What is a Virtual Data Room?
Why do you need a virtual data room?
What are the essential elements you should know!
In this article, I will break down the notion of Virtual Data Room so you know all there is to know about it!
Keep reading as I have gathered exactly the information that you need!
Let’s understand virtual data rooms and see why they are so important!
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Let’s get started!
What Is A Virtual Data Room
A virtual data room, also referred to as a virtual deal room, is an online repository where you will typically store electronic documents and securely share them with others.
In business, most of the time a virtual data space is used to share documents and electronic files in the context of due diligence performed by investors, financial institutions, audits, and for business purchase or sale.
As more and more businesses offer their products and services online and conduct more and more business online, the use of virtual data rooms has also increased over the years to safely store and share corporate information.
For example, in the context of an M&A, the selling company will establish a virtual deal space where it will upload a series of documents and electronic files to share with specific individuals or groups of individuals at the purchasing company.
The objective of using a “virtual data room” is for the party sharing information and documents to do so securely and with a greater level of control.
In fact, the company setting up the virtual deal room is able to configure the space in such a way that specific individuals or people may access the data, the documents could only be viewed, documents could not be printed, accesses to expire after a certain period of time or once the data is viewed, etc.
Since most companies have a lot of confidential information and private data they would not want to be leaked into the public domain or fall into the hands of the competitor, the safest manner in sharing sensitive commercial data is to set up a virtual data room.
When To Use A Virtual Data Room
There are many reasons and use cases why virtual data rooms may be used.
Let’s look at the most common reasons why secure virtual data rooms may be used by companies today.
Mergers And Acquisitions
One of the most common reasons why a secure virtual data room is set up is in the context of mergers and acquisitions.
In fact, for a company to buy or sell another company or for companies to merge, they may be required to share a lot of internal and private information with one another as part of the due diligence process.
Considering most of the data shared between the transacting parties are sensitive and confidential, the best course of action is to establish a virtual dataroom where the target will share the required information with the acquirer.
The use of a virtual data room will provide the target company sufficient comfort and security to be able to share its sensitive information.
In the context of an important company audit, virtual data rooms can help streamline the process.
Whether the audit is an internal audit by the company’s auditors or whether it’s a regulatory audit, the best practice is to set up a data room in a virtual space where all interested parties can get access to the documents they need from a centralized point of access.
When dealing with an audit, it’s crucial that the company shares the correct information with the right person to avoid complicating the audit process.
Using “virtual data rooms” will allow companies undergoing audits to share the right document with the right person and only for the time period that it is needed.
Auditing For Risk Management?
If you are involved in an audit to assess risk, you should consider getting Audit Risk Assessment Made Easy: Seeing What Others Miss (Amazon Link) providing you with key insights!
Another common reason why a “virtual” data room is used in the business world is for business partners to share important pieces of data and information with one another.
For example, if a company enters into a joint venture with another to develop a new product or work on a specific project, they may want to use a data room to virtually share key information they will need to work with one another.
For example, imagine that there’s a large construction project where there may be hundreds of subcontractors working on it, thousands of individuals, and the project is expected to last for a few years.
In that case, a virtual data room will be quite helpful in allowing the general contractor to share key information with all subcontractors along with specific information with specific subcontractors or their representatives.
This way, if there’s a commercial document that is amended or modified, everyone with access to the online space can immediately get access to it.
Initial Public Offering
Another reason why a company may leverage a virtual deal room is in the context of an initial public offering.
An initial public offering is a process where a private company undergoes a process to list its shares in the stock exchange and “get listed” so it can sell its shares to the public.
An IPO process is quite extensive, involves the sharing of lots of data, takes time, and is a big deal for the company going through that process.
To ensure full transparency and proper communication of data, the company going through the IPO process will set up a data room online to exchange documents with regulators, lawyers, accountants, and others involved in the transaction.
Going Through an IPO?
If you are going through an IPO and need to get yourself a good book to learn the essentials, you should get The IPO Playbook: An Insider’s Perspective on Taking Your Company Public and How to Do It Right (Amazon Link)
Why Use A Virtual Data Room
In business, there are many benefits to using a virtual data room.
The main objectives of virtual data rooms are to:
- Safely and easily store digital files and information
- Organize your electronic files
- Share your sensitive and confidential digital files with others
It’s quite common to see virtual deal room used:
- For mergers and acquisitions (M&A)
- For various due diligence needs
- For fundraising needs
- For an initial public offering (IPO)
- For strategic partnerships
- For internal, external, or regulatory audits
- To manage intellectual property
- For board communications
- For secured document sharing
- For corporate restructuring, insolvency, and bankruptcy matters
While in the past physical data rooms were used to share sensitive and protected information with others, in the modern days, companies will use a virtual data room provider or a virtual data room software to manage their document sharing needs.
