It is well recognized that data rooms are indispensable in the M&A process.
What is less well known is that they create just as much value to startups which are raising capital.
The most successful modern startups are increasingly turning to data rooms for a number of reasons – for example to increase their chances of getting acquired for the big bucks.
We at DealRoom help startups raising funds and here we made an outline eight of these reasons below:
1. Enhanced Security
When sharing a pitch deck with investors, how confident can anybody be that they’re not going to distribute it among their peers? The answer is not very.
In the worst case scenario, that can mean that your company’s business plan – often its competitive advantage – can fall into the wrong hands.
By using a virtual data room, you can control who sees what, by restricting their levels of access and thus limiting the chances of unwanted data leaks.
2. Lower Costs
As a previous article noted, the cost of a virtual data room can vary depending on your service provider and the level of your requirements.
But while the costs of a good VDR can rack up quickly, it still compares favorably with its physical equivalent.
Likewise, while it may seem like an unnecessary cost for a cash-strapped startup, try deal with the costs – reputational and financial – emanating from a data leak and the costs associated with a VDR will soon look insignificant by comparison.
3. Ease of Access
Ease of access is nothing new for most startups with pitch deck presentations: all they need is an internet connection and an email account, right?
That much is true if they’re willing to expose the pitch deck to anyone that’s willing to overlook the significance of an NDA.
A virtual data room provides the same ease of access but only to the individuals that you want to provide that access to.
They can access your information from anywhere, on the go, losing none of the functionality of email but retaining a level of security that gives you peace of mind.
4. Faster Decision Making
Time is of the essence for startups in the fundraising process and data rooms not only speed things up for investors, but speed things up for you as well.
By allowing investors to see all of your information in one place, there’s less of the back and forth that you associate with e-mail and telephone contact.
Decisions can be made significantly faster, which also leads to…
5. Faster Feedback
The ultimate aim of any funding round is to generate sufficient funds to grow your startup.
However, it’s not unusual to approach a few dozen capital providers before reaching one that’s willing to invest in your startup.
Where possible, you should be using each of these rejections as an opportunity to gain feedback about how to improve your business.
The fact that your VDR provides for faster decision making by investors also means that it allows for faster feedback for your startup.
6. Enhanced Due Diligence
The fundraising process is far more than a pitch deck.
What many people don’t realize after seeing a pitch deck impress investors is that it’s just the beginning of a process, of which due diligence is usually a significant component.
Furthermore, the feedback received from each investor is often used to improve your due diligence documents.
The more you add here, the more likely it is that the next investor will have everything they need for a faster decision.
7. Transparency with Investors
Closely related to the enhanced security provided by a VDR is the issue of transparency.
Having better data protection gives your startup the ability to be more transparent with the investors that matter.
This transparency also creates a positive feedback loop that should lead to the investor providing you with more informed feedback.
And there’s very little that scares investors away more than a lack of transparency.
8. Edge over Competition
Finally, having a data room gives you an edge over competing startups in the fundraising space.
It’s remarkable how many startups don’t opt for a virtual data room with one eye on minimizing short-term expenses.
Although this is common, it is also an oversight. For all of the reasons outlined above, a good VDR will allow you to gain an edge over companies in your space.
When capital providers are looking at startups, having a VDR is one way to ensure that your startup wins on the small margins that influence their decision making.
1. Investor Aversion
Even taking into account the benefits of using VDRs that we’ve outlined above, some investors have an aversion to using them. Their reasons will vary.
Most will cite the simplicity of a teaser and pitch deck, or the lack of time to go through the process of logging onto a system they’re not familiar with.
It could be that your project simply doesn’t warrant a data room…yet. Again, as advocates of virtual data rooms, we’re inclined to suggest that everyone can benefit from what they have to offer.
But the timing of that depends on where your company is in its journey.
If you’re just coming out of the concept development stage, it may be that you don’t yet have enough data to warrant a data room at this point in time.
3. Lack of Focus
The entrepreneurs of young startups find their attention is required everywhere from coding and development to marketing, HR and fundraising.
There are often several fires to be put out at once.
In the midst of all this, devoting valuable resources towards constructing a virtual data room lead to a lack of focus in areas where more attention is required (cash flow, being the most common example).