What is virtual data room: importance, use cases, benefits, implementation tips

A virtual data room (VDR) is a secure online space for storing and sharing sensitive information and confidential documents. Virtual data rooms also enable safe collaboration between the users who have access to VDR space.

Virtual data rooms are most commonly used during complex financial transactions, such as mergers and acquisitions and the due diligence process in particular. VDRs allow for the secure sharing and reviewing of confidential data among multiple parties involved in the transaction.

One of the distinguishing features of virtual deal rooms is the high level of data security, which is especially important when managing sensitive documents during business transactions.

Note: A virtual data room is often called an electronic dataroom, online data room, digital data room, or virtual deal room.

Read the article below to learn what is VDR and what is VDR meaning for a business.

Key takeaways: 

• A virtual data room is a cloud-based repository where users can securely store and share confidential data and effectively collaborate with multiple parties.
• Virtual data rooms are often used in such industries as technology, life science, investment banking, real estate, law, and accounting. VDRs are commonly used during due diligence, M&A deals, fundraising, or for corporate development needs.
• The main difference that makes VDRs stand out compared to traditional cloud storage solutions or physical data rooms is the level of security virtual data rooms provide. Additionally, VDRs also offer knowledgeable customer service, deal- and collaboration-focused features, and are more cost-effective.

The importance of VDRs

Considering the number of data breaches that happen worldwide, the security of information is of paramount importance. In the third quarter of 2022 alone, almost 15 million records fell victim to data breaches. The average data breach loss totaled $4.35 million in 2022. It’s clear from the figures that poor security measures are very costly for businesses. 

That’s exactly why the demand for virtual data rooms has grown lately. Virtual data rooms offer a variety of security features that ensure the confidentiality and privacy of any business-critical data that is shared via a VDR.

That’s also exactly the reason why companies often choose virtual data rooms for sharing information during complex financial transactions such as mergers and acquisitions.

Difference between a virtual data room, a physical data room, and cloud storage

Besides a virtual data room, there are other ways of storing sensitive data: physical data rooms and cloud storage software. The table below shows how they differ from VDRs and why using a VDR is more time- and cost-efficient.  

Disclaimer: This comparative table presents the collective results of our review of the most common cloud storage solutions you might be familiar with, as well as the typical physical data room.

Virtual data room vs. physical data room

Before the rise of virtual data rooms, physical data rooms were used for data storage. They were often called traditional data rooms. 

Compared to VDRs, they had certain limitations, such as:

• Inconvenient collaboration with multiple parties
• Costly maintenance 
• Time-consuming process of reviewing documents during due diligence
• Obligatory physical presence of interested parties during document review 
• The need for physical space, filing cabinets, security systems, and staff for document storage

On the contrary, modern VDR providers are easy to access anytime and require less costly maintenance. Besides, VDRs offer various dedicated services for:

• Streamlined communication

Virtual data rooms allow all the parties involved in the document review to collaborate on certain files right inside the data room in real-time, which significantly accelerates decision-making. While with physical data rooms, all the parties need to find ways to contact each other after the documents review if there’s a need to discuss something.

• Detailed reporting

Administrators of a VDR can get a detailed report on each user and document activity at any time, which allows them to react proactively when there’s such a need. While getting reports when using a physical data room might be a more lengthy process and reports aren’t as detailed as with VDRs. For instance, physical data rooms can’t present information on how long each document was viewed and by whom, while many VDRs can.

• Secure data storage

In the case of physical storage, security is provided only on a physical level. It often implies a human factor, which can lead to serious data breaches. While most VDRs offer more security features that allow for keeping sensitive data private and secure.

• Professional customer service

Virtual data rooms also offer almost instant assistance (and round-the-clock) when any issue occurs, while getting assistance when using a physical data room might take time and is mostly possible only during business hours.

Virtual data rooms vs. cloud storage

On the surface, cloud storage and virtual data room software might appear similar. However, there are principal differences between these two data storage technologies: 

• VDRs are more secure

At first sight, cloud storage software seems more cost-effective than a VDR. However, that’s the price you pay for rather average security measures that won’t provide complete protection for your confidential data. Modern VDR providers take many online and physical security measures to ensure sensitive information stays private. These include such security features as fence view, built-in redaction, granular permissions, and remote shred.

• VDRs provide better support

As a VDR user, you get professional and knowledgeable assistance if issues arise with the VDR software. Modern providers offer in-app live chat, phone, and email multilingual support, dedicated teams and managers, and help centers with product videos. This is what usual cloud storage solutions don’t usually place focus on.

• VDRs offer more effective collaboration features

Compared to regular cloud storage software, VDRs offer more collaboration services that are essential when working on complex business transactions. Additionally, they allow for detailed tracking of data room activity, which positively impacts the deal flow. Among the features VDRs provide are document annotations, Q&A sections, the ability to assign tasks, and audit logs.

Data room structure

Generally, the structure of a data room consists of folders and files. Depending on the project you choose a data room provider for, you can adjust the proposed structure to your needs. 

