What Is a Data Room?

Data Rooms have been safeguarding information for decades. What are the benefits of their virtual counterparts and what can we use them for?
June 28, 2022
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The investor was sitting in a private room, there was a single window with a view of the city’s skyline. The room was comfortable, just the right temperature, well lit, and sparse relative to its size. In front of the investor was a briefcase full of sensitive files that were part of an investment deal he was working on. He was inside a Data Room

As the name implies, a Data Room is a secure environment where data is stored and protected. What makes it unique are the security measures designed to keep the data from leaking. For instance, most physical data rooms are heavily monitored, and visitors often have to sign non-disclosure agreements.

In mergers and acquisitions, Data Rooms act like bank vaults for information. Often located inside the vendor’s premises, potential buyers are given limited access to go over the documents. Typically only one buyer and their respective advisors are given access at a time.

For multinational deals, and/or large processes, team members are flown in from different regions, and they have to remain available during the procedures. In essence, the information is safely guarded in one place, and whoever wishes to see it has to physically go there.

Obviously, Data Rooms can also be used outside of mergers and acquisitions. For example, food companies often use a similar setting to show secret recipes to interested parties. Other examples include investment banking, legal procedures, accounting, company restructuring, and fundraising.

The Data Room industry has seen steady growth in the last decade, and if forecasts are accurate it will become a $1507 million industry by 2026, which means a solid 15% annual growth. This trend can be explained by the surge in companies offering virtual data room solutions in different markets.

Virtual Data Rooms

Every company has information they would like to protect at all costs, and if they have to share it, they would prefer to have strict control over access to it. By these metrics, most companies would be more than willing to invest in a Data Room.

Unfortunately, the safety measures required to control the flow of physical information are cost-prohibitive. Not every company (especially startups) has the budget to accommodate constant monitoring, security consultants, mobilization, and the legal resources required to guard a physical space.

On the other hand, we have Virtual Data Rooms. As the name implies, these are online repositories used for the storage and distribution of data. Similar to their physical cousins, Virtual Data Rooms have become mainstream in mergers and acquisitions. With the caveat that due to its virtual nature, it’s more flexible, and it can be used for other purposes as well.

Virtual data rooms are commonly designed as extra-nets. An isolated virtual environment within a network’s infrastructure with limited access. Often, this environment is accessed via a web portal or with proprietary software, using temporary credentials assigned by the service provider.

From a user experience perspective, a virtual data room is akin to a cloud storage service like Google Drive or Dropbox. You open your web browser, log in with your credentials, and are given access to a folder where you can open and read the files.

But that’s pretty much where the similarities end. Virtual Data Room grant limited access to information, for example, most services block the ability to edit, download and/or share the files, alongside other security measures like:

  • Strong Encryption: Encryption is a method that encodes data before it’s moved to the cloud. That way, even if the information is intercepted, it’s extremely difficult for third parties to gain access. There are different levels of encryption, the more complex, the harder it is to crack.
  • Document permissions and restrictions: Not only do virtual data rooms limit the ability to manipulate or share files, but can also provide limited access to a file. For example, a user can only read specific pages of a document.
  • Digital Watermarking: Even if you limit download privileges, a user could potentially take screen-shots of sensitive data. With digital watermarking, every document has a specific ID embedded in the file that can be used to track a potential leak back to its source.
  • Two-factor authentication and limited access: Aside from controlling user credentials, virtual data rooms restrict unwanted access by using methods like blocking non-approved IP/MAC addresses, Geo-location restrictions, and email alerts.

Do I Need a Data Room?

Aside from mergers and acquisitions, a virtual data room can be used for any number of activities, both in-house and involving third parties. For example, if you are working with a sensitive project that requires strict confidentiality, then you can use a virtual data room as your main repository.

Other cloud-based services like the ones mentioned above, provide similar functionalities. Most cloud services, for instance, have logs that can be used to track user access and edits. That’s perfect if your only concern is managing how your team is interacting with the data.

But in some cases, that’s not enough, if you are worried about leaks and security breaches, then virtual data rooms force every member of your team to adopt the best practices involving security.

Remember that data breaches aren’t always the product of ill-intent or espionage. Sometimes it can be a simple oversight, like an engineer using an insecure connection to access files in a hurry. Or a designer leaving their work phone in a pub.

Virtual Data Rooms impose important restrictions on data access, which in turn, force team members to adopt better practices. That’s why a Data Room is perfect for any company or startup looking for a way to safeguard their data and minimize risk.

In-House Development or Outsourced Data Rooms?

If the idea of a virtual data room appeals to you, then the next question is, should you make your own, or should acquire the services of a data room provider?

Most often than not, the answer would be the latter rather than the former. Data Room providers have already developed some rather impressive solutions for all manners of businesses, from transnationals to startups.

A truly safe Virtual Data Room requires a significant investment, both in terms of resources and development time. Having said that, there are a few perks of building your own solution that is worth considering.

First and foremost, by eliminating the man in the middle, you have more control over your data room, it’s one less entity with potential access to your files.

The other thing to keep in mind is customization, if you are working in a fringe industry, then you might want to have special functionalities that aren’t available in the market. In such cases, a home-brewed solution will give you exactly what you need. And who knows, you might be able to sell your solution to your competitors.

But it bears repeating, that building a data room takes a lot of time and effort. You need a highly skilled team of developers with a good understanding of digital security. On the other hand, in a world where cybersecurity is a growing concern we can never be too safe.

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