The advantage for a company to use a virtual data room is that:
- It has a central repository of its data
- It can give access to specific individuals or groups of individuals
- The documents can be “view only”
- The ability to copy, print, and share the document can be restricted
- Anyone accessing the data room can do so at any time convenient for them
- The access to users can be easily granted and removed
These are just some reasons why virtual rooms are used to store and share data but there may be more use cases.
Who Uses A Virtual Data Room
Anyone looking to share digital files, digital documents, or electronic data in a safe and secure manner may potentially need to use a virtual data room.
There are certain industries that use virtual rooms more than others although every company may potentially need to use one in its lifecycle.
For example, the life science industry and the technology industry appear to be more heavily invested in the use of deal rooms online to store, organize, and exchange proprietary data.
In the technology space, companies tend to innovate at rapid speeds and thus generate a significant volume of proprietary and sensitive data.
Maintaining a secure online repository of proprietary data can help technology companies deal with venture capitalists, angel investors, M&A transactions, audits, compliance, IPO, and other important events in the life of a technology company.
Life science companies use deal rooms online to handle important transactions and events on their side as well such as keeping and sharing clinical trial data, intellectual property rights, HIPAA compliance data, M&A information, fundraising information, and more.
Here are other types of companies that may rely on electronic data rooms:
- Investment banking companies
- Law firms (legal industry)
- Accounting firms
- Private equity firms
- Venture capitalists
In the end, if you have confidential data that you need to share and you want to be protected, you may want to consider getting a virtual data room either through a virtual data room vendor or by getting a virtual data room application.
Want To Learn More About M&As?
A great book you can get to learn more about mergers and acquisitions is Mergers and Acquisitions from A to Z (Amazon Link)
Virtual Data Room Features
In the past decade, many virtual data room vendors and providers have entered the market offering more features and options to their clients.
Depending on your specific needs, you will need to evaluate the features and functionalities offered by a virtual data room vendor to ensure there is a good fit.
Here are some of the main features offered by virtual data room applications:
- Drag and drop features
- Bulk upload features
- Ability to redact the document
- Easy user invitation process
- Easy file management system
- Dashboard for analytics
- Detailed reporting
- Multiple viewing options
- M&A workflow
- Mobile-friendly application
- Auto-indexing of documents
- Single sign on
- Unlimited virtual data rooms
- Integrated Q&A features
- Ability to remotely disable documents
- Document security controls (save, print, edit, copy configurations)
- Artificial intelligence capabilities
- Video and chat integrations
- 24/7 support services
If you contact different vendors, they will provide you with the list of features and capabilities that they offer so you can make an informed decision.
It’s important to reach out to a few vendors to understand their strengths and weaknesses along with their price list so do not end up with surprise fees to pay.
Alternative To Virtual Data Rooms
If a company does not wish to use a virtual data room to share and exchange information with another, there are a couple of alternatives that may be considered.
The first alternative is for the company to use the data repository system it currently uses to share data with others.
Quite often, a company’s own data repository is not designed specifically for the purpose of secure hosting and exchange of data the same way that a virtual data room is designed for.
As a result, by sharing the data, you must recognize that the files being shared may be copied and retransmitted without your authorization.
If you are sharing sensitive company information or sharing information outside your organization, it’s important that you evaluate the pros and cons of potentially losing control over your data.
Another alternative to a virtual data room is the good old physical data room.
A physical data room is a secure physical establishment where individuals who are specifically authorized may access the documents kept in the facility for a certain period of time.
In many cases, governments and companies who have access to highly sensitive information that they need to be protected and safeguarded and where the risk of a cyber-attack would be catastrophic will use a physical space to store their documents.
Virtual Data Rooms Takeaway
So there you have it folks!
What is virtual data room?
In essence, virtual data rooms are online repositories where documents can be safely and securely hosted and shared with others.
Virtual data rooms for mergers and acquisitions along with virtual data rooms for due diligence are some of the most common reasons why companies may want to use an online deal room to share documents with one another.
There may be many more reasons why a company may want to use an online data room to securely exchange data, such as:
- To share information with a financial institution or investor to raise funds
- To share data with lawyers, accountants, and regulators in the context of an initial public offering
- To share sensitive corporate information with business partners
- To perform internal audits, external audits, or regulator audits
- To protect IP
- To provide information to board members
- To share sensitive information with service providers, investors, external partiers, or others
There are many benefits in using “virtual data rooms” particularly when it’s important to share sensitive information, minimize human error in sharing the wrong document, ensure that the electronic documents are not reproduced or copied, and have a good understanding of who accessed your files and when.
I hope this article gave you the essentials you need to make a more informed decision on getting a virtual data room.
My Investing, Business, and Law Blog
By the way, on this blog, I focus on topics related to starting a business, business contracts, and investing, making money geared to beginners, entrepreneurs, business owners, or anyone eager to learn.
I started this blog out of my passion to share my knowledge with you in the areas of finance, investing, business, and law, topics that I truly love and have spent decades perfecting.
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Now, let’s look at a summary of our findings.
Virtual Deal Rooms Overview
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