What is a virtual data room?

A virtual data room (VDR) is an online space for keeping and sharing confidential data. 

Usually, it is a cloud depository for the storage of sensitive or confidential information with an e-catalog. Organizations and entrepreneurs mostly utilize VDRs in complex corporate processes such as financial transactions, board meetings, communication with third parties, and more.

Unlike regular file sharing services such as Google Drive or Dropbox, VDRs offer better confidentiality and have a slightly different functionality, which we’ll explore further in this post.

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Key Advantages of Virtual Data Rooms

Virtual data rooms (“VDRs”) have four key advantages that push companies to move forward: security, availability, management, and effectiveness.

Security

One advantage of VDRs is security. When using a VDR, businesses enjoy a level of data protection similar to that of established banks or even governmental institutions. It becomes possible because modern VDRs comply with GDPR, HIPAA, and other personal data security standards.

From a technical standpoint, deal room providers use key card access, AES document and transfer encryption, 256-bit password encryption, multi-factor authentication, dynamic watermarks, expiration intervals, set of firewalls, and more. Such a vast range of precautions ensures the highest level of security.

Availability

Another advantage of VDRs is availability. A deal room is available and easily accessible to all the participants who need to be involved in the process or transaction.

It is also easy to use thanks to friendly and intuitive user interfaces, which mean no specific technical equipment or an expert are required to install and run the solution.

A VDR room provides the common and practical features needed to efficiently complete tasks like file drag-and-drop, advanced search, document versioning, undo options, etc. 

Management 

Yet another advantage of a VDR is management. A designated administrator is responsible for managing the pages. Management includes monitoring data and the activities of those who are given access to the room.

As soon as admins upload a file or a document, they select the list of people who can access the file. The admin may allow some of the team to make changes within the document, while making the file invisible to others.

Documents in VDRs also have expiration dates. Managers set the period during which the documents are available. No one can download or view the documents after their expiration date. Setting an expiration period is a foolproof way to manage data accessibility.

To prevent human error, VDRs have a “view as” function where an administrator can view workspaces through the eyes of any user group or individual.

Effectiveness

With the introduction of VDR, work process and cooperation in the company improve.

Before a VDR purchase, data protection was a stressor and the problem was seemingly insoluble. Directors opted for mediocre security practices and some risked their credibility and reputation using regular file hosting services.

Prior to the VDR, paperwork took up a lot of workers’ time and energy as physical repositories did not have features such as search, automatic update, and data collaboration. 

By utilizing a VDR, deals get fast tracked as all parties involved — lawyers, consultants, and accountants — are able to access the necessary documents all at once at all stages of the negotiation. With the VDR, security of data is no longer an issue for the company as the responsibility is now shifted to the service provider. Built-in artificial intelligence also automates various processes, saving time. 

Any deal is possible, no matter where the parties are located. VDRs create a safe meeting place where parties involved can meet, view data, and add their electronic signature quickly, in real-time.

Top 10 Use Cases of Virtual Data Rooms

Historically, the use of VDRs has had dozens of purposes. Below are use cases demonstrating the outstanding applicability of VDRs.

1. M&A due diligence 

In essence, due diligence in merging and acquisition is a complex process requiring data collection, thorough research, and review of materials.

In all these processes, participants actively use VDRs to avoid turning the final phase of M&A transactions into an exhaustively protracted routine as well as to ensure security. Even if a deal is not closed, it is possible to terminate data room access.

2. Audit

Frequently, this procedure entails the involvement of third-party professionals, which typically means that outsiders are going to have access to financial documentation, corporate records, and other confidential information. 

By using a virtual data room, users can prepare and share all the needed folders, while knowing that every bit of information is secured and cannot be corrupted or stolen. 

What’s more, the whole workflow becomes smooth and quick as auditors receive notifications about uploads and updates instantly; they can request, comment, and clarify everything needed at once. 

3. Fundraising

Attracting and convincing investors is often a challenge.

This process usually entails getting ready for many rounds of negotiations which need to be backed up with different kinds of reports, financial statements and customer references, among hundreds of other documents. Further, new files may need to be found and shared during the session.

Thanks to the existence of virtual data rooms, the whole process becomes less stressful and more productive. In addition, both sides of talks can enjoy a required level of process control.

4. Regulatory compliance

Compliance with regulatory laws help companies meet the expectations of governmental organizations, external firms and potential or current business partners.

Usually, documents like regulatory reports and checklists are used to check if the company is compliant with necessary standards and rules. VDRs help to seamlessly import all critical information into checklists and fill regulatory reporting forms at ease.

5. Litigation

Legal firms are regularly involved in processing and sharing large amounts of confidential records. Data rooms add convenience to that process.

Litigation teams and clients can establish an applicable channel of communication in a data room. Optionally, this channel can be expanded to allow external experts or other third parties to enter the litigation process.

The ability to process large amounts of documents and categorize them makes a VDR a beneficial tool for law firms.

6. Initial Public Offering (IPO)

When an enterprise decides to go public, it means exposure to new regulations. It also entails sharing a lot of specific information with shareholders and institutions.

