Investments in startups and growth companies must also be subjected to a thorough examination. To make this procedure simpler and secure investors and companies use virtual data rooms. In this article, we will analyze the functionality of the data room for startups.
Data room for the investor: efficient data management is required
When investing in startups, it is important to assess the investment offer correctly. All available data and information from the company are subjected to critical and questioning analysis and risk assessment. Conclusions are drawn from the answers, which are interpreted depending on the business model but also on the type of investor. For some investors or buyers, the offer is attractive or an exclusion criterion for certain reasons, for some it is not. Essential for this is the due diligence (DD), a professional (risk) analysis of a company. This form of risk assessment is part of daily business in venture capital.
Nevertheless, it must be assured that the risk assessment of such an investment offer is not to be equated with due diligence such as that carried out in large companies. In contrast to large companies, start-ups are still in a young development phase and often only have little data from months to a few years to show. When analyzing an investment in startups, many private investors do not have the same opportunities for analysis as professional investors, such as lawyers, auditors, or technical experts. Private investors can consider these points before investing in startups: team, product, business plan, unique selling point, market potential, financial planning, participation rate, network effects, use of funds, and taxation.
Preparing for and going through venture capital fundraising for the first time can be tough. During this operation, the company will need to disclose a fair amount of confidential information about the business, including all key financial, legal, and commercial documents so they should be organized and prepared ahead of time. Today it is better to do it in a secure cloud-based virtual data room.
How does it work?
The investor sends the startup a due diligence request list in which he requests all information and documents that he would like to look at. The startup then makes this information available to the investor in a virtual data room. The investor regularly commissions external service providers to check the documents. During their examination, they address any further questions to the startup as part of a so-called Q&A process. The results of the due diligence check, including any problems (so-called findings), are summarized by the investor’s service providers in a due diligence report.
What are the functions of the fundraising data room?
Digital data room has the following main functionalities:
- Full-featured routing and tools for describing scenarios for the movement of documents. It is a tool for creating models, standardizing, and optimizing all regular processing of standard documents. Once created, the scheme becomes the basis for automating and managing the execution of a chain of interrelated work by various performers.
- Data security. Data room provides access to documents strictly by the assigned user rights. Texts of documents can be additionally encrypted using passwords or digital certificates. All actions performed by the user on the document (reading, modifying, signing) are logged.
- Register of contracts, terms of deals, the status of mutual settlements under contracts, control of performance discipline upon approvals, etc. – a lot of reporting forms are already included in the data room module, and there is also a report designer with which you can configure any additional report in user mode.