For instance, if a team of investment bankers uses a VDR for conducting due diligence, the data room may contain the following folders:

• Legal
• Finance
• Human resources
• Taxes 

The virtual data room space is controlled by an assigned administrator who manages all the files and folders and establishes access rights to all users. 

The main admin’s steps of structuring the data room include the following:

1. Drawing a scheme of the data room structure before starting working on it. This simple step helps to visualize how the data room should look so that its navigation will be logical for users.
2. Creating a logical filing system for a project. This implies creating relevant folders and subfolders for intuitive navigation.
3. Adding relevant documents. For smooth due diligence or cooperation, it’s essential to make sure each folder contains only relevant documents.
4. Assigning access to users. One of the last steps is making sure each user has the right access only to the files they require to review.
5. Updating folders regularly. Considering the lengthy process of document reviewing, it’s important to regularly review and update the documents in each folder and refresh the folders’ structure if needed.

Tips on implementing a virtual data room

The success of VDR implementation greatly depends on selecting the right VDR vendor. Thus, before committing to any solution, it’s crucial to thoroughly compare and select among the best data room providers available. Consider essential factors such as features, security measures, customer support, and ease of use. 
Once you’re sure in your choice, start the process of data room implementation, which is generally divided into five main stages:

1. Account setup
2. Data room configuration
3. Users invitation
4. Permissions setting
5. Documents upload

Let’s briefly review the actions a user should perform during each stage. 

1. Account setup

Setting up an account usually presupposes account registration, filling in personal info, and adjusting security and notifications settings. 

To complete registration, provide your personal information and agree to the Terms of Use and Privacy Policy. Then, create a strong password and set up security settings such as two-factor authentication. 

Additionally, an administrator can set up specific notification settings, such as notifications about documents, Q&As, or reports.

2. Data room configuration

After completing the first step, the data room is ready for use. 

Now, you can take care of the security implementations and other data room settings such as: enabling or disabling automatic indexing, customizing watermarks, applying branding features, adding NDAs to your project, and specifying document labels.

3. Users invitation

The next step is usually to invite users to the data room, a procedure that is particularly easy to do via the bulk invitation feature. 

After this, an administrator usually creates user groups. Typically, there are two main user groups: admins and users. While admins have access to most of the files and actions, users are generally more limited in their actions inside the data room. 

4. Permissions setting

To ensure you’re controlling access to files, you should set up certain access permissions for each user or user group. These usually include View, Download, Print, and Edit.

Additionally, you can limit access to the data room till a certain date and time or apply certain IP address restrictions. 

5. Documents upload 

The final step is to upload documents for your project. For this, use the drag-n-drop option, and plies of data will be uploaded to the data room with a click. 

To ensure data room users only have access to the documents they require, opt for the granular document permissions. These allow for specifying access policies to each folder and document in the data room. Granular document permissions can include None, Fence View, View, Download encrypted PDF, Print, Download PDF, Download original, and Upload.

Typically, virtual data rooms are used when there’s a need to share and collaborate over sensitive documents securely and effectively. 

The most common use cases of virtual data rooms include the following:

• M&A
• Due diligence
• Fundraising
• Initial public offering (IPO)
• Strategic partnerships
• Audits
• Secure document sharing
• Corporate development

Let’s not shortly review each of them in more detail.

M&A

A mergers and acquisitions deal is a complex financial transaction that requires preparing and reviewing documentation. Therefore, for both the sell- and buy-side, it’s essential to have all required sensitive data stored in one secure, controlled environment and that’s what virtual data rooms do best. 
This is what customers say about using iDeals VDR during M&As:

Due diligence

Due diligence is the most frequent use case for virtual data rooms. During due diligence, the sell-side needs a secure platform to store documents required for the reviewing process, and prospective investors need a single place to review that documentation easily.

Additionally, both sides require smooth collaboration that can accelerate the deal. This is what virtual data rooms provide.

iDeals’ customers often choose it for conducting due diligence and appreciate the services provided:

Fundraising

Raising funds is one of the key ways for small and large businesses to grow. Unfortunately, attracting prospective investors is not an easy task. It requires collecting lots of financial documentation and other sensitive data, as well as establishing effective collaboration between both leadership teams.

Using a virtual data room during fundraising rounds makes the document review process smoother and collaboration more straightforward. 

iDeals’ customers indicate they had a “successful fundraising round using iDeals”:

Initial public offering (IPO)

Taking a private company public entails lots of paperwork and attention to detail. A company must follow various local and federal laws and regulations. Additionally, it’s important to ensure transparency for the public and prospective shareholders. For a successful IPO, thorough document preparation and management are essential. And virtual data room providers have a lot of dedicated features to ensure it.

For instance, Energisme, a software company from France, has used iDeals VDR when going public and this is what they say about their experience:

Strategic partnerships

Mergers and acquisitions are not the only way for a company to step into a new stage of development. Often, organizations choose strategic partnerships as a way to produce new goods, enhance their area of operations, or engage in an entirely new venture. A company’s decision to partner with another organization requires much document sharing, and virtual data rooms allow for doing so securely and effectively.

