According to Ernst & Young’s survey conducted among American board directors, cybersecurity and data privacy were among the top five board priorities for 2023. Such a focus is indeed justifiable, considering the global average data breach cost, which is $4.45 million as of 2023.
One of the solutions on the way to establishing a secure environment for confidential data management and sharing is a virtual data room (VDR).
This article explains what a virtual data room is, how it is different from a physical data room and cloud storage, and what data room features are essential for your business needs.
What is a virtual data room?
| A virtual data room, or an electronic data room, is a secure cloud-based repository for storing and distributing large volumes of sensitive corporate data. Virtual data rooms provide a secure and controlled environment where multiple parties can access sensitive documents and effectively collaborate on them. |
Virtual data rooms are typically used during such complex financial transactions as mergers and acquisitions, especially during the due diligence process. VDRs allow all interested parties to securely share and review financial, legal, and other sensitive data in one place.
What is a virtual data room used for?
Generally, virtual data rooms can be used in any situation where high security and privacy of data is required. Additionally, online data rooms are used when there‘s a need for multiple parties to have access to large volumes of data.
Among the main use cases of virtual data rooms are the following:
- Mergers and acquisitions (M&A). This is the most common use case for virtual data rooms, since during M&A transactions lots of confidential information is disclosed to third parties and data security is of paramount importance. The sell-side and buy-side of the deal can prepare and review due diligence documents and effectively collaborate online via a virtual data room. Such an approach can significantly accelerate the deal.
- Fundraising. To attract potential investors and get a business fundraising, startups or companies that seek growth need to disclose large amounts of sensitive information. Additionally, the way this data is organized also matters. That‘s why many businesses choose virtual data rooms to conduct due diligence during a fundraising round.
- Strategic partnerships. Virtual data rooms are also often used when two or more companies want to arrange a strategic alliance. Just like with mergers or acquisitions, during strategic partnerships companies need to share a lot of confidential and sensitive corporate data with third parties. That‘s exactly when virtual data rooms can be extremely helpful.
- Initial public offering (IPO). During an IPO deal, a company that wants to go public is subject to lots of extra rules and regulations at the local, federal, and state levels. Besides, it needs to become more transparent for prospective shareholders and the public in general. In such a situation, the security of sensitive information and the ability to easily organize and distribute large volumes of data is essential, and a virtual data room can help with it.
- Audit. During an audit process, a company needs to disclose lots of confidential information and sensitive documents to lawyers, auditors, and accountants. A virtual data room ensures that such a disclosure does no harm to the company and all the sensitive data is kept private and secure.
- Board communications. Often, board members are heavily involved in the company‘s operations and need to be able to access and review all the key information about the business. Being typically scattered around the world, board directors can easily access all the documentation via a virtual data room, which reduces the need to regularly travel to the physical office.
- Corporate data storage. The most common and obvious way of using a virtual data room is for storing corporate data securely. Data rooms are used in any situation where lots of data needs to be stored in a secure online environment and distributed among many parties.
What functionality should a data room have?
Modern virtual data rooms offer various features that make the process of data storage and sharing secure and efficient. Below is the list of the most common features a modern reliable virtual data room should have:
- Multiple file support. It‘s essential for a VDR provider to allow uploading and storing various types of files — from Excel spreadsheets to images. This enables users to seamlessly use a virtual data room without having to prepare files before uploading.
- Automatic index numbering. This feature automatically organizes all the documents per uploading and creates a well-structured data room index, reducing the need to do it manually.
- Dynamic watermarks. This feature presupposes dynamic watermarks to appear on top of every document when it‘s viewed, downloaded, or printed. A watermark can contain the user‘s IP address or name and the time and date of file access.
- Various levels of document permissions. The best virtual data rooms offer several levels of access permissions that allow administrators to control who can access what. For example, a VDR administrator can choose who can view, download, upload, or download encrypted PDFs.
- Time and IP access restrictions. Many data room providers allow administrators to restrict data room access for users from certain IP addresses. Additionally, they can set certain periods of time when the data room is accessible and restrict access if those time periods are not met.
