Virtual Data Rooms: An Informational Guide
What Are They, How Do You Use Them, and Why Are They Taking the Industry By Storm
What is a Virtual Data Room?
Let’s back up: What was a physical data room?
Let’s start with a basic question: How do businesses share information? First, there was physical communication, where information was primarily shared by printing documents, then mailed (remember that?) or faxed (remember that?) to the desired recipient. This is how physical data rooms originated. Interested parties in a business transaction would meet at a physical location, enter a supervised data room, and exchange and view information relating to the business. Physical data rooms were created to facilitate many different use cases for sharing business information, from conducting due diligence during a mergers and acquisitions (M&A) transaction, to raising capital, to asset sales and purchases. These physical data rooms provided a secure environment where access could be controlled and sensitive information could be shared while maintaining confidentiality. The catch? Lots of printed documents (print = money), you actually had to go somewhere to access information, and maintaining an audit trail was almost completely manual.
The Digital Age
Then came digital communication, where businesses could simply attach documents to an email or upload them to a flashdrive, and send to the desired recipient. However, this practice can get messy quickly. While businesses save in printing and traveling costs through digital communication, they lose controlled access to their information once the drive leaves their hands or they send the email. Sensitive information can easily be forwarded or copied to unintended recipients, and an entire deal can go south. Maintaining an audit trail is equally difficult with such a decentralized means of communication. Tracking down a thousand emails to different parties is a logistical nightmare, yet many businesses are still using this as a primary means of sharing sensitive information.
Enter: The Cloud
Then came the cloud. Cloud storage has enabled people around the world to manage and share digital information cheaply and efficiently. However, document control is still at risk once information is uploaded to the cloud. There are data breaches, hacked interfaces, misconfigured technology, as well as plain old human error. The list goes on. Using a consumer-grade file-sharing service like Dropbox or OneHub is great for exchanging regular documents with parties outside your organization, but it doesn’t provide the same level of security and control that’s needed for critical business transactions. How do you know who’s seen what documents? What if you have multiple parties interested in viewing your information? How do you control which groups see what? Sure, these platforms are cheap and easy to use, but you could be paying a lot more down the line if your information gets in the wrong hands or if your audit trail is incomplete.
Which Brings Us to Virtual Data Rooms
That’s where virtual data rooms, or VDRs, come to the rescue. Virtual data rooms employ the convenience of cloud storage and add extra layers of security to keep your sensitive information safe. The cloud enables individuals to access shared information from anywhere, be it desktop, tablet or smartphone, at any time. This makes sharing information more accessible and more convenient. By taking advantage of cloud storage, VDRs enable information to be shared easier, faster, and with more interested parties than via a physical data room.
You also have greater control over access with a VDR. A merger and acquisition deal involves numerous parties, including the selling firm or bank, prospective buyers, legal teams, and other external auditors. Each party requires access to specific sets of documents, each document needing to be treated with the utmost security. Virtual data rooms enable administrators to share specific sets of documents with the aforementioned parties through a centralized platform while maintaining security and confidentiality. Other access control features include the ability to grant and revoke access instantly (say, if an interested party pulls out of the deal), user and file-level permissions, and even Digital Rights Management, which prevents files from being printed, copied, or forwarded beyond your control.
Built-in activity tracking lets you monitor user activity in real-time and generate a full report of all actions taken within your VDR, such as file views and downloads. This tool greatly facilitates the audit process for investors, shareholders, board members, consultants, auditors, employees, and others.
All these security features, including industry-recognized security credentials, come at a premium. That’s why VDRs typically cost more than consumer-grade file-sharing services like OneHub and Dropbox. These aren’t videos of your cat playing the piano. Critical business transactions require the highest security standards and a streamlined platform to decrease the risk of information loss or user error. Otherwise you run the risk of compromising your deal. Cloud data is cheap—as demonstrated by free file-sharing services. So the true value that virtual data rooms bring is added security, controlled access, ease of use, and even customer support. If you’re in the market for a virtual data room, keep those factors in mind, and you’ll be sure to find the perfect solution.
