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Your Data Room: A Critical Part of Due Diligence

Posted by Digify

 

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Find out why setting up a virtual data room is the best investment you can make before fundraising.

 

When you're ready to start fundraising for your new startup, you need a data room as part of your due diligence process. This simple addition to your arsenal can help you achieve a number of benefits— including both appealing to your investors and letting them know that you genuinely care about what your business is able to offer them. Before you ever start to raise funds and approach investors, you need a virtual data room to help you reach all of your goals.


The Features of a Virtual Data Room

When you create a virtual data room, you aren't just opting for the file sharing capability of programs like DropBox or Google Docs. Instead, you're using a high-quality virtual "room" that provides high-level security designed specifically for business transactions. Virtual data rooms, or VDRs, offer a number of features that you simply won't find in a traditional file sharing service.

 

VDRs provide full access management. That means that you, as the founder, are able to fully control exactly who is able to access your data room and what documents they're able to view. There's no chance of someone outside your organization stumbling across the data you've collected.

 

VDRs allow you to set role permissions. Are there co-founders who need to have the same level of access and control that you do? Lawyers working with your company who need higher-level access? Your VDR will allow you to set role permissions that permit others within your organization to work at their full capacity.

 

Lead investors can be set as co-owners to the data room. When you have lead investors who are investing substantially into your business, you want to be able to provide them with high-level access to the data — and may even want to permit them to control what data is visible to others or to input their own files. These individuals can be listed as co-owners to your data room, giving them control that is equal to yours.

 

VDRs provide data indexing and reordering. Often, you need your investors to go through the files necessary for due diligence in a specific order — and there may be a lot of them to choose from! Data indexing and reordering will allow you to easily designate the order in which the files are listed so you can be sure that investors aren't confused by past documents and that they have the most updated information.

 

You'll get dynamic watermarking to help you maintain control over your documents. Documents can be automatically stamped with your unique watermark so that your investors will be less likely to leak confidential information. Documents are also stamped with the recipient's email address so that if a leak does occur, you'll be able to easily identify it and prevent it from happening in the future.


NDAs can be built into your strategy. Investors may not have time to hand-sign every document, but when you work with an organization like Digify to create your VDR, you'll get terms of use that include an NDA. This will help protect your ideas and give you reassurance that investors and other parties are accepting your terms before they can access your data.

 

VDRs are easier to use than you think. Many founders worry that their virtual data room will be one more challenging tool that they have to figure out how to use. Most of the time, however, virtual data rooms are comparatively simple to learn how to use — and they're an important part of your fundraising arsenal, making them well worth the time invested in that effort.

 

VDRs are great for long-term projects. Many people assume that virtual data rooms are best for short-term initiatives. The reality, however, is that they are an excellent tool for organizing your data long-term, ensuring that your investors have access to the information they need to make critical decisions about your startup. Whether that’s during the course of your fundraising or even after you’ve closed the round.

 

Data Organization Benefits

As a founder, you have a ton of documents that you may need to access — and provide to your investors — on a regular basis. In many cases, you may be responsible for organizing hundreds of documents in order to share them with your investors. You need to be able to provide your investors with the right information at the critical moment. Not being able to access that information can lead to stalls in the process — or, in a worst-case scenario, cause your funding to fall through altogether.

Your VDR helps organize all of that critical data, putting it at your fingertips when you need it most. Whether that's a quick communication with an investor who needs accurate information fast or the ability to ensure that you have the latest, most accurate piece of data at hand, your virtual data room ensures that it's a snap to provide the latest link to that data.

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Your goal, therefore, is to anticipate the needs of your investors: what information are they most likely to request. What data is most critical to those investors? What information needs to be included in your virtual data room? Keeping this information up to date is a critical part of due diligence and ensuring that your investors have all the information they need. Download this ready-to-use free investment due diligence checklist now to ensure that you have the right data at your fingertips before your investors need it.

 

Saving Time, Saving Funds

Your investors don't have a limitless amount of time — and if you're taking up excessive amounts of it, they'll be sure to let you know it. A great data room will save you and your investors time in a number of ways.

  • There won't be any lost time digging up old emails, since all of your data will be neatly contained in one place. This is particularly important when you're dealing with long email strings or multiple emails from a single individual.
  • Your investors won't have to wait around for you to provide them with the data they need, since it will already be ready to send and contained in one easy-to-access location.
  • You won't have to waste time digging up data that's no longer relevant to your current business needs, but that matters to your investors.
  • You'll be less likely to miss requests for data, which puts you in a better position to secure the funding you need quickly and efficiently. 

 

Rowan Grant, Partner at Series A focused venture capital firm Full Circle VC and Director at Arbor Group, has helped over 25 startup investment deals through due diligence. According to Grant:

“In my time with both Transition Level Investments (Steve Baxter’s startup investment portfolio) and Full Circle VC, I’ve noticed that there is one thing that most efficient and enjoyable deals have in common: a well-structured data room that has been prepared in advance of fundraising meetings.

 

A great data room shows your investors that you genuinely care about their time and effort as it pertains to your project — and that makes them more likely to continue to invest in your new startup. This saved time can significantly impact the funds that you're able to secure.

 

Easy Updates to Everyone

Series A funding rounds can run for a long time, especially as you need to secure additional funding or if you're working with new investors throughout the process. In many cases, you may find that you need to update your files on a regular basis  and that means updating your investors along with them.

Fortunately, when you utilize a VDR, you're able to seamlessly integrate the newest information. Not only is it easy for your investors to access the latest documents and see what changes you've made, you can set up automated emails to go out to your investors, making it easier to keep everyone updated and the latest information in their hands. Talk about more time savings.

 

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THE BIGGEST MISCONCEPTIONS OF VIRTUAL DATA ROOMS

If you've considered using a virtual data room in the past, you may have found yourself opting for a different means of sharing data as a result of misinformation. There are several key misconceptions that may have stood in your way — and you need to challenge those misconceptions in order to experience the full benefits of a virtual data room as part of the due diligence for your startup.

 

Misconception #1: Data rooms are too expensive. They're only for big businesses.

Physical data rooms were once a costly effort. Not only did they require physical space, they also meant flying in investors so that they could sit in the physical room and go through the data. The advent of the virtual data room, on the other hand, significantly decreases the cost associated with building a data room and allows all of your investors to access that data 24/7.

 

Misconception #2: Due diligence documents need more security than a virtual data room can provide.

The due diligence documents for your startup are critical, and they do require a heavy layer of security. You want to share them with investors in order to gain their support, but you don't want to give up control of that information, either. VDRs like Digify allow you to maintain control of that critical data while still permitting investors to easily access it.

 

Misconception #3: You don't really need to track who is accessing your documents.

Tracking who among your investors has accessed your documents is a critical step in ensuring that they are genuinely interested in what your startup may offer. A potential investor who hasn't even accessed your files is one who probably isn't particularly interested in investing in your startup, while a potential investor who has spent hours looking through your documents is more likely to actually invest. Being able to track that activity can help you better predict what funding you'll be able to secure — and that's something you won't be able to accomplish with Dropbox.

 

Virtual data rooms for due diligence are a critical part of your startup — both for organizing your information and for ensuring that you're able to easily and securely keep your investors updated. If you're ready to get started with a virtual data room for your new business, contact us today to learn more about how we can transform your data sharing efforts or check out our free trial to discover how well this platform can work for your startup.

 

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Tags: Startups, Venture Capital, Due Diligence, Fundraising