Also known as a deal room, a virtual data room (VDR) is an online repository for storing and sharing sensitive or confidential information. It uses a series of proprietary extranets to which users are given access via the internet. A VDR is typically used to facilitate the due diligence process during a number of transactions to review, share, and disclose company documentation when security or privacy are paramount. Examples of transactions include:
- Mergers and acquisitions
- Loan syndication
- Private equity offerings
- Venture capital transactions
In this definition...
How is a virtual data room used?
VDRs’ uses go beyond financial transactions—today, they’re used in a wide array of industries where a cost-effective way to eliminate the need for a physical data or consultation room is needed.
The information stored in a virtual data room is generally private documentation that is considered to be of high value to its owner. In addition to documents that require record keeping—such as financial, legal, and tax matters—most companies have other important documents that need to remain confidential and secure. For example, items relating to intellectual property such as copyrighted works need to be easily accessible to owners and buyers but also secured in a safe location. Actions such as copying, printing, and forwarding are in most cases disabled in VDRs.
Also read: What is data corruption?
Why use a virtual data room?
With the growing importance of data and the increasing demand that the data is safeguarded, VDRs have evolved into a needed business solution.
VDRs give businesses a way to organize, store, and share sensitive data and are available on-demand. A company can use a virtual data room for what they want, when they want. It’s far more affordable than traditional physical data rooms, and financial transactions can be carried out more effectively and efficiently.
The right VDR solution allows a company to worry less about the security of their data. It also enhances the trust business partners place in the company, knowing all documentation is secure.
Common uses of virtual data rooms
Virtual data rooms are most commonly used for financial transactions, but there are many other uses for managing sensitive documents.
Mergers and acquisitions
In mergers and acquisitions, businesses use a VDR to execute deals entirely online rather than having to meet in person to sign documents or review paperwork. Voluminous amounts of confidential information are exchanged during due diligence, so it’s imperative that all assets and intellectual property is safeguarded.
Forming and maintaining business relations or entertaining a purchase offer requires many contracts and frequent transmission of data. VDRs provide the storage for all confidential files and make them readily available for the continuance or formation of business partnerships.
Virtual data rooms are ideal for companies who commonly raise capital. Fundraisers require secure online spaces where financial information is housed for long periods of time. Convincing investors to fund a business, whether a startup or enterprise, can be difficult and takes a great deal of data and document sharing. Using a VDR facilitates the required exchange of sensitive financial information so everyone can remain on the same page, as there are lots of moving parts to raising capital.
Going public and offering an initial public offering (IPO) requires a sizable amount of paperwork. A business going public means they now require greater transparency with the state, regulatory agencies, and shareholders. A VDR is critical to manage the influx of documents and third parties involved when launching an IPO.
It’s not uncommon for an external party to review a company’s data. In these situations, it’s important for a company’s data and important documents to be shareable to comply with the regulator’s guidelines while minimizing the risk of private information being compromised. The use of a VDR allows attorneys, accountants, or internal and external regulators to have a centralized point of access.
Secure document sharing
No matter the industry of specific purpose, most companies will have a scenario in which they need to securely share documents with service providers, prospective investors, board members, project teams, or any other external or internal parties. Having a VDR with extensive security measures already in place will save time and effort in navigating these documents.
Virtual data room vs physical data room
A physical data room is a physical, on premises location that is established by a company where authorized parties go to review sensitive company information. This room is kept under surveillance at all times, and logs are kept of who accesses the room and who sees which version of each document.
While a physical data room ensures confidential information is not easily leaked, it’s inconvenient and expensive compared to a VDR. Many companies are switching from a physical data room to a virtual data room for the following reasons, among others.
Running a VDR is cheaper, since the only thing a company needs is a secure computer system and secure, encrypted access to online documents. With a physical data room, a company will need to either rent or dedicate a physical space for a data center and pay for its security.
As a virtual data room is hosted on the internet, anyone with the proper credentials and security measures installed on their devices around the world can access the documents. Those who need to access vital documents are not required to appear in person as with physical data rooms. They can be given access virtually and then have that access revoked when it’s no longer needed.
