We’re often asked what a data room is, how it is used and its main features and advantages. In this article, we’ll take an in-depth look at:
- What a data room means and how they are used
- What goes in a data room
- Their features and benefits
- Why data rooms are more secure than standard cloud storage services
- How to set up a data room
- How data rooms are evolving and able to support more than just due diligence
What is a data room?
A virtual data room, often just referred to as a data room, is an online repository for important or sensitive business information. In simple terms, it’s a secure storage facility and the modern equivalent of a physical room where hard copies of documents would be stored for review during buying or selling negotiations.
Today’s virtual data rooms perform the same function, but documents no longer have to be printed and physically stored, saving time, resources and space. With encryption technology and advanced security features too, virtual data rooms are also significantly more secure and accessible.
A virtual data room is a secure online repository for storing and sharing information
What are data rooms used for?
Most people think of a data room being used for the due diligence process of a merger or acquisition deal. Both sides of a potential deal can access the data room with sellers able to manage user permissions on the buyer side. This means sensitive information such as financial performance, patents and product development is shared and seen in a controlled manner. Of course, this is particularly important if the deal is abandoned by either party during negotiations, helping to limit the number of people with access to privileged information.
However, today’s data rooms are not just used for due diligence. Technical development and the trend for remote working means they are increasingly used to support the full lifecycle of a potential deal, as well as divestitures, fundraising and business restructuring. They are also popular as a method of internally storing and sharing corporate documents in a way that is more secure than email.
Typically data rooms are used for the due diligence process of a financial or legal deal between two or more parties. Increasingly however, they are being used for the full lifecycle of a deal as well as fundraising or restructuring.
The data room market is growing
As data room features evolve, their usefulness to a wider range of business types and sizes is apparent. Already popular with large corporate or multinational companies, start-ups and SMEs who may have remote or hybrid working teams, are finding them increasingly indispensable too.
According to research specialists Allied Market Research1, the data room market is expected to reach a global value of $3.63 billion by 2026, which would represent a compound growth rate of just under 14% since 2019.
Within Europe, another research firm, Business Market Insights, believes it could increase from $388 million in 2021 to $934 million by 2028, representing a compound growth of 11.6% in the 7-year period,2 while others believe there is potential for growth up to 14% or more.3
The European virtual data room market is expected to grow by up to 14% by 2028.
In their report commentary, Allied Market Research highlights the prevalence of data room usage in the IT, banking, financial and insurance sectors, but also predicts a growing adoption among SMEs. They argue that while banking and financial organisations largely use data rooms to help minimise the risk of cyber-attacks on customer data, they believe IT and telecom companies will increase their use “owing to its unique features of storing and delivering accurate information to end-users for improving their decision-making capability”. 3
Data rooms in practice - their purpose and benefits
Typically data rooms are used for managing the complex and sometimes lengthy process of due diligence. This is often during a merger or acquisition (M&A) negotiation, with the two sides reviewing business-critical documentation that may result in a future deal.
However, data room due diligence can also be about more than just M&As. It is also needed for equity and fundraising purposes or even bankruptcy proceedings. In practice, data room due diligence is important when planning or reviewing any business transaction that may financially or reputationally impact both sides of that transaction.
As a result, the job functions using the data room can vary widely. Senior management and c-suite executives, corporate or company secretaries, compliance officers, financial analysts and legal teams are some of the most frequent users. Business owners and founders, especially of start-ups and SMEs across a broad range of sectors, are now being added to that list too.
What goes in a data room?
Perhaps one of the most frequently asked questions is, what goes in a data room? The answer is not a straightforward one because, quite simply, it can be anything and everything pertaining to a deal or other project. However, here are examples of the most typical documents uploaded to a data room for due diligence:
- Financial statements including profit and loss, audited accounts and forward projections
- Shareholder details and information
- Partnership agreements and customer contracts
- Competitor analysis and position in the marketplace
- Patent and trademark information, including past or current disputes
- Past and present legal agreements or disputes
- Board meeting minutes
- Staff structure, contracts and remuneration
- Business plan and marketing and sales plans
- Technical systems, software and assets
While we’ve included some of the most common documents here, needs will vary by type of transaction and company. For financial or legal due diligence, we recommend using a checklist, like this one, as it’s a good starting point for gathering requirements.
What are the benefits of a data room?
Data rooms can save you time and resources, make collaboration and communication more timely, and of course offer peace of mind from a security perspective. Here are some of the key benefits for organisations and users.