This is what Lighthouse Life state about using iDeals for sharing sensitive information with partners:

Audits

There are many situations when an organization needs to disclose sensitive data to external parties for an audit. For example, it happens when companies seek to gain certification or compliance or when there’s a legal requirement for that. In this case, it’s essential to share confidential information in a secure environment without the risk of being compromised. And this is what virtual data rooms offer. 

Below is feedback from Invercolsa that used iDeals VDR during an audit process:

Secure document sharing

The most common use case of virtual data rooms is simple document storage. A virtual data room is then used as an online repository to securely store and share the company’s documentation. To meet this need, VDR providers allow for the sharing of everyday files with multiple parties: from third-party accountants to internal employees. 

For instance, this is what specialists from Autlan, a mining company, state about their experience of using iDeals for storing internal data:

Corporate development

A data room is also a great tool to establish effective board communications among board members and facilitate an organization’s development. A company’s leadership team not only can share all the required documentation via virtual data rooms but also collaborate with board members, which significantly accelerates the decision-making process.

This is how a member of the board from the Alyzia company describes their experience of using iDeals VDR:

Users of virtual data rooms

A virtual data room is typically used by a company seeking a secure environment to store sensitive corporate documentation or share confidential documentation with other parties to process a financial transaction.

The most common VDR users are usually the following:

• Life science organizations
• Investment banks
• Accounting and audit companies
• Technology companies
• Real estate firms
• Legal firms
• Private equity firms
• Startups

Let’s now take a quick look at each of them. 

Life science organizations

The life science industry includes biotech, pharma, and medical device companies. This business sector deals with all sorts of intellectual property that has to be properly stored and managed.

Additionally, companies in the life science industry often merge or partner with each other and raise funds, which also requires the protection of their intellectual portfolio.  
For example, this is what Sorrento Therapeutics says about using the iDeals virtual data room:

Investment banks

Investment bankers are the most common users of virtual data rooms. They assist the sell- and buy-side of the financial transaction with financials, document preparation, and other process-related activities. Obviously, they require reliable storage space for that, since financial transactions are complex and involve confidential data.

For example, this is what Aquila Capital specialists say about their experience of using the iDeals virtual data room: 

Accounting and audit companies

When undergoing an audit, companies often use VDRs to present required data, as VDRs allow for doing that securely. That’s why accounting and audit firms typically recommend VDRs for their clients when undergoing these complex yet important procedures.

For instance, this is what Ernst & Young’s consultant states about their experience of using the iDeals virtual data room: 

Technology companies

The tech industry is where continuous development takes place. Companies grow, expand, merge, or acquire other companies. All these processes require a reliable platform to share financials and other confidential information. 

Presto Testing Instruments have used iDeals virtual data room and this is what their M&A director says about it: 

Real estate firms

Real estate agents deal with lots of sensitive information: from real estate projects to clients’ private data. It’s of paramount importance to guarantee clients a high degree of privacy and security, that’s why virtual data rooms are so often used in the real estate industry.

Specialists from E-Gruppe, a German real estate project developer, especially indicate the easiness of project management that iDeals offers:

Legal firms

Virtual data rooms are especially useful for the legal industry. Legal firms need to securely share sensitive information with multiple parties: staff, clients, or other interested parties. Therefore, VDRs are commonly used during procedures, such as litigation, bankruptcy, fundraising, or M&A.   

This is how Orpen Franks Solicitors LLP, a law firm from Dublin, describes their experience of using iDeals:

Private equity firms

Venture capital firms and private equity firms are often involved in various complex financial transactions calling for sensitive document sharing. They need to do that in a secure environment without the risk of data exposure.

This is what Equity Partners Group specialist states about their experience of using iDeals:

Startups

Virtual data rooms allow startups to securely gather, store, and share their financials and other sensitive documents to attract potential investors. Via VDRs, startups often share such confidential business information as intellectual property, and it’s essential to minimize the risk of data breaches.

Top 5 benefits of virtual data rooms

A VDR is an effective solution for any business that requires a secure environment for efficient collaboration. 

The main advantages of using virtual data rooms include the following:

• Security

VDR vendors make document security a top priority. Most VDRs have all the features required for secure document storage: watermarking, redaction, fence view, remote shred, granular document permissions, IP restriction, and many more.

• Support

Virtual data rooms provide professional customer service via multiple channels such as in-app live chat, phone, and email, and the support team usually speaks multiple languages. Additionally, VDRs offer training videos and have dedicated project managers and teams to help you in place.

• Round-the-clock access

VRDs are SaaS software products, which means they’re cloud-based and can be accessed anytime. Additionally, many modern providers have responsive mobile applications which make access even easier.

• Collaboration

VDRs provide a variety of collaboration tools that make communication between parties smooth and effective. These include Q&A sections, document annotations, and the ability to assign tasks. Many modern vendors also offer various third-party integrations that allow users to use their favorite tools without leaving a VDR space and significantly facilitate deal-making and collaboration.

• Cost-efficiency

Though at first sight, VDRs might seem a bit pricier than traditional cloud storage solutions, such pricing is justified by the quality of services provided. By paying for a virtual data room, you pay for high-level security, professional support, and excellent user experience.

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