Data rooms have seen a boom in corporate usage over the past decade. But, in our increasingly connected world, are these online platforms really essential for startups?
Is a data room really necessary for startups?
The answer seems to be a resounding “yes”.
That’s because investor data rooms are a critical instrument for the fundraising process. And, as a recent study on the reasons why startups fail has shown, lack of investment is associated with a resounding 44% of startup failure.
An organized data room helps early-stage companies convert potential investors into actual ones in many ways. An investor data room helps to:
- Streamline efforts and improve organization with data room software and automation
- Organize company documents for better transparency and an improved due diligence process
- Ensure the secure system architecture and intellectual property protection with features such as auto-redaction, fence view, and remote wipe
- Identify the lead investor and most engaged parties with real-time reporting
- Speed up the due diligence process with ready-made checklists
Best data rooms for startups
Not all data rooms are created equal, and some will offer unique benefits for startups: a mix of the right collaboration features, 1st-rate security, affordability, and the potential for scaling.
The below investor data room list shows you some of the top virtual data room solutions for startups.
|Top providers||Top features for startups|
|iDeals||8 levels of granular user access permissions|
Fence view for screenshot prevention
Multilingual live chat support 24/7
Granular access permissions
Built-in Excel and document viewer
Real-time insights on user behavior
View As other user
Video support with Zoom integration
|Merrill||Granular user and document permissions|
AI redactionSearch in 16 languages
4 levels of permissions
Built-in smart redaction
Important features of a virtual data room for startups
Certain features are key for a startup virtual data room. Among the elements to look out for, the following are some of the most important.
|Data room certifications for security||SOC-2|
|Collaboration features||Q&A section|
Secure internal messaging
|Security features||Restricted view|
|Reporting||User activity tracking |
Real-time color-coded reports
Group activity reports
Terms of access customization
Email invitations customization
|Ease of use||Mobile user interface|
Now let’s take a look at those features in greater detail.
Data room certifications for security
Sharing important files via email is risky. Just one typo in an email address, and your data might end up in the wrong hands. That is why it’s important to use a secure place such as a virtual data room for startups. Most data rooms comply with such world renowned security requirements as SOC and ISO. More in this below.
SOC-2 is a certification provided by the American Association of Certified Public Accountants, or AICPA. It ensures the VDR provider has all the proper procedures and systems in place for proper protection of data privacy and security, among other things.
ISO/IEC 27001 is an international standard for information security. A provider that’s ISO 27001-certified is guaranteed to have been tested against a variety of threats and vulnerabilities, and to have been considered reliable to deal with them.
A good virtual data room should offer the ability to ask questions about its contents, recent developments, or specific questions of interest. Advanced data rooms offer ready-made Q&A workflows, allowing to assign certain questions to experts, who are responsible for timely answering all questions.
Secure internal messaging
Speaking of security, secure messaging is another essential way to protect your sensitive data. Data room certifications such as ISO 27001 and SOC-2 tell you your investor data room is a safe space to team and investor communication.
A good support section should include a list of the most frequent questions by the data room users. This allows you to quickly find the resolution to basic issues without needing to open support tickets and potentially wait longer.
From reliable data encryption to granular access rights, and various options for restricted access or view. There’s a wide range of security features data rooms can offer to safeguard sensitive information. Taking advantage of such features helps to guarantee that you don’t become the victim of a data breach.
For some kinds of confidential or sensitive information, it’s good to have the option to share certain files with restricted access:
- View-only mode prevents users from downloading, copying, or sharing information.
- Fence view allows you to share files so that viewers can only see parts of it, as if through a fence; it ensures protection against screen capturing.
Another way of managing access, granular permissions help you limit file or folder access to certain individuals or groups. Files set to be viewed by one group only will not be accessible to persons outside of that group. This helps further protect the confidentiality of your content.
Certain data rooms help you extend your control over the content in your company space:
- Remote wipe. Thanks to it, files can be deleted even after download by a user.
- IP/time restrictions. They allow limiting access to specific files according to the user’s iP or for a certain period of time.
User activity tracking
A key feature for investor data rooms is being able to track user activity. By understanding what kinds of relevant documents investors are interacting with in their due diligence, as well as how often and for how long, you can gauge user engagement and interest and carry out a competitive analysis of potential investors.
This, in turn, allows you to single out the most interested prospective investors, allowing you to better focus your energy and resources in communicating and closing deals.
