Data room basics for startups: Stage 1 data for the term sheet

You just had a great pitching session and subsequent follow-up discussions with a VC or prospective investor. They seem interested and have asked for more data or, perhaps, access to your data room. The VC or investor wants to validate what you have shared in your pitch deck and is looking for more granular information on your company, business model, traction and financials. These large data sets are easier to manage in a data room, as opposed to having to share Excel spreadsheets among internal staff.

Data room basics

Your data room has to be secure and accessible by only designated people. Dropbox and Google Drive are among the cost-effective cloud-based solutions used by early-stage companies. In addition, you may want to monitor usage, in terms of the people accessing the data and which data sets are examined the most. Many vendors offer virtual data room solutions for companies that are sharing a lot of data and need more controls.

Start building your data room when you begin your pitching process. While some of the information will be readily available, some will need lead time, as it has to be collected from lawyers and other team members. Organize it well and keep it current.

What are the stages of data in the data room? 

Data requests come in throughout deal flow discussions, but they most often occur at two specific stages.

• Stage 1—data needed for an investor to create a term sheet. This stage is focused mainly on data such as your product–market fit, financial models and cap table, but can also include areas from Stage 2 in lesser detail (e.g., the bios of your top team members).
• Stage 2—detailed due diligence data. This type of data is generally sought after the receipt of a term sheet and includes much more detail on company documents, securities-related docs, material agreements, financials and staff.

You should provide additional data and data room access when the VC or investor requests it—prematurely offering access to your data room is unlikely to spur their interest in proceeding to a term sheet.

Stage 1 data room content: What information do you need to include?

The VC or investor needs stage 1 data in order to create an investment memo for their internal decision making, and then to present you with a term sheet. That’s their initial financing offer, indicating economic and control terms. Here’s a closer look at what you need to provide.

Product–market fit

Data that shows you have a large addressable target market:

• Include market sizing and drill down to your target market—using industry reports from companies such as Gartner, Deloitte and McKinsey can help you in building a narrative.

Data that shows you are solving a real problem

This also includes customer data to prove your value proposition and pricing model, such as:

• Customer acquisition and retention data
• Customer engagement levels (for example, how often they use your product and which product functions they use)
• Customer ROI (typically for B2B ventures)
• Cohort tracking data
• Competitive positioning

Financials

The VC or investor is looking for your profit and loss history, balance sheet, grant history and comparable valuations. But, more importantly, they’re looking for these key drivers:

• Gross margins
• Trajectory of monthly recurring revenue (MRR)
• Cost of acquisition (CAC)
• Long-term value (LTV) quantification
• Sales pipeline and forecasts
• Planned usage of funds being raised
• Major client or partnership contracts to validate business model

Be transparent in your numbers. For example, clearly distinguish between revenue and MRR (the former may include one-off consulting revenue not directly linked to the product and is not replicable). Avoid red flags such as dealings with other companies run by the same founders, intercompany assets or IP ownership—these need to be minimized or clearly explained.

Highlight non-dilutive funding or support you have raised through pitching contests, and provincial and federal grants, as it further validates of your business and increases your credibility as a scrappy company. For an Ontario-based business, for example, this would include Ontario Centres of Excellence grants, Next AI and Scientific Research and Experimental Development funding.

Company documents and cap table

Work on maintaining a “clean” cap table leading up to fundraising to minimize VC or investor objections. For example, buy out a co-founder who may not be engaged anymore and has split away, ensure consistent terms to earlier investors and minimize the number of angel rounds on simple agreements for future equity prior to a larger VC round. To give clarity on current and future ownership, you should also include:

• Articles of incorporation
• Co-founders’ bios and profiles of other investors
• Share options pool
• Terms and clauses that may impact the future, such as liquidation preferences on prior term sheets that will affect new investors

Investors and VCs like to see co-founders who have solid skin in the game in terms of their financial stakes. They may be wary if early-stage founders are proposing to give away a significant percentage of the equity (typically over 20%) in a financing round.

Product road map and competitive positioning

In order to demonstrate your product’s value and market differentiation, include data such as:

• A product demo link
• Information on your intellectual property, such as patents and trademarks
• Analyst reports that validate your product

Staff

Founders and co-founders are generally expected to be singularly focused on your startup—meaning this is the only business they are running—before seeking VC or angel funding. If that’s not the case, you need to be able to provide investors with a good reason why they are not, as well as a plan for the transition to full time to show their commitment.

In your data room, include details about:

• Founders and their individual (and joint) working track records
• Bios of advisors and other key executive staff

What NOT to share in your data room

Make sure you do not share code or any proprietary information (such as high-value sales prospects) or trade secrets in your data room.