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What Is a Virtual Data Room, and How Would You Use One?

It seems that many of the top tech and business blogs have been extensively covering virtual data rooms (VDRs) in recent months. This makes sense, given that VDR technology is becoming quite popular in the business community, with one industry report forecasting that it will see a compounded annual growth rate of over 15% over the next five years. 

Indeed, an increasing proportion of businesses are now adopting VDRs, and more VDR software providers are expected to emerge.

So what is a virtual data room? What makes this technology so special that the VDR market has become so competitive? Is the rosy outlook justified, or is it just another fad from the tech world exported into the field of business?

Introduction to Virtual Data Rooms

Virtual data rooms are online repositories that can be used for storing and sharing confidential information. As the name suggests, VDRs are virtualized versions of traditional data rooms. 

These are spaces used to hold hard copies of critical and confidential files such as meeting minutes, financial reports, documents of incorporation, stock options, purchase plans, sales, and purchase contracts, employment partnerships, joint venture documents, product plans, licenses and permits, intellectual property files, and mortgage documents.

Virtual data rooms can be notably useful in situations like mergers and acquisitions, audit and compliance, corporate document storage, and the safekeeping of human resource files, venture capital raising, IPOs, strategic partnerships, litigation, buyouts, partner and investor communication. In these scenarios, external stakeholders need to do their due diligence, and VDRs make that possible without requiring anyone to travel to one another’s physical locations.

The primary purpose of setting up VDRs is to have a single, easy-to-track, and convenient-to-manage location for vital documents. Because of the critical and sensitive nature of this storage space, it usually comes with top-notch security specifications such as RSA 256 encryption and SHA 256 RSA SSL. It also has to comply with rigorous requirements such as CIS Benchmark, CSA-STAR certification, ISO 20000-1 2011, ISO/IEC 27018, FedRAMP, WCAG 2.1, CNSSI 1253, and CDSA.

Getting Started With Using Virtual Data Rooms

Providers of VDR solutions strive to make the process of setting up virtual data rooms as easy as possible. After all, not many of the intended users are expected to be particularly tech-savvy. Using virtual data rooms is essentially similar to more common file-sharing platforms, but with greater emphasis on governance, security and confidentiality.

To get started, the first step is to find a reputable provider. These are usually companies that offer cloud-based software services. You’re generally best off choosing one that allows fast and easy setup. You can find options that offer a simplified process, something that can get you up and running with just a few clicks. Also, make sure that you get all the features you need, including robust rights management, quick file searches, and audit log reporting.

Once you are done with the setup, you can start familiarizing yourself with the different features of the VDR service. One of the most important functions to get acquainted with is rights management. Virtual data rooms must be securely shared with other users, usually remotely, for them to serve their purpose. Hence, they have to come with a solid system for granting and regulating access.

It’s important to implement strong security mechanisms for access. Preferably, there should be multi-factor authentication to prevent unwanted access even when passwords are compromised. Also, the system should send out notifications to account holders whenever someone accesses files. Audit logs and reports are likewise useful. 

If you’re using a VDR for due diligence at your company, it’s important that you take advantage of all the security features that come with your VDR service. In particular, all security mechanisms must be activated. Access should require multi-factor authentication. If encryption is available, it should be employed, unless the files are too large and it would be inconvenient to repeatedly decrypt whenever a file needs to be opened (and encrypt again after accessing the file).

How Due Diligence Processes Are Expedited by Virtual Data Rooms

The use of virtual data rooms can be a boon to due diligence processes. VDRs are helpful in mergers and acquisitions, for example, as that type of undertaking typically involves heavy research and the compilation and sharing of large amounts of documents containing information that can’t leak to the general public. 

Instead of collecting hard copies of documents and sending them to the intended parties, the process is made more efficient by having a VDR through which people can submit and view files securely and confidentially.

The same goes for startup fundraising, IPs, and the forging of strategic partnerships. All of these entail the collection and controlled distribution of various critical documents and sensitive information. The process could drag for a long time if everyone relies on the traditional transmittal of physical documents to view reports and critical information so they can decide on the actions to take.

Businesses that partner with other organizations, or those that outsource some of their operations to entities in remote locations, also benefit from VDRs. Companies that outsource their software development, for example, need secure methods to share files and view code libraries, something that is handily addressed by virtual data rooms. 

The use of virtual data rooms also creates tangible advantages in audits. A VDR can make it easy to share documents with accountants, auditors, and lawyers without compromising information security. It prevents the unauthorized sharing or stealing of files. Sharing files through encrypted USB flash drives is an option, but the delivery of the physical thumb drives is an unnecessary added step.

Even in cases when there are no third parties involved, VDRs also benefit due diligence processes in businesses. They can be used to provide greater transparency for board members who may not always be able to visit the office to examine documents. Likewise, virtual data rooms enable efficient intellectual property management, which is vital for companies whose existence and survival rely heavily on the protection of these assets.

The Takeaway

Businesses across different industries benefit from virtual data rooms, as VDRs provide a secure online location for delicate information that can make or break a business deal or planned action. This well-protected space can be accessed from anywhere at any time, so it’s more convenient than maintaining physical in-premise data servers. It’s also more advantageous compared to keeping physical documents. 

VDRs can even be considered to be a type of productivity hack for SMBs, particularly those that are undertaking fundraising and partnership endeavors, submitting to audits, or managing intellectual property.

Ultimately, virtual data rooms make it possible to share documents or information securely to anyone anywhere and anytime. They are an excellent solution that create conveniences for prospective investors, partners, stakeholders, auditors, government regulators, and internal employees. Using them results in greater efficiency, faster transactions, and more rapid decision making. It’s only fitting that VDRs relegate traditional data rooms to obsolescence, as they offer significant advantages that improve businesses and organizations.

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