Data Room Best Practices, According to LPs
As you develop your data room, it’s important to keep the following principles in mind:
The LP diligence process is a combination of art and science.
Your data room needs to speak to both your qualitative and quantitative strengths to shine. “I’ve rarely seen a truly differentiated investing thesis,” says Erik Sebusch, Partner in the Mercer Alternatives Group and the Global Strategy Leader for the Firm’s Venture Capital and Growth Equity investment practice, which met with more than 1,400 managers last year. “I look for a combination of passion, conviction, and portfolio construction that all resonates with each other. Specifically, I’m looking at alignment, cash GP commitment, vesting schedule, value add, and your sourcing advantage.”
Each LP is different.
The diligence process varies dramatically for a family office and an endowment, so it’s best to be prepared for anything. Some may request all these documents, and some may only need a subset. We recommend that you put together a comprehensive version on a virtual data room platform, plus a downloadable set for LPs with access or security constraints. Many LPs have small teams and limited bandwidth, so consider creating a smooth, user-friendly experience across the board.
Erik Sebusch offers this tip: “If you’re planning to share sensitive company-level data with some LPs but not others, you can start by sharing a data room table of contents and ask each LP to request the specific items they’d like to see instead of sharing the full set.”
Put your best foot forward.
Daniel Dehrey, a managing director on SVB’s Venture Capital Relationship Management team, recommends that first-time fund managers think about their data room materials like a waterfall. If you have outstanding numbers (e.g., a 10x angel portfolio), lead with the numbers. If you only have good numbers (e.g., a 3x multiple), you may still need to provide additional qualitative context to entice LPs. If you don’t have much of an established track record yet, then consider creating a strong story that demonstrates why LPs should take a chance on you.
Be transparent and thoughtful about any gaps.
LPs understand that first-time managers may not be able to provide all the details they might prefer to see for some items. Nevertheless, you should strive to be as open and detailed as possible to pre-empt common questions. This type of clear communication can help you build trust and credibility with LPs from the beginning. You may also reduce the potential for friction in your future diligence process.
Set yourself up for success.
Many of the data room documents may require legal review and input. Work closely with your fund counsel to ensure you’re providing accurate and industry standard information. Some documents, like your track record, may also require approval from your prior fund to validate your role in the company.
The bar is higher for second funds.
If this is not your first fund, in addition to the nine key components, you should also be prepared to include and speak to components such as:
- Audited financial returns
- Examples of prior capital call and distribution notices
- Compliance manual
- ESG and DEI policies
- Valuation policies
- Business continuity planning
Think about your data room materials like a waterfall. If you have outstanding numbers (e.g., a 10x angel portfolio), lead with the numbers. If you only have good numbers (e.g., a 3x multiple), you may still need to provide additional qualitative context to entice LPs. If you don’t have much of an established track record yet, then consider creating a strong story that demonstrates why LPs should take a chance on you.
Read About The Next Component:
Fundraising Pitch Deck
One of the main qualitative documents LPs may use to vet your fund. A compelling fundraising pitch deck entices an LP to review the rest of your data room.
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The nine key data room components LPs need from emerging managers