- Analytics and reporting. Virtual data rooms offer such reporting and tracking capabilities as audit trails that allow tracking of every user‘s action on each document. This is especially helpful when certain issues arise or during an investment round, as it helps to track potential investors‘ interest.
- Multi-factor authentication. Thanks to this feature, every user will need to verify their personality before accessing a data room in a few steps. Usually, it‘s a two-factor authentication which presupposes entering a password and a single-use SMS code.
- Q&A section. In case users have any extra questions about a certain file or its parts, they can leave a question in the Q&A section and get a prompt answer to it. Additionally, some VDR providers allow for assigning experts when leaving a question, which ensures professional help from the dedicated specialist.
- 24/7 support. A virtual data room should offer round-the-clock support and via several channels, such as phone, chat, and email. This is essential so that every user can get prompt assistance when any issue arises.
- Customization. Many VDR vendors allow customizing their virtual data rooms so that it has a brand look and feel of your business. For example, you can customize the logo, brand colors, header and footer, watermarks, language settings, and terms of use.
What is the difference between a traditional data room and a virtual data room?
A traditional data room is a physical data room.
Physical data rooms are basically physical walk-in rooms where lots of company data and documentation are physically stored in filing cabinets. Storing sensitive information like this is risky since there can be various gaps in the security system that might fail to protect confidential data from unsolicited views.
Moreover, traditional data rooms are quite expensive, since you need to pay for the building rent, filing cabinets, staff wages, etc.
All these issues are easily solved when using virtual data rooms. VDRs provide a higher level of data security and are less costly. What‘s more, they simplify the process of data management and distribution since they allow for round-the-clock access from anywhere.
What is the difference between cloud storage and a virtual data room?
While the difference between physical data rooms and virtual data rooms is quite obvious, the difference between VDRs and cloud storage might be not so evident.
Just like virtual data rooms, cloud storage services allow storing large volumes of data online so that multiple parties can access it anytime and anywhere. There are also various features that make the process of data management and collaboration more straightforward and effective.
However, the main difference between VDRs and cloud storage services is the level of security they provide. While cloud storage software offers multiple security features, they are still often pretty basic, making cloud storage a great solution for personal use.
Virtual data rooms take data security as a top priority, making it a suitable solution for various complex financial transactions such as M&A.
Are there any alternatives to a VDR?
Now, let‘s take a look at how exactly virtual data rooms are different from cloud storage and physical data rooms based on the features they provide.
- Disclaimer: This comparative table presents the collective results of our review of the most popular cloud storage solutions and a typical physical data room.
| Virtual data room | Cloud storage | Physical data room | |
| Secure document sharing | Yes | Partially | Questionable |
| Real-time reporting | Yes | Yes | No |
| Time and IP access restrictions | Yes | No | No |
| Remote shred and wipe | Yes | Yes | No |
| Secure fence view | Yes | No | No |
| Notifications | Yes | Yes | No |
| Access to multiple parties | Yes | Yes | Yes |
| Large volumes of data | Yes | Yes | Yes |
| Customization and branding | Yes | Sometimes | Questionable |
| Mobile devices support | Yes | Yes | No |
| 24/7 support | Yes | Yes | No |
| Time savings | Yes | Yes | No |
| Cost savings | Yes | Yes | No |
As we can see from the comparison results, physical data rooms are definitely an outdated data-storing solution. While cloud storage can also offer many modern services for security and effective collaboration, it still can‘t provide the virtual data rooms‘ level of security.
Conclusion
Let‘s briefly summarize what we know about virtual data rooms so far:
- A virtual data room is a secure cloud-based repository for storing and sharing large volumes of sensitive data.
- Virtual data rooms are used during M&A, IPO, fundraising, strategic partnerships, audits, board communications, and corporate data storing.
- Among the most common features a modern virtual data room should offer are multifactor authentication, dynamic watermarking, 24/7 support, Q&A sections, various levels of access permissions, and multiple-file support.
- The main difference between a virtual data room, cloud storage, and a physical data room is the high level of security VDRs provide.
