Virtual data room for investors: How to organize and what to include

Even though investments were lower in 2023, totaling $49.8 billion compared to $56.1 billion in 2022, investors still need different tools to manage their deals effectively. Among them is a virtual data room — a solution that allows investors to securely organize, share, and review sensitive documents, facilitating smoother due diligence processes.

In this article, we explore how investor data rooms are beneficial for companies, how to organize and manage a data room, and how to choose the right data room solution. We also provide an investor data room checklist for preparing documents.

What is a data room for investors?

An investor data room is a secure online repository used to store and share sensitive documents between prospective investors and companies during a fundraising process. It can also be referred to as a startup data room, a fundraising data room, or simply a virtual data room.

Let’s explore a typical scenario where an investor data room is employed: 

A startup has managed to impress potential investors during the pitching process, and they seem interested in investing in the current round. 

“Congratulations. You’ve successfully attracted venture capital with your business case, your million-dollar product idea, and you have a signed term sheet. But there is still one more hurdle to overcome before investors write the check: the dreaded “due diligence” process,” says Martin Zwilling, the founder of Startup Professionals.

Indeed, every prospective investor or venture capital firm would want to know more about the company, its business model, financials, and operations to make an informed decision on the investment opportunity.

At this stage, a prospective investor or a venture capital firm often asks a company to provide them with access to business documents via a data room. Companies should expect this and be ready, as using a virtual data room during the due diligence process has become a common practice today.

Here are more reasons early-stage companies should have a data room prepared: 

• A quick start. A data room organized in advance with all the relevant information enables potential investors to start due diligence right after the pitch deck, so no time is wasted on requesting and preparing documents. 
• Investors’ confidence. The company’s readiness and proactive approach create a positive impression and provide investors with confidence that the company is dedicated to creating a transparent partnership.
• Investors’ engagement. Virtual data rooms help companies track how investors are engaging with fundraising materials and understand which documents receive the most attention. Using this information, businesses can adjust their communications to address specific concerns, increasing the likelihood of successful fundraising.

Therefore, it’s recommended to have the data room ready before any transaction or fundraising efforts kick-off.

Investor data rooms benefits

Here’s how companies can benefit from a well-organized data room.

1. Saved resources

Using a virtual data room, companies can save:

• Money. Unlike physical data rooms, virtual data rooms offer a more affordable solution by eliminating the need for physical space and associated costs like rent, utilities, and on-site staff. For instance, storing physical documents alone, on average, costs $1,400 per year — for one file cabinet.
• Time. The time-saving aspect is important, too. Accessing data online through a virtual data room only requires a few clicks, as opposed to the time-consuming process of being present in a physical data room and manually searching for documents.

2. Enhanced security

Virtual data rooms offer advanced security features, protecting sensitive information during investment deals. For example:

• Redaction functionality allows users to conceal sensitive data selectively within documents while still providing investors access to relevant information during the due diligence process. 
• Two-factor authentication is an additional layer of security that requires users to verify their identity through two independent means, typically a password and a unique code sent to a mobile device. 
• Granular document permissions allow VDR administrators to specify access levels for different users, such as viewing, editing, printing, or downloading.

These are just a few examples of how VDR providers ensure document security, and this is what differentiates them from free platforms like Google Drive or OneDrive.  Those solutions are designed for the storage and distribution of individual user files, not a company’s confidential information.  

3. Faster and more effective due diligence 

Ultimately, the key purpose of every data room for startups is to help companies and investors complete the due diligence process quickly and efficiently. Successfully conducted, it might further lead to an investment agreement — the goal both sides pursue.

Here’s what helps investors to complete due diligence faster and more efficiently:

• Advanced search. The function eliminates the time users take to look for files. Users can search keywords or apply search filters.
• Q&A section. This allows for centralized communication between the involved parties. Users can assign and answer questions, receive notifications, and attach documents to comments in one place, streamlining collaboration.
• Accessibility. The files in the data rooms can be accessed 24/7 from any device and platform, such as  Windows, Apple iOS, and Android. This accessibility ensures uninterrupted investor engagement, whether from the office, home, or during travel, speeding up due diligence. 

Assessing the need for a virtual data room

The following cases for having a VDR are for those unsure of whether they need to invest in a data room: 

1. A company is actively engaged in fundraising activities
2. A company is engaged in other complex business transactions such as mergers, acquisitions, or partnerships
3. Investor interest in a company grows
4. A company has document management challenges

The majority of VDR providers offer free trials, giving full access to their data rooms and letting prospects test the platforms themselves. This helps with the final decision on whether a startup can benefit from this solution.

How to organize and manage a virtual data room?

Find below the advice on how to organize an effective data room and what documents to upload so that investors have a streamlined and comprehensive overview of the company.

