I’ve been funding startups for 9 years, and I’ve found that the list of documents we need to see from founders during the diligence process has changed over time. Earlier in my career, I was working with a long list of documents that proved to be too unwieldy: it can be difficult for founders to dig up every document that might be useful, and I grew concerned that a very involved diligence process would hinder potential deals.
These days, I strike a middle ground in the diligence process: on the one hand, I need to be a good fiduciary to my LPs by getting them enough relevant information about the companies we’re funding. On the other hand, I want to be a good partner to founders and run a strong process that doesn’t overburden them with requests. Here's the full list of documents we typically require and that I think all founders should put in their data rooms:
Financial statements and annual projections
Financial documents are among the first files I look for in a data room. Founders should include historical profit-and-loss statements since inception as well as a year-to-date statement if it’s the middle of the year. I also need to see the company’s most recent balance sheet.
Financial projections are also really important. Some VCs don’t think pre-seed and seed companies should be doing financial models, but I think that founders who deeply understand their business will naturally want to spend the time on preparing a financial model. Projections also help me learn how a founder thinks.
Companies at the pre-seed stage should show 3 years of annual projections, and companies at the seed stage should show 5 years. These are fairly basic models that include revenue by segment, cost of sales, expenses, and EBITDA (a proxy for cash burn). If you have a couple lines of business, you should break them out and be sure to also show the cost of sales by segment. Expenses should cover marketing and sales; general and administrative costs; and research and development. Finally, I want to see how much capital will be needed over the next few years to get to $25M+ in revenue.
At the end of the day, financial projections help me understand whether they’ve thought about the basic elements of their business. For example, how many salespeople are required to bring in the expected number of customers each year? Is enough being spent on R&D? Are gross margins reasonable? Founders should show me that they’ve thought meaningfully about these and other aspects specific to their business.
List of references
References are another tool we use to learn about the founders we work with and to determine how customers perceive the problem being solved.
Founders should aim to include a range of individuals in their lists:
- Key members of the management team
- 1-2 customers
- 1-2 current investors (if any)
- Advisors
- Other people who know you well and who can strengthen the reason to believe in the business
The best references tend to be existing customers, advisors, current investors, and current key team members. (As an aside, in addition to references that founders include in their data rooms, I also typically contact other individuals in my network to get their feedback.) It’s important that when the founder puts together the list of references, they select people who understand their business, who they trust, and who will say good things about the company. Founders should have a crystal-clear understanding of who’s going on their lists and a good sense of what those people will say.
One way to build a reference list is by including the contact details (email addresses and phone numbers) of relevant individuals. However, I suggest founders only share names, affiliations, and LinkedIn profiles of references and offer to provide contact details upon request. At any point in time, a founder might have 10 or 20 people going through their data room; if they’re all contacting the same references then people will get frustrated!
You may not want every investor contacting your highest-profile or best customers. Instead, a good strategy is to have your lead investor speak to these customer references, write up notes, and then share those in the data room. This way, other investors can read the notes and won’t have to bother certain customers.
A good fundraising data room can set you apart
It should only take a few hours to put a data room together at the beginning of a fundraise. But this doesn’t mean you should take the process lightly. On the contrary, founders should aim to create the best possible data room which can help you stand out from the crowd and impress investors.
- Aim for 4-7 sections in your data room — you don’t want to overwhelm investors or steer them away from the most pertinent information they need to make funding decisions.
- Include a folder for each of these sections with straightforward naming to allow investors to see at a glance exactly what documents are included and where they’re located.
- Use a data room provider such as DocSend that allows you to keep information up to date and track what investors are reviewing.
Other documents to consider
While the above documents are “must haves” for your data room, you might also want to opt for thoroughness and share other relevant information. To get my full list of documents to consider including in your data room, here's the full blog post.
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