DATA ROOMS - why, when, and how? (also..what the heck are they?) + Fundraising Fieldnotes - 11.5.21
Hey - it’s Jason Yeh 🕺🏻
This is my Friday recap of thoughts I’ve had while helping founders solve their fundraising challenges this past week (11.5.21). Yes I realize I’m a day late, but it’s been a busy one!
If you have any questions, please reply! I try to get to every comment/question I get :)
On to this week’s Fieldnotes…
So what’s the deal with data rooms?
As with so many Fundraising-related topics, data rooms are a part of the process that tends to confuse founders. What is a data room? What goes into a data room? Why are they important? Who should be let into a data room? Should there be carpet or hardwood floors?
The last was a bad joke but it’s not too far from how confused founders can get when it comes to the topic.
Let’s start with the basics.
What is a Data Room?
A data room is simply a compilation of information that teams provide investors during a due diligence (DD) process. The “room” isn’t a physical space but rather some digital folder of documents, spreadsheets, and any other documents that would help with the DD process.
Of course, defining an esoteric word with another esoteric word hardly helps, so a quick definition of “due diligence” is also in order. Due diligence is a process to verify claims through data analysis, reference checks, and research. In the startup fundraising context, these claims are whatever is shared as truth in a pitch or suppositions an investor makes in their head.
Here’s a more concrete example. Felicia Founder says in her deck and live pitch that her company is based on an innovative new ML technology unique to their team with an install base growing 50% month-over-month and strong relationships or LOIs with Coinbase and Dapper Labs. Her team slide is glowing with impressive experience like leading strategy at MLB.com. An interested investor thinks in their head “I bet some of the sports leagues would die for this tech!”
This opportunity presents a number of exciting claims. Let’s list them:
Innovative, unique ML technology
50% MoM growth
Strong relationships with Coinbase and Dapper Labs
Impressive founder that worked at leading sports tech company (MLB.com)
Possible extension to sports leagues (the investor’s guess)
How many can be taken at face value? On the extreme side of things, there are well-known cases of straight-up lying during fundraising. And while Theranos isn’t the norm, the non-extreme version of innocent story-spinning or light exaggeration is quite common. So the answer is, who knows what can be taken at face value.
In the current market, speed is what wins deals and investors have been taking risks by overlooking extensive due diligence before committing to invest. That said, if given the time an investor should prefer to conduct due diligence - especially on the parts of a story that are most crucial to their investment. They want to validate what is presented to them with a secondary source, additional data, etc. and that is due diligence.
So I get due diligence now, but why Data Rooms exactly?
Why? Well even in a more subdued market, momentum closes deals while friction and time blocks them. Data rooms allow investors to execute diligence as efficiently as possible. If done well, the data room helps verify claims you made and answer follow-up questions investors have.
And when? Like when do I create one and when do I send?
Your data room should be a living, breathing thing that you can start on as soon as you begin planning your fundraise (with a basic level of content) and add to as you gain better understanding of what investors need to see.
As far as when to share a data room with investors, there are a variety of opinions.
I often reference these two exact opposite opinions on the topic of when to send a data room when I prepare founders who are starting to educate themselves on fundraising. The point is that there are many circumstances in which you can find two equally credible people who recommend the exact opposite piece of advice. (continue reading…)
Impress with simplicity. Make it dead simple.
Understanding the VC Process can be helpful
Till next week. Stay adamant and be chased.
If you missed last week’s essay, it was a good one👇
p.s. this digital avatar is crazy high quality!
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