A data room for early stage companies should show you things like:
- Data room access: which users log into your investor data room most often
- What documents they view or download
- How many times they’ve logged in or viewed a file
This audit trail helps energize your early stage fundraising process; some data rooms will even generate activity and engagement reports that give you an instant overview of user engagement.
Real-time color-coded reports
A very useful, if not very common feature, it helps you understand at a glance all user interaction and activity within the data room.
Group activity reports
When interacting with several groups of users, group activity reports can come in handy, as you’re able to easily get a view of who’s been engaging with your content the most, and with what kinds of files specifically.
Customization and branding
As an aspiring startup, you’ll want to focus on creating an instantly recognizable look and feel. Branding is a key aspect of your marketing success, and carrying it through to your data room is a way to impress potential investors and show you’re dead serious — even in minor details.
The right data room will help you extend your brand to company documents, in the shape of automatic watermarks, as well as to the investor data room interface as a whole.
Terms of access customization
Another valuable feature in a virtual data room is the ability to customize users’ terms of access according to your company’s needs and specifications.
Email invitations customization
Once your data room is set up and you’re about to invite users — investors, buyers, and so on —, it’s a good idea to be able to personalize your invitation message. You can add your own tone or your startup’s greeting to it, making it more friendly or formal as the case may be.
Ease of use
Mobile user interface
You can meet a potential investor in a conference room or in the elevator, so you should always be ready. And one of the advantages of using a virtual data room is that you can access all the information via your mobile device.
Mobile compatibility in investor data rooms is a key way to speed up work and communication; it’ll help you not miss any opportunities by always being able to respond, share, and interact while on the go.
A key aspect of an organized data room is not only ensuring the safety of sensitive information, but also offering plenty of redundancy in the form of backups for all your important files, including things such as balance sheet files, financial statements, and the like.
Data rooms are an optimal way to ensure your data never gets lost or is held in a ransomware attack; a fundraising data room server can be located in different parts of the world, ensuring redundancy and speeding up file transfers to as fast as 200 Mbps.
If your investor data room allows you to choose where to host your data, you can optimize file upload and download speeds up to 10 times.
Most data rooms offer one or two other languages apart from English; according to your investors’ needs and localization, though, it can be useful to choose a data room that provides interfaces in a greater variety of languages. Some data rooms also provide user support in several languages.
How to choose a suitable data room for startups?
Decided to use a startup fundraising data room? Time to choose a suitable provider — but that can be easier said than done.
After all, the investor data room market is full of providers offering their services at various price points. Although most companies provide similar basic features, there are variables, including the number of users, storage capacity, as well as many other aspects that affect the functionality and the final pricing.
Here are a few elements that can help you choose the best investor data room for your startup.
1. Choose a pricing structure
Your budget can be a key factor when choosing a data room. So, the first thing to do is to decide which pricing plan best suits your company’s budget, ensuring you get the bang for your buck and don’t waste precious resources on features, storage, or user limits that you don’t yet need.
More on pricing below.
2. Determine your main needs
How much storage your investor data room should have, user limits, and security, collaboration, and messaging features — clearly understanding what your needs are will help you understand what data room, and what usage plan, to go for.
3. Check out reviews for the best providers
After deciding on your budget and features, you will have shortlisted your possible options. The final step is to find a data room that fits your company best based on user reviews.
Factors that influence the pricing of data rooms for startups
Data rooms vary significantly not only in cost but also in the data room pricing options made available.
Some data rooms will offer a tiered system based on storage; this allows you to pay only as much as is necessary for your current data hosting needs, while retaining the option to scale up if needed.
Typical per-storage plans start at 10 GB; more advanced plans can offer as much as 1 TB or even unlimited storage.
Number of users
Other virtual data rooms have pricing based on the number of users in your virtual data room. You pay for each new user added (typical data room pricing can range from $15 to $250 per user) or pay in user tiers — up to 5 users, up to 10 users, and so on.
Depending on the number of team members that need access to your VDR, or the number of outside users such as potential buyers or third-parties such as consultants or auditors, this may be one of the factors to consider.
Typically, per-user pricing is only a good idea if you’re planning to have very few users in your data room.
The most common kind of investor data room pricing is a monthly subscription. This can also factor in the above criteria — you can choose between different subscription plans with a greater or smaller number of users and storage space, as well as access to more advanced features which are reserved for the top tiers.
Top-tier users will also typically benefit from priority in support tickets and other help desk advantages.
Per page pricing approach
This option is usually provided by the priciest VDR companies, where the cost will vary according to the size of your capital raising campaign. Per-page pricing averages between $0.40 and $0.80. However, it’s not unheard of for virtual data rooms to charge as much as $1 per page.