How Can A Virtual Data Room Help You?
8 Use Cases for Virtual Data Rooms
With so much sensitive information under siege today, protecting private documents has become even more of a priority. A virtual data room, or VDR, offers the ability to store and share files in a safe and secure manner, while providing the additional benefits of smooth collaboration and document management.
Businesses of every size and industry can find many uses for a virtual data room. Here are six key applications for this innovative and efficient system.
The stakes are often quite high in most legal battles, making access to information extremely important. It’s not uncommon for law firms to house documents in large, expansive spaces called data rooms, where files are maintained by clerks. Due to the number of cases that are often worked at one time, this means that a lot of data is moved in and out each day. This can make it difficult to track where paperwork has gone.
By moving everything to a VDR, it becomes much easier to track document sharing. Access can be granted and removed as needed, so that information remains secure even once its purpose has been served. Files are also more readily available when time is no longer a luxury.
Merger and Acquisition Departments
As mentioned previously, when mergers and acquisitions (or M&A) deals are on the table, there’s a great deal of paperwork and documentation that must be reviewed by both parties before anything is officially signed. Before the advent of secure file sharing, this meant extensive travel, so that M&A professionals could view the data they needed to make an informed decision. Sensitive documents could not leave the locale where they were stored.
Because the digital space has now become an option to safely review and negotiate business transactions from the convenience of each side’s own office, another moniker for the VDR is the virtual deal room. Should a merger fall through, access to data can simply be withdrawn.
Auditors and Accountants
An accountant acts as a consultant for a business and evaluates the money coming in and going out to determine efficiency. This involves a review of the four key financial statements in business:
- Balance sheet
- Retained earnings
- Cash flow
- Income statement
This group of documents contains sensitive data that could be detrimental in the hands of competitors. VDRs provide a secure document sharing feature that enables companies to collaborate instantly with accountants. Information can be shared promptly without running any risk of falling into the wrong hands.
Auditors play a slightly different role, examining tax records in addition to financial paperwork. Their job often involves a lot more travel, so that this information can be thoroughly reviewed. A VDR has the ability to simplify this process.
Chief Financial Officers
The primary job of a chief financial officer, or CFO, is to know the numbers of the business. This requires the orchestration of all those documents that accountants and auditors wind up reviewing. Retaining management over these files is far easier with a VDR. Data is always precisely where the CFO needs it to be, and he or she is able to give or restrict access to certain employees or external professionals that may need it.
Large corporations frequently operate in locations across the country. Whether these branches are corporate-owned or bought by franchisors, it’s necessary to share policy updates or upcoming strategic plans with representatives from each business.
In some cases, corporate offices will encourage input from their franchise operators. This is where collaboration becomes a major factor in virtual data room uses; when data moves back and forth more efficiently, more qualified individuals can be reached. This results in the discovery of more effective insight.
Investment bankers are always looking at the nitty-gritty details of potential deals—sensitive information that both investors and sellers may not be interested in letting out into the wild. A reliable Virtual Data Room makes the ease of the deal that much simpler. Investment banks frequently use VDRs for buy-side M&As, sell-side M&As, raising capital, issues of rights, strategic partnerships, and initial public offerings (IPOs).
When you’re getting your business up and running, or even just maintaining a successful small business, space can be limited. Even so, you’ll want to keep an archive of financial records in case an auditor ever needs to review your company’s history. By storing all of this data within a VDR, you’ll save on floor space that may have been devoted to bulky filing cabinets.
The technology world moves fast in every way, from initial conception to raising funds to going public to getting acquired. Tech companies have to stay on their toes, and flying from Silicon Valley to New York City repeatedly to deal with physical data rooms is something that no one—least of all tech CEOs—have the patience for. There must be a better way. And there is.
Ultimately, virtual data rooms have the potential to benefit any business owner. Document storage is a necessity in any enterprise; securing that data from unwanted eyes is of equal importance. You can close deals in the safe and convenient venue of a virtual data room without ever having to set foot on a plane.
