Startup Basics – Reasons To Not Use Virtual Data Rooms For Fundraising

Startups always have that ambitious drive to get their ideas out and to expand their brand reach and engagement. Additional funding or attracting investors would definitely help them achieve that.

An easy-to-use yet intuitive VDR package would definitely help your startup get started on your business venture. On the other hand, not all startups prefer to use virtual data rooms for fundraising because of the intricacy and sensitivity of the due diligence process in fundraising.

Not Having Much Financial or Business History

A lot of startups would make that mistake of trying to build on their profit stream than strengthening their organizational muscle strings. Fundraising at startups would require a robust mindset and technology.

The idea is that startup would naturally be just a budding business and would have less buildup information in terms of brand and financial credibility. This poses a problem especially when pitching to investors.

Startups would then have to hustle faster to get everything in order. They have to transform their entire business reputation into something more detail-oriented, organized, and meticulous in a few months’ time. You would have to follow industry standard formats in terms of proper indexing of files that contain all digital assets. This has to be in a specific order for easy and seamless viewing.

Risk of Leaking Out Sensitive Information

Not all VDRs can provide advanced security controls in keeping the highest security and compliance standards in managing sensitive data. You should therefore look for a VDR provider which has advanced keycard and biometric controls in place so that your data is protected 24/7. Th capacity to grant access is equally important to revoking access.

There would always be new investors entering the pool, so your VDR should have the capacity to add and remove certain users. The process should be automated by providing access expiration dates to every recipient. With certain VDRs that lack security controls, the risk of leaking out sensitive business or financial information is imminent.

A lot of businesses would just be able to freely access and view important and confidential information of your brand without really the intent of providing additional funding. You would generally be allowing a pool of businesses to tap into your classified or confidential information without any restrictions. This could expose your vulnerabilities to the wrong people which can be very dangerous.

What is the Role of Due Diligence To Fundraising?

Due diligence is key to getting funding or venture capital. This is an investigation that investors would conduct to dig into the financial history and reputation of a business.  This is likened to a risk assessment or checking of the potential benefits or profitability as well as the risks and liabilities of a business. This allows an investor to create a big and clear picture of whether a certain investment would provide a solid ROI or be profitable in the long run.

Investors would mostly likely look into the following:

  • Financial Status

An investor would definitely want to know whether a business has outstanding loans. Has the business over-leveraged to the point of being neck-deep in debt? Having a good credit standing would definitely impress investors while a bad credit score would put off a lot of investors because this is not a good sign especially for startups. There would still be investors willing to provide funding even if you have debt but this would be difficult at this point. You should be able to provide your investors an overview of your financial status with the following information – financial statements, budgets, balance sheets, and forecasts.

  • Contracts

Investors would always check on the contracts or agreements to see if there are no red flags or shady negotiations. The key here Is to completely transparent and straightforward so that you will have no disparity in intention and understanding of the agreement. A breach of these contracts would results to multiple and expensive lawsuits; which you may not be able to afford being a startup.

Startups would normally evade the use of virtual data rooms for fundraising because the due diligence process may be opening more doors to risks rather than opportunities. You see, fundraising is a typical sales process. Investors would of course want to check around or look into a brochure before they invest or buy in. Now, the brochure strategy for investors may not work because some of these investors may just be routinely getting into VDRs and peeking into overwhelming data without any intent to invest.

The key to getting an investment or funding for your business is to get into the first step of the sales process. You have to get their attention first without getting your entire information out. You can send information via email instead that inviting people to access your virtual data room. You can’t just throw brochures everywhere and let them figure it out themselves.

The traditional sales process may be a long route but to get a deal or funding, you first have to capture your targets and that’s when you pitch your story. The bloated and overwhelming data can be just a blur but if you are able to connect and personalize your pitch with an investor, that’s where you get your funds rolling in.

Carrie

Carrie

Carrie Ragsdale is a blessing, as her fellow writers say. She is a wonderful writer and her articles are something everybody loves. She mostly writes about nature and food.