With the rise in hybrid and remote working, board teams and senior management can rely on the technology behind a virtual data room to keep sensitive documents and information secure, such as:
- The encryption technology used in a data room is superior to that of normal cloud storage, which is why they are frequently used by financial institutions to protect customer data that is at higher risk of cyber-attack
- User permissions can be tailored by data room administrators, so access to specific documents can be restricted where necessary
- Contents of the data room are automatically backed up ensuring companies never lose confidential information
- Login access to the data room is strictly controlled by the latest authentication methods
The more quantifiable benefits of a data room are cost and time savings. Reducing resources and time spent by staff finding, sharing and communicating information frees up their time and corporate budgets to be spent more efficiently in other ways.
- The sheer volume of documents stored in a data room means uploading them electronically is much quicker than printing out large quantities of hard-copies
- Administration of the data room relies on a user-friendly dashboard designed specifically for the needs of due diligence or transaction management, saving admin time on processes
- Data rooms help companies reduce costly resources from both a financial and environmental perspective such as printing, paper and ink etc, plus they no longer require physical space for document storage
- Data rooms are an efficient way to collaborate with internal and external stakeholders, reducing time spent on emails, online meetings and phone calls
With the rise in hybrid and remote working, having instant access to documentation is critical. A virtual data room means scattered teams, across countries, regions and even time zones can still access every document, whenever it's needed.
- Enhanced security measures within the data room mean wherever the information is being accessed, it is still done so in a secure and controlled manner
- Advisers and stakeholders that you involve in the due diligence process can also access your data room in a secure manner. This is especially useful for legal or investment advisers who offer expertise in deal negotiations but are external to your team
A data room can take care of so many administrative and supporting processes. They free up time to focus on the stuff that matters most - such as the deal, or project itself.
- A data room makes uploading and sharing documents quick and simple and always from within the same environment, saving time going between different applications
- It’s easy to set and control access to documents by user, so less time can be spent managing who sees what
- Collaboration between internal teams is easier as everything is in one place. Features such as Q&A modules and secure encrypted messaging are used within the same application, making communication seamless, secure and efficient
The benefits of a virtual data room include enhanced security, process efficiencies, and time and resource savings. They can also be securely accessed from any location and any device.
How secure is a data room?
When we talk about a secure data room we are referring to the enhanced security measures that underpin it. Technical developments have resulted in the most effective methods of safeguarding its contents against malicious cyberattacks or even just the more common human error. A leak of information can be at best frustrating and time-consuming to rectify, but at worst a deal-breaker or one that requires serious damage limitation.
Since a secure data room utilises enhanced security measures, data and documents are encrypted before they are stored, and login history and user permissions are controlled and accessible at all times. Most data rooms also use two-factor authentication (2FA) as an extra layer of security and are compliant with specific security certifications, such as:
- ISO 27001:2013 certification - an international standard for managing security and safeguarding information security and reducing the risk of data breaches
- SOC 2 certification - a series of controls that ensure the integrity of information availability and processing, including the privacy of that information
- GDPR compliance - a data room owner will become a data controller and processor under GDPR legislation, so it is vital the data room solution adheres to data protection and privacy requirements
What’s the difference between cloud storage and a data room?
Often, clients ask us if they really need a data room. Quite understandably, they wonder if they can just use a cloud storage solution like Google or OneDrive, or maybe a file-sharing service like Dropbox.
While data rooms are built on the principles and systems of cloud storage, and therefore share a similar approach to document availability (on any device and in any location), their main differentiating factor is far greater security protection.
In a data room, information and documents are encrypted as they are moved to the cloud, when being shared and during storage in the data room.
In personal file sharing or storage solutions such as Dropbox and Google Drive, data is only encrypted during the uploading process itself. As most of the documents involved in due diligence are of a highly sensitive nature, we believe the additional encryption of a secure data room is vital.
A data room offers the same level of encryption technology as banks and financial institutions, ensuring data is encrypted during file sharing and storage. When choosing a data room solution, look for relevant certifications such as ISO 27001:2013 and SOC 2
How to choose the right data room for your needs
Choosing a data room is an important decision - you’ll need to decide on storage capacity, check it has the right features but also easily accessible technical and product support.
Let’s first look at how big a data room has to be. As you might expect, this will depend on the volume of documents and data you wish to upload and store. For example, text documents will take up less capacity than high-res images or technical drawings. However, if you are a small or medium-sized business and are expecting a due diligence process to be fairly straightforward in its complexity and duration, then we’d suggest a solution that offers between 500 and 1000MB of data storage.
