What exactly is a data room?
Are you looking to set up a data room, maybe ahead of an investment round or acquisition but not sure what exactly it is, why it’s important and what should be stored in it?
A data room is the modern equivalent of a file room of your key business documents and is stored in the cloud. It securely stores your documents ahead of going through an investment round and required due diligence and is a single location to speed up the due diligence and investment, or M&A process.
But how do you build a data room and when should you start?
Building your data room
At its simplest level, you can build a data room in Dropbox, Google or OneDrive but there are also specific data room providers (web applications) that offer more functionality than just document storage and structure.
A data room is an online repository of documents, typically utilised in various types of business transactions such as mergers and acquisitions, initial public offerings (IPO) and fundraising. It’s a secure and confidential virtual space where different parties can access, review, and share due diligence materials such as financial records, legal agreements, contracts, intellectual property documentation, and other sensitive information.
A data room is a more efficient and convenient way to store and share data compared to traditional methods such as mailing or printing documents. Data rooms provide robust security features to limit access to specific users, monitor activities, add watermarks and prevent data breaches. Overall, data rooms have become an essential tool for facilitating complex business transactions in today's digital world.
Ulyana Shtybel, PhD, co-founder and CEO of Quoroom, a data room solution, offered her perspective:
‘When a VC fund submits a complete list of required documents to a business that are necessary for due diligence, those business often have real issues collecting and organising those documents as they’re stored in so many different places. If they stored all corporate documents in one data room from the beginning ahead of funding rounds, the process would be streamlined. But unfortunately, companies don't do it unless they is a requirement or later on when the process becomes more complicated.’
Such cloud solutions offer templates, create ways to manage and sort your files easier, offering multi-user access and ways to communicate to those who have access along with permission settings. Additionally, they offer bespoke analytics and data tracking, even watermarking to downloaded documents as well as providing a cyber-secure environment. By storing your data in this way, you offer external parties, potential investors for example, clear insight to your business and access to your data.
There are many data room storage providers, like Quoroom, iDeals, DataSend or Docsend for example, so do your research to see which one suits the needs of your business best.
Why is a data room important?
A potential investor who sees an organised and comprehensive data room will tend to look at the business in a more favourable light. It’s likely to make the investor feel there won’t be any hidden surprises.
A poor data room, or not having one at all, will likely slow the process down and potentially cause a loss of trust between external parties and you, and it could affect your valuation potentially.
flinder Portfolio CFO Dave Eaton shared a story around the importance of not only data rooms but data room management and organisation:
‘With a previous client, we received an acquisition offer from a large, acquisitive business with an internal transaction team and a well-established system for running their due diligence processes. They had their own data room software and a prepopulated template of requests within the software for us to complete and all looked good on the face of it. However, the challenge we had was that we were a seven-entity group and their software had no provision to categorise any of the responses by our group entities or create subcategories within the responses.
For an example of the complexity, one of the requests was for payroll filings for the last three years. It sounded simple enough but with seven entities each with monthly filings. We ended up dropping in over 250 documents into that one question. Having been told by the acquirors that responses weren’t going in quick enough we were soon told that dropping 250 documents into one response was far too much. That was when it was clear that the data room was becoming completely unmanageable quite quickly. The other challenge, from an internal perspective, was that it was really hard to determine if something had been dealt with as there wasn’t one owner of it nor did anyone have the ability to tick off a response for any individual entity.
My job was to drive the whole due diligence, maintain momentum and manage contributors from seven jurisdictions who had no ability to tick off tasks within their system unless 100% complete. It was impossible to track progress and understand where the blockers were. So, what we did was create a SharePoint mega folder structure and a list for every entity as an export from their system, breaking each section down by category. More importantly, we created a view that allowed us to see progress for each jurisdiction and each section. On our daily check-in calls, I could easily see where the gaps were, deal with issues and make sure the process moved forward. This was just not possible with the software we were originally asked to use. This new alternative method was a must and ultimately much appreciated by the acquirors and led to a much quicker due diligence process.
Being organised and finding a format and system of checking tasks off as well as a summary page to tell everyone where we were at during the process at a snapshot was key. It was an enormous undertaking but a very good exercise and learning experience.’
What’s stored in a data room?
A data room doesn’t need to contain every detail of your business. There’s no need to over-share so be strict with what you put in a data room. A disorganised, cluttered and cumbersome data room could work against you so take time and get it right.
These are typical examples of what to include across various business areas:
- Company -be sure to include your Confidential Information Memorandum (CIM) as well as the detail of your Board structure so investors have full understanding of both.
- Operations - the operations of your business, including Board meeting minutes, milestones, key customer contracts or terms of business and key supplier contracts are essential in order to give context and history to your business journey.
- People - investors want to see employment contracts, staff handbooks, understand who the key employees are in the business as well as current team structure, understand the EMI options schemes, along with future hiring plans and team structures.
- Technology - your tech stack is another important component to share with future investors.
- Financial - potential investors will want to see all monthly management accounts (including P&L, balance sheet and historic cashflows) annual accounts (audited if applicable), forecast model with any marketing plans/strategies and any current trading updates.
- Legal - include your articles of association, any intellectual property you have registered (trademarks, patents or other IP) as well as your cap table - this is an important document and one that your potential investor may look at first. A cap table breaks down who owns the company and to what percentage. Be sure to have a clear cap table to help smooth the deal process with your potential investors.
Your business and your investment process and any deals with potential investors will be unique so there may be additional documents needed for your data room.
Final word on data rooms
A data room will help organise documents investors need to review, and store them in a secure place, while offering benefits such as access security and defined templates specified to your needs. Whether you’re preparing for a potential investor, an exit or acquisition, a data room could be the right next step to get you ready.