Per-page pricing is a somewhat outdated model and is not usually a good idea for startups with big due diligence needs that are looking to scale, since the cost can easily get out of hand.
Benefits of using a VDR for startups
Let’s recap all the ways in which virtual data rooms can benefit an aspiring startup.
Optimize communication flows
Communication is more than just a professional phone call. It’s seeing eye to eye, having full transparency on both sides, and working together towards a common goal.
An investor data room helps you do just that by:
- Accelerating real-time conversations in a secure environment
- Facilitating the sharing of important documents
- Providing options to collect signatures, run polls or votes, etc.
- Ensuring transparency throughout
Keep full control over file sharing
Once you email your pitch deck as a PDF, you have no idea who has full access to it or where this information is used. But with a data room, things are different.
Here, you not only control who gets to view the content you shared, but you can also revoke access at any time during or after the due diligence process.
Some VDRs even offer a remote wipe option, meaning you can destroy files even after they’ve been downloaded into someone’s computer.
Keep your stored data safe
Living in a world where cyberattacks happen thousands of times every day, cybersecurity should be a top priority for companies. And a big step towards ensuring your peace of mind is leveraging VDR security.
With a virtual data room, admins can monitor and track all of the activity happening within the data room, protecting against data breaches. Users can also be required to follow best security practices, such as setting up strong passwords and activating 2-step authentication.
Most importantly, file access can be restricted to specific investors and user groups, ensuring your intellectual property and other key company documents are kept out of sight of wrongdoers.
Organize your data
A VDR for startups is a great solution for keeping and organizing any amount of company files. Your startup cap table, onboarding documents, investor rights agreements, other legal agreements and similar legal documents, financial models, co-sale agreements, articles of incorporation, financial projections, HR documents, marketing materials, past investor updates… the list goes on.
Compared to email or Google Drive, where you need to spend valuable time searching for necessary info, a good data room will provide you indexes, word searches, and filters, so you can find more data, faster.
Organization, needless to say, helps throughout the fundraising process. Both investors and startup members can access and collaborate over relevant information shared without hassles or waste of time.
Generate user analytic reports
A startup fundraising data room provides companies not only with a high level of security but also with the ability to analyze user activity. You can instantly generate reports providing you with an overview of investor interest based on their interactions with data room files.
Having a comprehensive audit trail throughout the due diligence process can be a key way to stay abreast of everything that’s going on and take the best-informed decisions for your startup.
What documents to include in your startup data room?
It’s not always straightforward which documents to upload or how to structure them in your data room. The best course to follow here is to keep in mind the current stage of due diligence and update the data room accordingly.
Here you’re trying to get potential buyers or investors to see the value in your startup. Typically, the content shared here is of a general nature: you may share a pitch deck or presentation to create interest and hopefully draw investors towards the next stage.
Once the other party has expressed serious interest — which usually is to say, after a letter of intent has been signed, — it’s time to get cracking with the more serious stuff.
Here you’ll be uploading documentation that goes into the details of your company’s work and internal functioning. Documents like:
- Corporate records, including board minutes, articles of incorporation, and so on
- Business model, including existing customers analyses, market overviews, projected earnings, and similar aspects
- Company financials, including balance sheets, financial projections, bank statements, profit and loss statements, etc.
- Cap table, which includes all data on company ownership and value of equity throughout the rounds of investment
- Legal agreements: any contracts, terms of service, NDAs, and so on
- Employee information: list of employees and their salaries and other benefits, among other info
- Intellectual property: patents, copyrights, and trademarks owned by your company
Post deal closure
A data room doesn’t become superfluous once the deal is closed; it merely changes its purpose. Now you’ll be using the data room to share sensitive documents and updates with your investors. These can include:
- Investor updates. Reports pertaining to company performance, including financials, goalposts attained, etc.
- KPI updates. You may choose to regularly share your startup metrics for success or failure in the near and short term, giving investors a clear bar for comparing and analyzing progress
- Cap table updates. The changing ownership of the company should be reflected in your reports in the data room
Are you ready for new investors?
With the help of VDR for startups, you kill two birds with one stone: organize all the essential materials you have and attract more investors.
Read more about the Fundraising process with VDR.
Besides that, you save time by having all the data one click away which also fuels the fundraising process.
To help ensure a successful result, be well prepared to find the most suitable data room for your startup that will accelerate each step and help you to manage every process.