sign that you don’t have a handle on your business,” says James. “This gives investors pause.” Take the time to properly set up your fundraising process by thinking it through and doing things ahead of time.
5. Keep It Clear
Minimize acronyms, nebulous terms, and wording that only makes sense if you work inside the company. Your information should be clear enough that someone unfamiliar with your business can understand your materials.
6. Control the Message
Be purposeful in the materials you provide to potential investors; do not overshare. “It’s better to have an investor ask specific questions that you can answer with context,” says Lily Lyman, Underscore Partner. “Throwing a ton of data at VCs without context can lead to misinterpretation or confusion.”
7. Be Responsive to Follow-Ups
Respond quickly to questions on your data room, and provide any supplemental materials within 24 hours. Wasted time kills deal momentum!
If an investor asks about something in your data room, ask for a call and have them send questions in advance of that call. “Carefully plan your response and build a script with your talking points,” says Chris Gardner, Underscore Partner. “Then practice and rehearse, so it’s natural. The key is always to control the message.”
8. Ask for Help
Last but not least, don’t be afraid to ask your existing investors for help. It’s also a good idea to keep your investors in the loop on the confidential information you’re sharing.
New investors will often connect with existing investors, and you don’t want your existing investors to be caught unaware of things you may have disclosed during the fundraise.
Checklist: How to Organize Your Data Room
Now that you’ve gone through general data room best practices, here’s a checklist for your initial deal room (before you sign a term sheet).
>> We’ve also created a sample folder structure in Google Drive.
1. Cover Letter
A cover letter guides an investor through the deal room, explaining which documents are where. For “extra credit,” customize the letter for each investor.
You can also use this space to draft a brief investment memo, giving a VC the information they need to make a quick, educated decision—and sell their partnership stakeholders on it. “If you do that, you can quickly boost their comfort with the investment,” says Richard.
2. Pitch Deck
If you’ve previously shared an abbreviated deck for a first meet, this is where you’d include the expanded pitch deck. Be careful not to “overshare” (an 80-slide deck is too much!), but provide a robust overview of the business.
This should be a professional-looking deck with a strong pitch narrative. If you are a presentation ninja, great! If you need design help, don’t be afraid to spend a little (not a lot) to get a professional set of materials.
Tip: Host the deck in DocSend and include a link to the file in this folder.
3. Team
How are you going to build your team? Include an organizational chart of what your team looks like now—and how you plan to expand it with this next funding round.
Leadership team bios are also helpful. Why are these the right team members to solve this specific problem?
4. Product / Technology
What are you building? And how will you continue to build it? In this folder, it helps to include a product overview and pricing, your product roadmap, and some demo videos. Videos are an easy way to save time and streamline efficiency.
Startup Secret: Consider recording some customer videos to convey customer love for your product. This also helps limit live customer reference calls to a smaller group of highly engaged potential investors.
5. Financials (Actual & Projected)
What is your financial plan? What is your revenue? How is the business going to materialize? In this folder, share past and projected financials as well as your “model.” This includes your income statement, balance sheet, cash flow statement, and key metrics.
Some tips to consider:
- Don’t post a fully interactive Excel/Google model for VCs to play with. That can quickly become an overshare.
- Send a deck summarizing the financial metrics, key drivers, and underlying assumptions. The objective here is to control the message on your financial story.
- Send a set of financials that shows historical financials, forward projections for two years, and any relevant KPIs.
- Share the same forecast that you show in board meetings and use to operate your business; don’t create a separate one for investors. The key is to be accurate—if you miss your forecast in the middle of your fundraise, you lose a ton of credibility. But on the flip side, massively overshooting your forecast suggests you might not have a great handle on the business.
6. Capitalization
Who owns what, and how much is in the pool? Share a detailed capitalization table in this folder. VCs will want to understand the size of the existing option pool, the amount of ownership by founders and employees, confirmation of ownership by series of stock, etc. (We recommend using an online tool like Carta for managing your cap table, option grants, etc.)
Additionally, include term sheets, convertible notes, and/or SAFEs from previous financing rounds. These help VCs understand your ownership structure.
Post-Term Sheet Signing: Materials for the Legal Due Diligence Process
Once you sign a term sheet, you’ll need to provide investors with access to a full data room for them to complete confirmatory and legal due diligence on your company.
Y Combinator has a great Series A Diligence Checklist and notes that preparing these documents ahead of time can cut as much as a week off of your closing process.
It helps to manage this data on a day-to-day basis as you file and maintain documents. Have these documents ready to be shared if required.
And remember: The best approach to handling due diligence is to share what is required (nothing more, nothing less) in a timely and complete fashion.