If you are working on a larger project or deal, then perhaps look at a package that offers around 1500MB of storage. Other factors in deciding how big a data room has to be include:
- The number of users needing to access the data room
- How easily you can upgrade if you need additional storage capacity in the future
- How many deals or due diligence processes you anticipate over a given period of time
Essential data room features
Naturally data rooms vary in size and functionality but there are some core features that you’ll always need for a successful due diligence process. Since data rooms are not only used for M&As, you’ll soon discover that most of these features offer additional benefits to you and your team too.
Alongside encryption of documents and data, your data room should also offer internal team messaging within the application. A secure messaging tool offers a much higher level of encryption security protection to share confidential documents compared to using email. It reduces the risk of data leaks and saves users time since they don’t have to bounce from one application to another.
Assigning reading and uploading tasks for both internal and external users usually falls to the data room administrator. A good task management tool within the data room will provide a 360° view of every task, who it is assigned to and it's status. This makes following up on tasks and deadlines more efficient.
While secure messaging is used for internal communication, as soon as your data room is opened up to a third party, a Q&A tool will facilitate discussion and manage the Q&A process between the two parties.
For example, during due diligence for a potential M&A deal, questions will be posed by the buyer-side based on the contents of your folder structure and its documents. The task of answering those questions can be assigned to the seller-side team by the data room administrator. For total confidentiality, there will be a different Q&A module for each potential buyer team so there is no risk of confusion. A good Q&A tool provides structure and organisation to an essential and often protracted part of the due diligence process.
Manually removing sensitive information from a document can be time-consuming and will increase the likelihood of single or multiple instances being missed. This could have a serious impact on the deal outcome.
A redaction tool enables data room users to reliably and selectively block out information in any document. This can be done by scrolling to each instance or by using the keyword search function to find and redact multiple instances in the document in one go.
Adding personal notes to a document stored in the data room can be a great way to gather thoughts and questions for the other side. We’d also argue that the best annotation tools allow you to make notes on any document that are only viewable by you - so even if a colleague or a member of the third party team is viewing the same document, they won’t see your notes.
Controlling access to the data room and its contents is vital, whether it is being used for due diligence, internal file sharing and storage or fundraising purposes. Granular access permissions that can be customised based on role, document and folder level, or activity within the data room, are essential.
Keeping track of tasks, Q&A threads, document uploads and deadlines is much easier if your data room sends email notifications to users that have assigned tasks. These should be customisable by the user in terms of frequency via the data room dashboard.
Making sure you have enough data storage, but that you can also easily change your package or subscription with minimal fuss, are important for continuity and peace of mind. As needs change and evolve, your data room will need to adapt too, so look for a provider that builds flexibility into their subscription packages.
Many data rooms now include integration with machine learning or artificial intelligence (AI) tools. AI can be invaluable in reducing time spent on manual tasks such as reviewing long or multiple documents while searching for potential discussion points or deal-breakers. AI tools can do much of this for you, surfacing any ‘red flags’ quickly and systematically, and reducing the amount of information a human being has to read.
For data room administrators, understanding who is doing what and by when is vital to keeping the potential deal or project on course. Good data room solutions include a suite of reports detailing user activity, from what documents have been viewed to which have been downloaded or printed. This is especially relevant once the data room is opened up to a third party and helps ensure confidential information continues to be safeguarded appropriately.
Ongoing technical and account management support is vital to getting the most from your data room. With regionally scattered teams who may work across different time zones, support that is available 24 hours a day 365 days a year is another important factor to consider.
Comparing features when choosing a data room provider is crucial to finding the right solution for your needs. Features such as a Q&A module, task management tool, customisable user permissions and secure messaging are among the most important to evaluate.
How to set up a data room
Once you’ve chosen your data room provider and decided on storage capacity, it’s time to look at how to set up a data room. Initially, you may want to consider using a preparation data room, which is a data room that is set up for internal use only. Once you’re ready to invite a third party, it becomes a full data room - there’s more on preparation data rooms below, but first, let’s look at the main set-up process.
How you set up a data room at the start is important in getting the most from it. Creating your folder structure is usually the first task and most data room solutions will help by automating the process. This provides a template structure that you can adjust and refine based on your exact needs. Some data rooms also provide templates depending on the type of project or due diligence you are working on - for example, fundraising, legal or financial due diligence, which you can tweak to your preferences.
