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Virtual Data Rooms (VDRs): Meaning, Use Cases, Security and More

An Introduction to virtual data rooms

In mergers and acquisitions, virtual data rooms are commonly used as data repositories by companies or divisions being acquired or sold.

These companies provide interested parties with access to the virtual data room, which serves as a controlled environment where confidentiality can be preserved.

The data room thereby removes the requirement for physical storage for data and can provide access to an unlimited number of parties at any one time.

What is a virtual data room (VDR)?

A virtual data room or data room (it is more frequently called, a “VDR” or "electronic data room") is a secure online space that acts as a repository of a company's documentation.

Online data rooms allow users to share critical business information with clients, investors and company leadership over the internet in a controlled environment.

VDRs enhance companies' due diligence processes and reduce the physical paperwork involved, reducing overhead, clutter and waste. You may also come across names such as "virtual deal room", or "dataroom" or "private virtual room" which mean the same.

How does a data room look?

Here is how virtual data room looks like.

virtual data room
virtual data rooms

The evolution of data rooms to virtual data rooms

A Virtual Data Room is essentially the next generation of data room.

Data rooms were physical, walk-in rooms within companies where relevant data would be stored. Detailed logs were kept of everyone that entered the data rooms such was the sensitivity of the data stored within.

While these were a major advance on the traditional method of storing sensitive data - filing cabinets behind locked doors - they still suffered from excessive use of energy, being clunky and expensive to run.

Furthermore, like much of early technology, data rooms were far from user- friendly. So, data rooms now mean advanced cloud data storage, but depending on the chosen provider, the capabilities and features can widely vary.

Why do people use virtual data rooms?

One of the several advantages that virtual data rooms have over their data room predecessors is that they’re on-demand.

That is, you can use it for what you want, when you want. The main reason for using virtual data rooms is safe and efficient storing and sharing of documents either between employees of a company, or the employees of several different companies. 

This makes the benefits of VDRs applicable to a range of industries and situations.

While we typically associate their usage with the financial services sector, particularly asset management, joint ventures and mergers and acquisitions, many industries are now using virtual data rooms in their day-to-day operations for their information and data needs.

What is the difference between data rooms and cloud storage tools?

On the surface, this is a reasonable question.

But in fact, there are numerous reasons why cloud storage is inadequate when it comes to modern data needs, and not just for large organizations - even small boutique companies now usually turn to virtual data rooms, even when their data needs are relatively limited. 

There’s a few reasons for this:

  • Reliability. Accessing software on the cloud is far more reliable than it ever was on a traditional mainframe computer. On the off chance that your computer doesn’t start, no problem,it’s on the cloud. 
  • Security. Laptops can be stolen. Desktops can be stolen from offices. And  fires and floods have been known to wipe entire IT infrastructures. No such problems exist for cloud computing.
  • Accessibility. Depending on the file sharing tool you’re using, every user may need to download a .exe file, install a program...and then access it when required from that same desktop. This isn’t access - it’s a barrier. Virtual Data Rooms allow far better access to the right people, from any registered device.
  • Scalability. Anyone who has ever used a traditional spreadsheet program with over 5,000 results will appreciate the problem of scalability. Manipulating a spreadsheet of even moderate size can crash a computer. A virtual data room, on the other hand, provides seamless data access, no matter how much data is being stored.

Who uses virtual data rooms and where?

In the modern business environment, the only thing that unites all firms is the need for quality data.

Less than 30% of Amazon’s operating income is earned from retail, while over 70% is earned through AWS - its data services.

Furthermore, companies have really only begun to scratch the surface of the potential of data in business.

usage of virtual data rooms

There are a number of purposes for which companies use data rooms including:

  • M&A - Virtual deal rooms are often used during the due diligence stage of M&A as a place to house and share thousands of documents with different teams, such as potential buyers and sellers.
  • Fundraising - Companies can share confidential company information with prospective investors when raising funds. Prospective investors then have a place to access files, ask questions, and upload their own information.
  • Strategic partnerships - Potential partners can use virtual data rooms to give each other access to important files and data regarding each other. They can also set specific permissions to know who has access to what. 
  • Board Communications - Teams can securely communicate within virtual data rooms regarding different aspects of a deal’s lifecycle. Teams can also secreuly invite outside users to communicate within the room as well.
  • Secure files sharing - Virtual data rooms are used to store unlimited amounts of data. This includes many different types of files, such as documents, videos, presentations, and more.
  • Consultancy - Confidentiality and privacy are top priorities of consultancy businesses that require a controlled environment; a VDR handles it with ease.
  • Manufacturing - Manufacturing industries use VDRs to share new designs or product data.