Storing documents in a virtual environment means that the information is not affected by natural disasters such as fires and storms as with physical environments. Maintaining documents physically subjects them to wear and tear. Physical documents are easily misfiled, and must be looked at individually to review content. VDR solutions, on the other hand, typically feature a searchable database of all shared content.
Types of virtual data rooms
VDRs come in all shapes and sizes depending on what a business needs. They vary in terms of price, security, usability, and feature sets. When looking to invest in a virtual data room, it’s important to know the difference between the two types of solutions: traditional and modern. As an alternative solution, collaboration or file sharing services are also available and have similar features of a virtual data room.
A traditional virtual data room is one that focuses on the merger and acquisition space. The due diligence process has always required masses of data sharing and document inspection. With this in mind, a traditional VDR allows for significant data uploads and storage via high-speed network infrastructure.
This type is feature-heavy and very secure, but it’s the most expensive kind. The pricing model is often built around per-page upload fees and fees for extra users. If you’re not using a VDR for financial transitions, a traditional VDR may be too feature-rich and expensive for your needs.
In contrast to traditional VDRs, modern VDRs are easier to use, quicker to set up, less expensive, and better serve a wider range of industries. Modern VDRs focus on data security and ease of use. They include advanced encryption of assets in transit and at rest, multi-factor authentication, and distinct permission privileges, allowing users to give and revoke access. Document-specific security features such as watermarking, disabled printing, and blind view are common to a modern VDR as well.
A collaboration or file sharing service is not a virtual data room. On the surface, the two may seem similar, but file sharing services such as Dropbox or Google Docs are not sufficient for protecting an organization’s most sensitive information.
Collaboration tools allow users to share and collaborate on a file or document. These tools are typically free or inexpensive and can be used alongside a VDR, but they should not be used in place of a VDR.
Compared to the capabilities of a VDR, file sharing services make large-scale document sharing complicated and difficult to navigate. The permission settings are not customizable and secure enough, and it’s easy to accidentally share data with the wrong people. These tools also don’t provide the detailed tracking, auditing, and reporting that professionals need to monitor user activity and document security.
Best virtual data room software
When choosing a virtual data room software, look for one that has the following features:
- Secure storage and distribution of content, data, and documents
- Security measures such as encryption, MFA, and single sign-on controls
- Customizable permission structures
- Control files remotely through digital rights management
- Compartmentalization of data within multiple projects
The following are the best virtual data solutions, chosen by features, security, and reviews.
iDeals is a VDR solution with emphasis on facilitating due diligence in any industry, including mergers and acquisitions, real estate, biotech, and technologies. Users can apply eight different permission settings on an individual or group basis. All activity is tracked, time-stamped, and made available in audit logs. Other features include 256-bit encryption, automatic watermarking, and antivirus protection.
ShareFile VDR is a cloud-based data room created for businesses to exchange files easily, securely, and professionally. The solution is equipped with a multi-level security system, data encryption, dynamic watermarks, and multi-factor authentication. Regulatory compliance guidelines such as HIPAA, HITECH, FINRA, CFPB, and bar association ethics rules can be maintained in almost any industry.
Onehub is a VDR provider for businesses of any size and offers a suite of other business tools such as client portals and Google Docs integration. Users can set robust user permissions and keep track of all activity. Onehub supports bank-level encryption, has the ability to organize the data room with secure workspaces, folders, and files, and allows users to post messages and assign tasks to make document sharing easier.
DocSend facilitates secure file sharing and document control. DocSend Spaces (its VDR product) allows users to share multiple files with a single link, making it easier to reference all documents needed for a deal. The virtual room can be restricted to certain email addresses and domains and NDA can be required before allowing access to specific files.
Ansarada uses artificial intelligence and machine learning in its VDR to highlight risks and opportunities, raise and protect potential, and optimize processes from deal preparation to close. The VDR comes with excel and email integrations, commenting, navigation, and role-based Q&A workflows, and access controls.