How to Choose a Virtual Data Room for Startup Fundraising

Jul 10, 2021

7 min

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Fundraising is the backbone of any startup. That is what the development (or setback) of a business depends on. The tech market intelligence platform CB Insights claims that 29% of failures come from insufficient funding levels. Consequently, startups must go to great lengths to attract investors.

There are various guidelines and tools for finding and strengthening investor relations. However, this article highlights one of the most crucial technological aspects — virtual data room for startup fundraising.

What are a startup’s first steps toward funding?

Before embarking on the search for investors, starters should complete a few more tasks. Without this, it would be troublesome to create the impression of a result-oriented and professional team.

Define financing objectives

As a rule, business plans address financing. If this is not the case, companies cannot answer these basic questions from investors:

  • Why do you need the funds?
  • How exactly will they help?
  • How are you going to manage your money?
  • How does funding affect the success of the project?

Startup high-flyers create convincing, detailed reports for investor presentations.

Establish a budget

For startups, this is one of the most painful points. It is because they do not own historical data for forecasting. Here are some tips on things to keep in mind for a proper budget sheet.

  • Employee salaries. The average payroll for human resources is 25% for startups. Depending on the field of activity, the percentage can be higher or lower. It should take into account benefits, employee training, etc.
  • Equipment. As with human resources, the need for equipment varies. However, nearly all companies today use servers, computers, and business software. Technical support quality is essential for workflows and data security.
  • Legal assistance. Lawyers confirm the legitimacy of the idea through a business-plan study. Then, they introduce a company to potential risks and ways to mitigate them. And ultimately, legal experts register a startup as a legal entity.
  • Promotion. In the internet era, teams have unlimited advertising opportunities. The directors devote significant resources to ads, websites, and social media — broad coverage improves the chances of success.

Find an investor

If an organization wants to put its best foot forward, it should provide investors with data on the two previous points — financing and budget. Therefore, it is necessary to pay due attention to this rule.

So, here’s how to find a source of funding:

  1. Refer to the experienced. Peers can do more than give valuable advice. For example, they often recommend colleagues to the investors they worked with previously.
  2. Take advantage of Crunchbase and SeedInvest. These dedicated services help connect a founder and an investor.
  3. Ask lawyers. Attorneys can be a useful resource for advising on issues regarding investors and may share deep insights. They can also recommend startups to investors.

Make paperwork easy

Before investing, investors need to review and analyze a large amount of information. For this, directors choose a modern approach — software for business. One of them is the data room fundraising platform.

What are the benefits of data rooms? 

 Business owners and investors alike prefer using data rooms to conduct due diligence during fundraising campaigns. Below are the reasons why:

BenefitsHow they work for a startup
Proven data protectionStorage and collaboration tools are often a source of concern for users. However, fundraising data room software offers top-notch security.

That significantly strengthens the startup position, for which any leak can be fatal.
Fast but informed decisionsThe platform is available to users at any time, anywhere. This feature empowers a team and improves cooperation with investors. That is, directors set up a secure place for collaboration, staying in touch 24/7.
With everything at hand, investors make decisions faster.
Information transparencyTo maintain integrity, organizations notify investors of all changes and actions. The fact is that everyone runs the risk of financing an enterprise with pitfalls, which is why they need to be able to rely on accurate information. Those who use unreliable storage solutions suffer from poor-quality data protection.
VDR users share data confidently.
Reasonable priceA startup cannot afford expensive business purchases. Given the feature set and robustness of virtual workspaces, customers get a lot more than they pay for.

Hence, value for money is  heaven-sent for an organization.
Easy and secure remote accessUnlike other tools, a VDR makes it easy for authorized users — not for hackers and competitors.

Wherever a team member or investor logs in, sophisticated mechanisms keep workspaces secure.
Priority over competitorsA virtual data room for investors is also an advantage for comfortable cooperation. As a result, platform owners are more attracted to investing in it.

Capital providers are confident in a smooth, fast, and safe business flow.

For what purposes and solutions do startups use VDRs?

Software designers have taken into account the complexities faced by different industries. As a result, the product is suitable for all-sized businesses and deals. As for startups, they also receive support from providers throughout the entire project cycle.

Fundraising

  • The challenge is: The further cooperation goes with investors, the more information founders have to provide.
  • The solution is: As already mentioned, the goal of the service is high-quality data protection without risk. The program contains non-disclosure agreements, activity reports, and detailed access settings. All these factors help to guarantee peace of mind.

Initial public offering

  • The challenge is: The process of offering shares is cumbersome due to the involvement of multiple parties. According to some reports, there are twelve of them. For fruitful cooperation, all participants must keep in touch continuously.
  • The solution is: A virtual data room for startups that offers communication and collaboration features. Users are available online in private and group chats, or in the Q&A module. The protection mechanisms apply to this content, too. Parties can leave notes and comments directly in the documents.

Due diligence

  • The challenge is: The procedure involves the collection, accurate analysis, and audit of documents. The information gives investors an idea of the investment prospects. It is in a founder’s interest to create a good working environment.
  • The solution is: Data rooms offer tools for sorting data. The program automatically organizes documents according to the settings. An owner of the virtual spaces controls access throughout the entire procedure.

What to look for when choosing a VDR for startups?

Data rooms come in handy at every stage of fundraising, from pre-seed to IPO. Thus, work quality and the benevolence of investors depend on the choice of software.

Data rooms for startups should be:

Flexible in price

Some providers start from the following parameters in setting the cost. In this case, it will be reasonable for a founder.

  • How many projects? Since the only task of a startup at this stage is fundraising, this is a lucrative offer. The fewer projects an organization has, the lower the price.
  • How many users? Large corporations pay more for virtual workspaces. However, fundraising involves many fewer people. Therefore, it is inexpensive for a startup.
  • How much storage capacity is needed? Founders do not own a lot of data compared to other users. And in this aspect, the purchase is beneficial for them.

Perfectly safe

Protected spaces operate under international standards and with the use of modern security mechanisms.

  • Compliance with ISO / IEC 27001: 2013 means a thorough platform review by independent auditors. If the internationally recognized certificate is there, then it shows that a provider adheres to best practices to protect data.
  • 256-bit data encryption is the benchmark. It is the most reliable way since hackers will need 2 ^ 256 key combinations to break into the database. It is impossible. VDR vendors use this method for at-rest and in-transit data.
  • Two-step authentication prevents third parties from logging in. The procedure is that a specific code is required to enter the system. Only authorized persons receive it via SMS.

Branding-featured

Startup data room individual branding distinguishes a founder from others. Thus, teams gain a competitive advantage in the eyes of investors. If a user chooses this service, then:

  • the URL contains the name of the organization
  • emails include the name of the organization and logo
  • data room becomes more recognizable with specific logos and designs

How much can VDR cost for startups?

The previous section highlighted the relationship between price and startup needs. It turned out that implementing a data room is not an expensive process. Namely, there is no need for:

  • buying unlimited storage
  • inviting many users
  • working on multiple projects (only fundraising)

The price depends on these factors and the place of the provider in the market. However, the average data room costs around $99 per month.

What can a startup do to make the right choice?

Most providers allow potential users to test the tool. They usually do not limit the features in the trial version. Thus, customers evaluate the benefits to make an informed decision.