A virtual data room (VDR) is an online place 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 such complex corporate processes 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 talk about further.
Virtual data rooms (“VDRs”) have four key advantages that push companies to move forward: security, availability, management, and effectiveness.
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.
Another advantage of VDRs is availability. A deal room is easy to use thanks to friendly and intuitive user interfaces. The latter provide all the common and practical features like drag-and-drop of files, advanced search, document versioning, undo options, etc.
Moreover, no specific technical equipment or an expert are required to install and run the solution. The rooms are available and easily accessible to all the participants who need to be involved in the process or transaction.
Yet another advantage of a VDR is management. There will be a designated administrator responsible for managing the pages. Management includes monitoring data, activities, and persons engaged.
As soon as admins upload a file or a document, they select the list of people who can access these files. The admin may allow some of the team to change it, while making the document invisible for 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 even if somebody tries to download it following the expiration period.
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.
With the introduction of VDR, work process and cooperation in the company improve.
Before a VDR purchase, data protection has always been 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 searching, automatic updating, and data collaboration. Deals get fast tracked as all parties involved — lawyers, consultants, and accountants — are able to access the necessary documents 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 as the platform is a safe meeting place where parties involved can meet, view data, and add their electronic signature in a matter of hours, or minutes, in some cases.
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 the data room access.
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 more smooth and quick as auditors receive notifications about uploads and updates instantly; they can request, comment, and clarify everything needed.
Attracting and convincing investors is often a challenge.
This process usually entails getting ready for many rounds of negotiations which need to be back-upped with different kinds of reports, financial statements and customer references, among hundreds of other documents. Further, they may need to find and share new files during the session.
Thanks to the existence of virtual data rooms, the whole process becomes less stressful and more productive. Besides, both sides of talks enjoy a required level of process control.
4. Regulatory compliance
Compliance with regulatory laws helps companies meet the expectations of governmental organizations, external firms and potential or current business partners. Usually, such documents as regulatory reports and checklists are used to check if the company is compliant with necessary standards and rules. VDRs help swimmingly import all critical information into checklists and fill regulatory reporting forms at ease.
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 there. Optionally, this channel can be expanded, and external experts or other third parties can 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 exposing itself 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 many sensitive files may be used. To facilitate this process, businesses can employ virtual data rooms.
7. Procurement projects
Both public and private agencies may participate in procurement projects. Procurement managers often use request for proposal (RPF) templates as well as can 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 and initiate a Q&A session for managers and bidders.
Strategic partnerships are formalized, which implies the use of contracts and legal agreements.
Before signing up documents, both sides need to be transparent regarding their corporate records by sharing all the needed data to ensure mutual trust and facilitate negotiations.
In case a partnership falls short, access to the data room can be restricted immediately.
Reporting is a widespread and varied corporate activity, which requires a tailored level of transparency of 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 VDR users without risking the exposure of confidential data. It’s also possible to create a template as reports are required regularly.
10. Board meetings
As remote work is gaining momentum, board meetings involving members living in different cities, states or even countries have 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 updates of corporate records.
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.
Commercial players obtain a large number of financial records, departmental files, employee information, in other words, the intellectual property that must be protected.
Thanks to VDRs, corporations can accelerate fundraising or IPO, establish Q&A sessions during financial audits, protect information in M&A due diligence, and streamline various stages of procurement.
Besides, the data room may be a tool of choice to keep all the confidential data for inner-company use.
Investment bankers usually utilize online deal rooms for M&A activities, IPOs, strategic partnerships as these rooms ensure stable and safe transactions and are easy to use.
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.
To satisfy clients’ needs, law firms should meet their responsiveness and accessibility requirements. Virtual deal rooms can help lawyers meet both of these requirements. In the legal field, the data rooms are used for M&A, IPO, RPFs, RPIs, and bankruptcy.
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.
The industry faces communication challenges since many remote parties need to be connected. The typical implementation of VDRs in the energy 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.
Plan and prepare
The plain fact of purchasing an online room does not mean it’s entirely ready to be used. Users will need to set up all the features they need on their own. The good news is that doing it is a piece of cake.
It’s essential to start with the categorization of files and customization of permission to folders. The next step would be to determine who will get access to the deal room and to what files particularly. 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 completed, an administrator should double-check everything. One of the ways to do it would be using 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.
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 types of secure files with trusted partners.
When choosing a VDR provider, it’s crucial to be very careful. Checking the provider’s offerings and pricing, as well as third-party reviews may be a good step towards making the right choice. Also, VDR users should focus on the minimization of human errors — they should be a responsible gatekeeper at the entrance to a data room. Once everything is set up, VDRs become an indispensable tool for secure and fast communication.