Startup founders and employees often get starry-eyed at the prospect of investor funding, and there’s little wonder why. Venture capital means you’re getting a product or service you and your team worked hard on and are passionate about to the market; you can expand marketing and R&D and get an oft-needed influx of cash. These are all welcome additions from investors.
But don’t let the excitement of planning how to use venture capital obscure your immediate target goal: getting the funding in the first place. The process involved in third-party investment funding is long and can be difficult for inexperienced people. And, unfortunately, the nuts-and-bolt details of securing funding aren’t that exciting to put together. One misstep in pitch documentation or follow-through can mean the difference between success and failure.
This is where investment packaging and data rooms come into play. Both are essential elements for startup founders soliciting venture capital.
What’s an Investment Package?
Investment packaging is the core of your plan. In short, it’s a comprehensive set (package) of needed documentation and deliverables that are must-have products when you’re finding funding. Not having one or more components of an investment package will likely mean your pitch won’t even get in front of an investment team.
Luckily, the core components of an investment package are standard across industries. External firms are also available to help put a package together for those founders finding themselves with precious little of the most valuable capital of all - time!
Your pitch deck is the soul of your venture capital adventure. As a living document, you should never be satisfied with the deck; you must always seek to improve it. Often, the pitch deck will have to speak for you, and prospective investors need to be able to get excited and informed from the deck alone.
Because the pitch deck must be able to speak in your absence, you will need to ensure it has all the answers to the most fundamental investor questions:
- Unique selling proposition (USP): the “so what,” the USP is the deck’s equivalent of an elevator pitch. The USP needs to be concise, coherent, and comprehensive while also getting the reader excited. What sets you apart from the competition, and why is your startup a worthy investment?
- Purpose: an opportunity to expand upon the USP, the purpose dives into the “why” behind the “what” of your company. What are the mission and driving forces behind your company? What problem does your startup solve?
- Market size, competition, and products: Including these shows that you have a viable service or product to sell to an existing customer base and how saturated the market you’re serving is. More importantly, it shows investors that you’ve done your homework and due diligence in assessing the playing field.
- Team: This is your chance to put faces to names when you aren’t in the same room. You should highlight essential experience and credentials, educational or otherwise, while also humanizing yourself. Look like the kind of founder and team investors want to work alongside.
- (Brief) financials: While your complete financial modeling and projections must be available, including critical metrics in the pitch deck is a chance to highlight the most compelling ratios or statistics to draw investor interest further.
And in addition to ensuring your pitch deck has all the pertinent information, it also needs to be sleek, attractive, and visually compelling. Flow, graphics, and writing style communicate your personality and professionalism, so the deck’s appearance must be tight and clean.
Business plans are a way to get your vision out of your head and onto paper and serve as the guiding light to steer your organization forward into the future. You likely already have a business plan if your startup is slightly past the conceptual phase. If not, you need one.
They must also be realistic, with clear and actionable steps coupled with quantifiable measures of success as milestones to gauge periodic progress.
Any time you solicit funding, whether debt from creditors or equity stake from venture capital, the other party will need your business plan. Both equity and debt financing represent a risk to the other party, and the business plan must show them you’ve anticipated risk, mitigated it, and ultimately have a path to profitability or another measure of success.
Financial models show that you’ve put thought and planning into the financial management undergirding your business plan. The financial model must be practical and predictive to the greatest extent possible.
Since they’re crucial to fundraising, your financial models should show when cash infusions are necessary along your journey, where you allocate that capital, and how it will fuel growth.
Valuations are often the most challenging part of an investment package for startup founders to generate themselves, so they often get outside help. As much art as science, valuation is nuanced and can be found in many ways.
More importantly, the end number needs to be defendable to investors because the valuation is the bargaining chip driving the total amount of funding you get. This is why several valuation methods are vital; investors or creditors may have different methodological preferences, and the technique must justify your final number.
Finally, the investment teaser serves as an executive summary of the entire package. More than a USP but less than a business plan, the teaser is typically a one-page document with all the relevant information an investor needs to know before considering whether the time investment in getting to know your startup is worth it.
An investment teaser alone is often the determinant of whether the prospective investor even looks at the rest of the package, so a quality teaser is vital.
Virtual Data Room
Now that you’ve got the investment package, how do you physically deliver it to an investor?
In today’s age of digitization and globalization, mailing or delivering a hard-copy package is impractical and, for many venture capital firms, not desired. Instead, you’ll need a one-stop shop for all package components in an accessible, well-formatted index.
This is why data rooms are essential.
Data rooms are, at their core, online repositories of the investment package deliverables and any backup documentation investors might need. Although many prefer a more secure system, the package can be stored on any cloud-based or similar filesharing services like Dropbox or Google Drive.
For some, having a public-facing data room available with all proprietary or sensitive data scrubbed and a more secure, private data room may be helpful. Doing so will let you send the public room to many investors without risking leaks or data loss; the private room with the full details can be shared after investors express interest.
A quality data room makes the investor’s job easier, not harder. This means it must be well-laid out, with all files named in an intuitive and standard way that makes navigation easy. The investor’s most valuable asset is his time, so they likely won’t waste it searching through a batch of misnamed or disorganized files.
It’s a good practice to have the investment package documents at the top of a data room and easily visible, with backup documentation in subfolders that are also clearly labeled. Remember, the data room is also for you and your fellow founders, so having a comprehensive compilation can be very helpful as you move forward as a firm.
A few, but not all, additional components that should be included in a data room are:
- Company administrative documents like articles of incorporation agreements.
- Board materials like meeting notes and minutes.
- Past financials and forward-looking pro forma projections.
- Draft term sheet; this will give investors an idea of your term expectations before committing to negotiations.
- Full-depth market research to supplement the findings you present.
- Sales data and sample marketing materials.
- Any intellectual property or patent filings.
Again, this is a very brief sample and by no means an exhaustive list. The great thing about data rooms is that they’re virtually limitless in scope. You can include far more documentation and data than you ever could in a physical prospectus or investment package.
A quality data room will save time during actual pitching to investors. They will be more familiar with your startup than they would be and can quickly answer some basic fundamental questions through the data room. The caveat is that the more data you have, the greater the likelihood is disarray and disorganization. For most, it’s best to have external help managing and organizing the data room. If nothing else, they can be an unbiased observer to look at it through the investors’ eyes.