Once you’ve decided how to build your data room’s folder structure, there’s 4 more steps to finalise the process:
- Index your folder structure - a data room index is just like the contents of a book, it lists each folder and its contents helping you to keep everything organised. A good data room index also helps users navigate the data room to easily find the documents they need
- Next, continue to build the data room by uploading documents into the folder structure
- Assign user access permissions for internal teams - decide on who should have admin privileges, if specific users should have restricted access to certain folders or documents, and what access a potential buyer or third party needs
- Assign document upload and reading tasks to your team and advisers, and once you’re ready to invite them in, third-party personnel too.
What is a preparation data room?
A preparation data room or portal is a term used to describe a data room during the set-up period and before third parties are invited to join. It helps an organisation get ready for the main due diligence process, uploading documents and information in a systematic way without being under the pressure of task-related deadlines.
We are often asked how early should a data room be opened or due diligence started and our
answer is always the same - it’s never too early! Getting everything prepared and documentation uploaded early means once a third party is invited into the data room, you feel equipped to manage the process and their questions more efficiently.
Many organisations now use a data room on an ongoing basis too, relying on its enhanced security measures for safe file sharing amongst teams and as a method of secure storage for confidential records. It can also be extremely useful as a project management tool or if an organisation is preparing to attract investors. A preparation data room will help keep these types of projects on track, creating process efficiencies along the way.
Inviting third parties to the data room
Once a data room has been set up, the folder structure created and files and documents added, the buy-side or other third parties can be invited to access the data room. They will see the same dashboard but with access to specific folders and documents controlled by an administrator.
Therefore, data continues to be protected according to the user permissions that have been set. They can also use Q&A modules to ask questions of the other side forming the main process of data room due diligence and helping to keep deal negotiations moving forward.
Closing a data room
Deal-making can be a lengthy process that reviews hundreds of documents with many questions and answers going back and forth between parties. Inevitably the data room contains a lot of confidential information and once the deal is struck, or the project is finished, it is important to know how to retrieve that information from the data room.
Exporting files from the data room should be straightforward and allow an administrator to extract the information in an encrypted format such as a ZIP file. Once the data has been zipped and downloaded to a computer, we recommend it is stored as an archive that can easily be uploaded again into a data room once another due diligence process begins.
Data rooms are evolving
As an organisation's needs change, data rooms will need to adapt and offer new ways to support processes and efficiency.
The growth of AI tools and integrations is certainly driving innovation in virtual data room technology and we expect this to continue. Despite our modern need for faster delivery and shorter deadlines, due diligence hasn’t really changed in that it still takes a long time to properly review and discuss every aspect of a company’s operations. And quite rightly so, since generally speaking the stakes are pretty high. However, an AI tool within a data room can remove manual tasks from highly qualified people, such as lawyers, and free up their time to be better spent on more strategic or advisory issues.
We also predict that using a virtual data room for more than just due diligence will continue. The growth in remote working means there’s a greater need for an online repository for corporate information. While some companies may initially choose a shared drive solution, the increased risk of cyberattacks and data leaks will undoubtedly mean many seek a more secure option. With its advanced technology, a data room can offer the highest levels of security and privacy, plus its internal messaging feature can mean far fewer emails are clogging up inboxes.
Virtual data rooms are enablers of the due diligence process and wider corporate efficiency. They are sophisticated but user-friendly software with advanced features and security measures as standard.
Choosing the right data room for your needs does mean spending time reviewing how your organisation will use it, the most beneficial features for your company and how it will save you time, effort and money. But, this planning time will really pay off once the pressure of due diligence for a deal begins.
Finding a data room provider that will work alongside you, not just during purchase and set up but also for the lifetime of your data room, can make all the difference. 24/7 technical support is of course very important, but you also need a partner who will help you maximise the data room’s capabilities to achieve corporate goals. Whether you are a large multi-national company or a smaller, entrepreneurial start-up, a data room can and should adapt to your needs as they evolve over time.
For more insight into how data rooms support efficient due diligence, read our Ultimate Guide to Due Diligence Success. You can also request a free no-obligation demo to see our data room in action.
- 2020 Virtual Data Room Market, Allied Market Research
- Europe Virtual Data Room Market Forecast to 2028, Business Market Insights
- Virtual Data Room Market Statistics 2026, Allied Market Research