This translates into many steps and rounds of discussion in which sensitive files may be used. To safely facilitate this process, businesses can employ virtual data rooms to ensure security and quick file share.

7. Procurement projects

Both public and private agencies may participate in procurement projects. Procurement managers often use request for proposal (RPF) templates and request specific information (RFI).

In both scenarios, VDRs help to keep all the project materials such as bidding instructions and procurement protocols in one place while initiating a Q&A session for managers and bidders.

8. Strategic partnership

Strategic partnerships are formalized, which implies the use of contracts and legal agreements.

Before signing documents, both sides need to be transparent regarding their corporate records. This is accomplished by sharing all the needed data to ensure mutual trust and facilitate negotiations. A VDR makes this process secure, quick, and opens the door to accessibility from anywhere.

If a partnership happens to fall short, access to the data room can be restricted immediately.

9. Reporting 

Reporting is a widespread and varied corporate activity, which requires a tailored level of transparency regarding confidential data.

Usually firms provide reports for limited partners and investors to share company stats. With the VDR, they can gather necessary statistics for a report and set group or individual access for other users without risking the exposure of confidential data. VDRs can also help with creating templates for regularly required reports.

10. Board meetings

As remote work gains momentum, board meetings involving members living in different cities, states or even countries has become a common phenomenon.

This calls for a safe and modern solution like VDRs that can ensure secure and fast communication through classified meetings, as well as the regular receipt of updated corporate records.

Who Uses Virtual Data Rooms?

Virtual data rooms are helpful for any technology-based industry or company role. But there are six fields of activity in which deal rooms are already essential.

Corporate

Commercial players obtain a large number of financial records, departmental files and employee information. In other words, intellectual property that must be protected.

Thanks to VDRs, corporations can accelerate fundraising or IPO, establish Q&A sessions during financial audits, protect information during M&A due diligence, and streamline various stages of procurement.

In a corporate setting, the data room can easily become a tool of choice to house confidential data for inner-company use.

Investment Banking 

Investment bankers usually utilize online deal rooms for M&A activities, IPOs and strategic partnerships as these rooms ensure stable and safe transactions and are easy to use.

Private Equity

With the help of deal rooms, PE associates and principals participate in buyout or exit negotiations, sell-side due diligence, investor communication, partnership arrangement and reporting, fundraising activities, and more.

Legal Segment

To maintain a high level of service, law firms should meet their client’s requirements regarding responsiveness and accessibility. Virtual deal rooms can help lawyers do both.

In the legal field, data rooms are used for M&A, IPO, RPFs, RPIs, and bankruptcy.

Life Sciences

The life science industry is rapidly evolving. Besides, biotech companies, medical device producers and pharmaceutical firms often collaborate with enterprises. That is why researchers, engineers, and executives use deal rooms to protect shared intellectual property during fundraising, licensing, or discussing clinical trials with contract research organizations.

Energy Industry

The energy industry faces communication challenges since many remote parties need to be connected. The typical implementation of VDRs in this industry includes fundraising and financial negotiations, joint ventures, strategic partnerships, RFPs and bidding, tax equity investing, environmental audits, company monitoring, reporting, and more.

For sensitive data transactions and discussions, representatives of energy segments utilize online data rooms.

Successful Launching of Virtual Data Rooms 

Before the implementation and exploitation of VDRs, every new user must follow two fundamental rules:

Choose a trusted VDR provider 

Before partnering with a provider, it’s essential to evaluate all its offerings. For example, many companies have annual subscriptions, free trials, fees for the number of files uploaded, or other options.

Another crucial point is the presence of a 24/7 responsive customer support or customer care team. A credible VDR provider has a website with contacts, “about us” page, partners’ feedback, and all the software features explained. It’s better to check independent reviews and comments about the product available on peer-to-peer review websites rather than the provider’s site.

Plan and prepare 

Simply purchasing an online room does not mean it’s ready to be used. Users will need to set up all the features they need on their own. The good news is that doing this is a piece of cake. 

1. Document preparation. It’s essential to start with the categorization of files and customization of permission to folders. 
2. Team invitation. The next step would be to determine who will get access to the deal room and to what files in particular. 
3. User controls. Setting roles and responsibilities clearly is a must, too: each member of the process must know what they can and cannot do. 

When everything is complete, an administrator should double-check the set up. One way to do this is to use the “view as” function to see what every user can do. To maximize the security of VDRs, it is normal to ask for signed agreements like NDAs before entering the room. 

Final Highlights

VDRs are convenient, time- and cost-saving alternatives to physical data rooms. While modern deal rooms may have various sets of options and structures, their biggest advantages still lie in their security and availability. Experts of different levels and from different industries choose VDRs to manage and share copyright data, intellectual property, and other sensitive files with trusted partners. 

When choosing a VDR provider, it’s crucial to do your research. Checking the provider’s offerings and pricing, as well as third-party reviews may be a good step towards making the right choice. Once everything is set up, VDRs become an indispensable tool for secure and fast communication.