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Investor magnet: the appeal of the data room

Written by Rebecca Appleton | 09 May 2024

Every day, we make decisions. But while some are mundane and ultimately unimportant in the grand scale of things - pizza or sushi tonight? Others can quite literally make or break our livelihood.

A good business decision can set you on the path to success, and a bad one can have dire consequences. So, if dinner can be chosen following your heart (and stomach!), business decisions must be made based on cold hard data - and this very much applies to investors.

For venture capital and startup investment, the importance of thorough due diligence cannot be overstated. This means investors need access to a staggering amount of data.

But that raises an important question: how can companies share data in a way that’s more effective than email, but keeps critical data safe from unauthorised third parties?

This is where data rooms come into play.

What’s the deal with data rooms?

A data room serves as a digital repository which houses important company data.

From financial records to intellectual property documents, market analysis to product roadmaps, a well-curated data room has none of the limitations of traditional file-sharing methods. It offers a secure and centralised platform for stakeholders to access critical information.

“In the digital age, a well-organised and secure data room is a vital tool for founders seeking investments, partnerships, or undergoing due diligence processes,” explains Manish Balakrishnan, a technology sales leader with over two decades of experience in the tech industry.

“It streamlines information sharing, enhances security, and fosters transparency, ultimately increasing the likelihood of successful business transactions.

"By including the right documents and following best practices, founders can make the most of their data room and position their companies for growth and success."

What do investors look for in a data room?

For seasoned investors, a well-curated data room is a treasure trove. It offers a wealth of information that can make or break an investment decision.

From financial metrics to market dynamics, every piece of data holds the potential to sway investor sentiment.

“A data room is a dynamic, interactive hub showcasing a startup's journey, potential, and future plans,” explains Startup Coach, Sharn Bassi.

“It goes beyond historical data, offering real-time updates, and ensures every document paints a comprehensive picture for investors making well-informed decisions.”

Having a data room can make a positive impression on a potential investor: it gives the impression of a well-organised operation which takes data security seriously.

The alternative, where documents are sent via email request is less professional, less convenient, and less secure. And, of course, anyone who’s ever had to dig through old emails to find a specific file will know just how frustrating this mode of file sharing can be.

In short, the better your data room, the better you’ll look to potential investors - and that can only ever be a good thing!

Building the foundations of excellence

Constructing a high-quality data room is no small task; it requires meticulous attention to detail, robust security measures, and seamless collaboration capabilities. 

A good data room is built on three pillars:

  1. Security
  2. Monitoring capability
  3. Tiering 

Security is the bedrock of any data room, with stringent access controls and encryption protocols vital for safeguarding sensitive information.

Monitoring user activity can give insight into investor interest and engagement, allowing startups to tailor their outreach strategies accordingly.

Tiering data ensures that the right information is shared with the right audience. While you’ll want to share all relevant information with an investor, this doesn’t mean they're entitled to access everything!

Tiering allows you to strike a delicate balance between transparency and confidentiality.

It's more than a repository

Entrepreneur Jason Kirby says:

“We’ve heard some advocates for having no data room at all and only sending investors the exact information they ask for. We don’t recommend this either since it creates a sense of hiding information or being unorganised.

"There is a generally accepted idea that startups should have data rooms for VCs to look at. The expectation is that they are comprehensive and organised."

In an era defined by digital innovation, there are myriad tools to showcase a startup’s potential and captivate investors. 

And as the investment landscape continues to evolve, with transparency and cybersecurity taking centre stage, the role of the data room will only become more pronounced.

Your digital vault

Vestd customers can create secure data rooms to begin their investment prep. Sign up today, and you too can streamline funding rounds and instil confidence in potential investors.

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