This means that everyone uses data rooms. Just consider some of the applications to the following industries:

  • Technology - There is no bigger advocate for virtual data rooms than the technology industry. VDRs allow the world’s largest tech firms to share information among teams spread across the globe to facilitate the spread of ideas within the companies.
  • Investment Banking - Investment bankers are among the most common users of virtual data rooms. Investment banking processes like IPOs, capital raising and M&A can demand huge amounts of information sharing for which the VDR is ideally suited.
  • Corporate Development - With an increasing array of data on which to base corporate strategy, companies should seek ways to structure the data so that it works for them, not against them. A VDR is invaluable in this process, allowing companies to identify trends in big data that might previously have gone unnoticed.
  • Private Equity & Venture Capital - Private Equity and venture capital firms usually analyze several deals at once, bringing reams of data into the company which demands organization. It’s little wonder so many of these companies depend on VDRs to securely organize this data so that they’re on top of the process, regardless of how many deals they have in the pipeline.
  • Legal Industry - Perhaps no industry is as notorious for mountains of paperwork as the legal industry. But electronic document sharing is changing this. Gone are the filing cabinets and in come virtual data rooms, allowing streamlined sharing of documents for every manner of legal proceedings.
  • Life Sciences - Most companies in the life sciences industry are only as good as their IP. This means the R&D process has to occur under the highest possible levels of data security. Life science firms use virtual data rooms for everything from clinical trial results and HIPAA compliance to licensing IP and storages of patient files.
  • Startups - When startups are talking with prospective investors, data rooms help them analyse interest. VDRs allow startups to see which investors are spending the most time reviewing specific company documents and how much time they spent in a room to get a better idea of their engagement level.
  • Accounting and audit companies - Companies can share reports and audits with clients over a secure platform.
  • Business agents - A VDR provides an accessible means to share information on deals and closures.
  • Risk capital - Helps disclose documents on investment management and finance management.
  • Immovable property - Land and housing deals require copious amounts of document exchanges. A VDR comes in handy no matter what immovable property industry you’re looking at.

What are the benefits of electronic data rooms?

A VDR is a solution for any business that wants to streamline their document sharing and make it more efficient. People who have the following needs will make perfect users of VDRs:

  • Sharing documents and critical business information
  • Protection of company information
  • Document management and secure data management
  • Grant access to multiple parties at the same time
  • Support for mobile devices
  • Permission to upload high amount of data
  • Precise searching functionality

Investing in a VDR makes sense when you don't want to tie up resources with a physical data room. Business owners, clients, suppliers, acquirers, leaders, and managers are suitable candidates for a VDR. 

Are data rooms secure?

VDRs are considered extremely secure - hence why they are often called “secure data rooms”.

More specifically, ISO 27081 certification is considered the premiere security choice for cloud storage systems.

Platform’s security measures provide clients with controls, reporting, and procedures required to keep all their data and operations safe. 

So, data room providers take a comprehensive, multi-faceted approach to secure online files. Several complex layers work together to create an all-encompassing barrier against potential risks and threats. 

Here is a list of features of VDR which make it more secure when sharing documents and data: 

  • Physical security: continuous data backup, uptime over 99.9%.
  • Application Security: encryption methods, digital watermarking, data siloing in private cloud servers, multi-factor authentication, accident redemption.
  • Infrastructure Security: 256-bit AES data encryption, storing data on remote data centers
  • Data Center Certifications: includes various certifications like SOC2, FINRA, ISO 9001 / ISO 27001 and more
  • Auditing and Compliance: activity audit logs for any action in a data room

Some words about data room structure

One of the best parts about online virtual data rooms, is the ability to customize room structure based on your needs.

Data rooms are compiled of folder and file structures that are filled with documents or files. For example, an investment banking team using a virtual data room for due diligence can set up folders for legal, IT, HR, finance, and tax files.

Once files and documents are in the room, they are in a safe environment for different team members to have access to them. And the level of access can be adjusted for various users.

The data within a virtual data room is oftentimes stored in a variety of places; countries or even continents, depending on where the service provider’s data centres are located. Providers invest money in data room security to make sure clients data is in safety. 

Depending on the server provider, some create multiple copies of the data and store these in disparate locations to ensure that it won’t get destroyed or be inaccessible in the event of a natural disaster.

At the same time even data room provider companies don’t have access to your data, the source documents and files, same as other people outside of the room.  

What is the main difference between data room providers?

It makes sense to avail of free trials with data rooms to see which one works for your needs before uploading too much data to the server, making a move to a different VDR more complicated.

This will allow you to check between the subtle differences in the features, capabilities, ease of use, interface and of course, costs, involved with each individual data room.

You can find various virtual data room comparison charts and review the best on the market.

Regardless of industry it’s important that companies seek out the type of VDR provider that best suits their unique needs. What many find, after careful assessment, is that those needs change over time.

Commonly, companies will look for providers with specific feature sets, price points, security implementations, and usability which they can test during a free trial - offered by most providers in the industry. 

There are some options how you can analyse what each data room provider offers. Here they are:

  • Investigate their website information
  • Check provider reviews on review websites
  • Check reviews from company employees

The best advice we can give you is to try each data room provider you like visually by utilizing a free trial.

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