How to organize a data room: Best practices 

Follow these six recommendations to create a good data room:

1. Training sessions. An often-quoted saying in IT is that 80% of customers only use 20% of the software features. While this isn’t always the case, it certainly demonstrates a trend — users typically don’t get full value from their tools.  That’s why it’s important to train data room users and help them gain a deeper understanding of the software’s capabilities.
2. Structured folders and logical categories. A clear folder structure improves navigation and prevents confusion. For example, create top-level folders like financial documents, legal documents, and marketing materials. Within each of these folders, create subfolders for further categorization, such as invoices, contracts, and brochures.
3. Clear naming conventions. Descriptive and consistent file naming is crucial for effective data room navigation. Thus, avoid generic names like “Document1”. Instead, include details such as date, document type, and a brief description. For instance, a financial report can be named “2023_Q3_Financial_Report.pdf”.
4. Labels. Assign various labels to files for easier categorization and filtering. Label by department (legal, finance, IT), status (to do, in review, approved), or confidentiality (confidential, internal use only, public), etc.
5. Access permissions. Employ role-based permissions to ensure users access only information relevant to their roles. Be attentive when granting access, double-checking that confidential documents are shared only with the intended individuals or teams.
6. Regular updates. Periodically review and improve the folder structure, adjusting categories and labels as needed. Remove outdated files and folders. Also, update access permissions to align with any organizational changes, ensuring the deal room reflects the current state of the business.

Investor data room checklist

Preparing for investment involves several critical steps. One of them is compiling a set of documents essential for due diligence. This checklist outlines the key documents investors usually require:

• Financial documents: financial statements (profit and loss, balance sheet, cash flow), performance reports, audits, and tax returns.
• Cap tables: a cap table describing the ownership structure, equity distribution, and details of shareholders.
• Legal documents: articles of incorporation, bylaws, and any legal agreements defining the company’s structure and governance.
• Intellectual property: patents, trademarks, and copyrights.
• Market information: data on the market size, growth trajectory, competitive landscape, and competitive analysis.
• Sales and marketing materials: the sales and marketing plan, a sales deck, a probability-weighted sales pipeline, and win rates against top competitors.
• Customer data: number of current customers, customer acquisition cost, average revenue per customer, customer references.
• HR documents: employee contracts, policies, NDAs, codes of conduct, benefits, and any other HR-related documents.
• Technology documents: system architecture, software documentation, and cybersecurity protocols.
• Environmental, health, and safety documents: risk assessments, emergency response plans, safety manuals, environmental impact assessments, and compliance reports.

Tip: Avoid cluttering the data room with irrelevant documents that don’t contribute to the investor’s decision-making. For instance, outdated marketing materials, internal memos unrelated to the current business strategy, or personal correspondence don’t provide meaningful insight into the company’s current value or growth potential.

How to select the best data room for investors?

These are four key steps for choosing a data room.

1. Identify desired features

Data rooms are different. Some provide just basic functionality for data storage and sharing, while others offer advanced tools for document management and collaboration. Identifying the features that best address the company’s goals is vital. Here’s a breakdown of the most common and necessary VDR tools:

1. Access security features. About 43% of online attacks are aimed at small businesses, making data room access control paramount when choosing a VDR. Thus, prioritize platforms offering customizable permissions and role-based access levels, allowing administrators to grant and revoke access easily to documents and folders.
2. Document security features. A VDR should also offer tools that help control what users can do with the documents. For example, the fence view allows users to see only a part of a document where a cursor is hovering, preventing screenshotting. Dynamic watermarks show who viewed the file, preventing unauthorized sharing. 
3. Document management features. Features like bulk upload, drag and drop, full-text search, automatic index numbering, and labels are also important, as they streamline and save time on document organization and search.
4. Analytics features. Look for VDR platforms that provide insightful analytics, including user activity tracking, full audit trails, and real-time reporting. These features demonstrate how investors and other stakeholders interact with data, helping them identify the areas of interest or concern and adjust their fundraising strategy.

2. Consider the budget

Providers charge differently for their services. Prices range from $200 to $1000+ per month and depend on several factors, including:

1. Storage capacity. The more storage space is required, the higher the price. On average, one GB per month can cost around $500.
2. User licenses. Many providers charge on a per-user basis. The prices range between $2.50 and $120 per user per month.
3. Features. More advanced features may be available at an additional cost.
4. Duration of service. Yearly plans are often more beneficial, as providers offer discounts, on average, up to 15–20%.
5. Support and training. Additional costs may be associated with premium customer support, training sessions, or onboarding assistance.

3. Compare different solutions

The next step is data room comparison. Once finding a few providers that suit feature preferences and budget, compare them using:

1. User feedback and reviews. Leverage VDR review platforms like G2, Capterra, and Software Advice to learn what other users like and dislike about certain providers and how they rate them.
2. Demo and trial periods. Take advantage of available demos or trial periods that providers offer to test the functionality and decide which solution best suits the company’s needs. 

This thorough approach to selecting the optimal data room ensures the solution aligns with goals and enhances internal decision-making processes.

Key takeaways

• An investor data room is a secure online repository used to store and share sensitive documents during a fundraising process or other business transactions.
• Key benefits of using virtual data rooms are cost and time savings, enhanced security measures, and a streamlined due diligence process.
• To organize a data room efficiently, follow recommendations like adopting clear file naming conventions, using labels for categorization, implementing role-based access permissions for security, and conducting regular updates to maintain relevance.
• Selecting the best data room for investors involves identifying essential features, determining budget limits, and conducting a thorough comparison of available solutions based on user feedback and trials.