What Else Can Virtual Data Rooms Do?
The above-mentioned tech companies aren’t the only ones needed to raise funds. It’s a fact of growing a business, and as anyone who has ever gone through it can tell you, it can be a headache. Well, it can be a series of ever-increasing headaches until maybe, just maybe, things come together just right. But to get to that goal, there’s a lot of paperwork, a lot of due diligence, and a lot of inspecting financial records. Sure that can happen with a lot of travel, but wouldn’t it be better if you could do it all without leaving the comfort of your office?
An Initial Public Offering is non-stop scrutiny from every direction. Not only are you being examined by investors, but your information is being combed through by regulatory and statutory bodies who need to make sure that you’re dotting every i and crossing every t. There is a level of transparency that accompanies an IPO that you don’t normally get in some of these other case studies as you’re being investigated by thorough prospective shareholders. A VDR is necessary to make sure that you get through the process with all of your documentation well-managed.
It’s brutal enough when a prospective buyer is looking at your books and numbers, but it’s even worse when you have a potential adversary digging into your records trying to find every iota of misplaced data, every single error. When an audit happens, there are records that you’ll need to supply to the investigators, but you don’t want to hand them everything, and a VDR is exactly the kind of program that you want working for you to make sure that you’re sharing just what needs to be shared and nothing more.
Just as financial records may be strongly guarded when being audited or examined by shareholders, intellectual property is something you may need to keep under lock and key—to make sure that your corporate secrets are kept safe and secure as you’re dealing with buyers who may want to purchase them. By using a VDR, you can make sure that only the appropriate people can see your shared documents and that they’re safely stored.
Why Virtual Data Rooms are Hot
You think mergers and acquisitions are hot? The money is hot. The business is hot. And the platform, Virtual Data Rooms, is where the heat happens. We’re aware that “Virtual Data Rooms” are not the sexiest sounding term. Here are five reasons why virtual data rooms are hot:
1. They’re Where the Action Happens
VDRs are hot because they’re where deals are made—which means they’re where money is made. Because of the security (that seems intrinsic but is actually well-orchestrated) in a VDR, they are the perfect place for high-powered meetings and big money deals. In fact, our technology is getting to the point where not only do most deals happen in VDRs, but most deals require VDRs. To use anything less would be unsound business practice (or, at least, very inconvenient to go back to old physical data rooms.)
2. They’re intuitive
We live in two worlds. The intuitive one of the modern internet, based on data, documents, and clean interfaces. And the false one left over from last century with clunky platforms and awkward interactions.
But there is a need for a less awkward place to conduct business. If you enjoy emailing documents back and forth, you’re in the vast minority—and odds are the people you’re emailing to aren’t too happy with it, either. But if (and when) you start to lose track of you and your clients’ confidential information (and this will happen), you’ll start to wonder if there’s a better way. And there is: Virtual Data Rooms are the cutting edge in finance.
With a VDR you’ll experience less pain with each business transaction. When you don’t have to navigate outdated technology, your pathway to better business deals (and more money) is set. Secure document sharing doesn’t sound super cool, but when you can share sensitive documents in peace, you can spend more time focusing on making the deal happen.
3. They’re convenient
The information age is all about convenience: an more convenient way to meet people, to buy clothes, to listen to music. We all want convenience—in fact, we’ve come to expect it. When online interactions aren’t convenient we get angry. Anyone who has lived on the internet for the last twenty years and is suddenly asked to find a fax machine to satisfy some arcane bureaucratic rule can tell you that the price of convenience is a price they’d be willing to pay.
Think of this way: Jet lag isn’t convenient. Long car trips aren’t convenient. Needless travel to get to a physical data room isn’t convenient. So, instead of hopping on a long, grueling flight to see your clients in-person, why not conveniently pop into a physical room by setting up a virtual data room? The only boarding you’ll need to do is onboarding new clients. And that’s hot.
When you get your deals done in the right virtual space, you’ll keep pace with new business. And you’ll conveniently close the deals that matter.