Build an effective data room with 5 key documents

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In an increasingly competitive venture capital environment, emerging fund managers need an effective way to stand out and close their funds. If your venture firm is raising your first or second fund, you’ve likely already built your network of prospective limited partners (LPs), generated pitch materials, refined your story, chosen a law firm, and selected your fund administrator. But, an unsung hero of the fundraising process is the data room. 

The demand from institutional investors for access to the venture capital asset class continues to rise. According to a 2020 report from Preqin, over three-quarters of institutional investors will maintain or increase their commitments to alternative assets this year. On the supply side of the market, venture capital investors collectively closed 267 funds and raised more than $60 billion in the first half of 2020, according to a Q2 Pitchbook report. Meanwhile, emerging managers and small funds raising less than $50 million raised a total of only $3 billion during this period. 

Despite the current numbers, over 60% of family offices surveyed by Silicon Valley Bank believe the highest returns in the next decade will come from emerging managers instead of established firms.

How can emerging managers compete? 

It comes down to a solid fundraising strategy. Your prospective LPs need as much information about a fund as possible—and a data room can help you tell your fund’s story more effectively. Not only can a quality data room demonstrate your professionalism and save LPs time, but it also helps you successfully move prospects through the funnel and get existing LPs to continue investing.

We’ve put together our framework for building a data room that showcases your team and your fund’s potential. Focus on the following three factors when building out your data room: strategy, storytelling, and standardization.

Strategy 

Without support or a clear direction, a data room is just a series of documents. Before you release it:

  • Create two different versions of your data room: one with general information and one that includes more proprietary information to stage-gate your prospective limited partners’ access to information. 
  • Ensure your previous firms and/or co-investors will verify your investment track record. 
  • Reach out to the companies you’ve invested in to ensure they’re ready to discuss your role as an investor. 

Storytelling

Your data room is an opportunity to control the story surrounding your fund. Make sure you:

  • Describe important aspects of your firm’s history, including why you formed the firm and your partnership, investment thesis, portfolio construction, investments, and portfolio company support.
  • Provide context for each data point you include. Don’t simply provide a spreadsheet of your investments. Instead, contextualize which investments are outperforming, which are neutral, and which need additional support.  
  • Highlight your accomplishments and any challenges you’ve overcome individually and as a team. LPs want to understand details about who you are as much as what you’ll do. 

Standardization 

A good data room should leverage industry-accepted templates and documents whenever possible. Standardization ensures your data room is aligned to industry expectations and easy to read. To make that happen:

  • Embrace industry-accepted templates used by the LP community, including the Institutional Limited Partners Association (ILPA) due diligence questionnaire template.
  • Always run your data room materials by your fund lawyer to ensure you’re following industry protocols. 

What to include in your data room

Here are five items to prioritize:

1. Pitch deck

A pitch deck provides an overview of your fund and gives prospective LPs a better idea of what to expect when investing with you. Your pitch deck should be digestible—between 5-10 slides—and explain the following: 

  • People: Who’s on your team? What are their backgrounds? 
  • Performance: What’s your investment strategy? How has your fund performed so far? If you’re a first-time fund, how have the individual investments of your team members performed?
  • Company or individual case studies: What are your strongest examples of success? 
  • A summary slide: Consider including a single multipurpose slide that has an overview of your team, new fund, investment strategy, total portfolio companies, key co-investors, and key LPs if applicable. This slide can come in handy, especially if you don’t have time to show LPs the entire deck.

Remember: your pitch deck is a chance to differentiate your fund. A potential investor should walk away knowing what your qualifications are, what makes your fund unique, and how they’ll benefit from investing.

Download our free VC pitch deck template

Build an effective data room with 5 key documents 1


The VC pitch deck template was developed in partnership with Kauffman Fellows.

2. Track record 

Before they invest in your fund, LPs will want to understand your investment track record. Even if you do not have an existing investment track record, be prepared to show the portfolio construction of the fund. 

When presenting your track record, aim to be upfront, clear, and thorough. You don’t want to send prospective investors on a fact-finding mission. Your track record should show the details and performance of your investments at the company-level, as well as the performance of your fund. 

Show the value of your unrealized investments by including your co-investors, your ownership of each investment, multiple on invested capital, the current value of the company, and the value of your holdings. If you’re raising your first fund, highlight angel deals, SPVs, or deals from your prior firm you can reference. Overall, your investment track record and portfolio construction model needs to tell a story that aligns with your investment thesis.

3. Audited returns

Audited tax returns give prospective LPs insight into your firm’s finances. By looking at your fund’s tax returns, a potential investor can see your profits and losses, assets and liabilities, cash flow, operating expenses, and liquidity. 

If you don’t yet have audited financials, it’s still a good idea to speak to the subject. Include your current financials, then work on explaining how your firm plans on addressing the need to audit. For example, you may need to get an ASC 820 valuation to determine the fair market value of your investments. 

Carta can help. When you use our self-service ASC 820 valuations tool, we’ll assign you an experienced analyst to help you make sense of the results. 

4. Due diligence questionnaire

A due diligence questionnaire (DDQ) gives investors answers to frequently asked questions about your fund. The information included in the DDQ will vary depending on your fund, but in general it’s helpful to describe your fund’s journey, explain your investment objectives, and disclose any risks—internal or external—your fund faces. 

Answering such a long list of questions about yourself and your work can be tedious, but when a prospective LP starts their due diligence, you’ll be ahead of the game. You will have developed a new asset for your fundraising process in the form of an index of information for investors.

ILPA has a great DDQ template you can use as a starting point, and it’s also a good idea to ask your lawyer what to include. 

5. Previous investment memos

To round out your data room, consider including your team’s previous investment memos. Even if you’re investing in the fund together for the first time, prospective LPs will be curious about your approach to underwriting a deal. 

You may even want to include a deal attribution analysis for each of your fund managers. These analyses, which measure the performance of certain portfolios, can help reassure LPs and demonstrate your team’s expertise. 

Fundraise with Carta

Fundraising as an emerging manager takes time, strategy, and paperwork. Fortunately, a comprehensive, accessible data room can help you distinguish yourself and land investments easier. Instead of sharing your data room through email, try using an online hosting platform. If you’re raising a new fund, you can get a free, secure data room from Carta.

With every item in one location, your prospective LPs won’t have to dig through their inboxes to read documents or forward attachments to their attorneys. Plus, managing a data room on Carta is easy. As a fund manager, you can customize your data room controls, track who views the data room, and enable or disable settings to allow downloads, require NDAs, or watermark documents.

Carta also offers pre-close services and fund administration solutions so you can close deals faster and with less hassle. If you need to build a new data room, fill out this form and we’ll reach out to schedule a demo. 

DISCLOSURE: This communication is on behalf of Carta Investor Services, Inc. (“Carta”). This communication is not to be construed as legal, financial, accounting or tax advice and is for informational purposes only. This communication is not intended as a recommendation, offer or solicitation for the purchase or sale of any security. Carta does not assume any liability for reliance on the information provided herein.

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