glossary
What is a Data Room?
Governance GlossaryPublished: January 17, 2025
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Data rooms are a place where companies can collect and keep financial documents that their partners, donors, and investors review and understand the business. They provide the information needed for due diligence and investigating something before making a decision. Historically, a data room was a physical place for companies to securely store printed documents and present them for review. Today, data rooms can be on-site or cloud-based.
Preparing a data room is a particularly important step for new organisations and business start-ups interested in approaching potential investors or donors. For example, they can help with pitching a new project, business idea or funding proposal. Virtual data rooms are used by legal teams, investors, auditors, and financial advisors, and are critical to making secure transactions and controlling access to confidential data.
What is a Data Room used for?
The primary purpose of a data room is to store and share confidential files. Data rooms are used during legal processes and can support the board and management by creating a general file-sharing system. A data room can be used by both businesses and not-for-profit organisations.
Here are a few practical applications:
Non-Profits
Having a data room can help a non-profit board develop and maintain partnerships with community stakeholders, government agencies, and corporate or individual donors. It is an important resource for protecting confidential documents and sensitive data while providing access to key individuals.
Having a secure place to keep and share confidential information can enhance an organisation’s ability to fundraise, protect sensitive data, improve cybersecurity, and mitigate risks such as breaches in compliance. Virtual data rooms can make information sharing more efficient and streamline communication.
Companies
Venture capitalist Justine Moore describes data rooms as essential to business processes, particularly during the liquidation process or when ‘going public’. For example, during the initial public offering (IPO) process, a private company will provide access to its data room to raise capital.
How to Create a Data Room
Morgan Cheatham, Vice President of Bessemer Venture Partners, offers several recommendations for building an effective data room. The key is to be concise and provide accurate and up-to-date information, allowing the data to tell the story.
What should a data room include?
Since the purpose of a data room is to obtain funding from a potential donor or investor, the room should position your organisation as a potential investment and partner. It should also articulate the opportunities and benefits of funding your programs, products, or projects.
The information provided in a data room should include:
- An explanation of the market research, introducing the donor, funder, or investor to the industry and market opportunity. This section should provide sources such as research reports.
- A pitch deck presenting the vision, team, competitive landscape, and a plan for how the funds will be used.
- A profit and loss statement (P&L) outlining the company’s revenue, expenses, and costs over a specific period of time.
- The Customer Acquisition Cost (CAC), outlines the total money spent to acquire new donors or customers, helping the organisation find effective tools for marketing and fundraising.
- The cash burn rate assesses how quickly the organisation loses money and measures how efficient and sustainable it is at using its funds.
- A capitalisation (Cap) table showing the organisation’s equity and helping donors or investors make decisions about market capitalisation. Cap tables can also help an entity meet its legal obligations.
- Financial information showing the company’s growth over time, where it acquires customers or donors (acquisition channels) and customer or donor retention.
- A balance sheet and a list of key performance indicators (KPIs) show potential donors the growth rate.
- A (brief) summary of the executive team members to show the functional areas of leaders.
Cheatham recommends providing only a few KPIs to show what matters most and how the organisation is performing against them.
Virtual Data Room vs Physical Data Room
Physical data rooms have a few limitations. They make searching and reviewing documents more time-consuming and only allow one person in at a time, making them less accessible and slow. Teams must be on site during data room visits and the process can sometimes take months.
In comparison, virtual data rooms are housed in a secure space and designed to meet security standards. They can be accessed by unlimited users through an approval process, saving the company time and money. A cloud-based data room can be set up quickly and accessed from anywhere.
What to avoid in a data room
Your data room should not include detailed team bios or org charts. There is no need to include detailed financial projections or legal documents such as leases or loan agreements. Data rooms should not have tax returns or information about audits. In addition, they do not need to have board meeting minutes.
Common mistakes companies make involve providing unclear or fragmented data, not using headings in the slide deck, and forgetting to provide a takeaway or conclusion. The same is true of providing too much data, which can overwhelm people who review the information. Forgetting to include commentary and notes in the materials can lead to additional work and time offline.
How to ensure the data room is secure
Your data room should allow you to use secure data encryption and backup financial data. Data room security is a key element needed to build trust with potential donors, funders, and other stakeholders. Other features offer the ability to redact sensitive information in documents as well as use multifactor authentication or intrusion detection/prevention systems.
A secure data room should also have the ability to categorise files and ensure bulk uploads that retain file structures to make information more searchable once it’s uploaded. The room design must support efficiency in the financial review process and align with best practices for fundraising. Securing customer and client data is critical to complying with industry regulations and laws.
Here are a few examples of software you can use as a data room:
Podcast Episode: Diving into Data Rooms
Prefer to listen?
Check out the Our Cat Herder Herding Cats discussion on Data Rooms.
Frequently Asked Questions
What is another name for a data room?
A data room is also commonly referred to as a 'virtual data room (VDR)' or 'deal room.'
What is the difference between a data room and a data center?
- Data Room: A secure space, often virtual, used for sharing and managing sensitive documents during financial transactions, due diligence, or legal processes.
- Data Center: A physical facility housing servers, storage, and networking equipment to store, manage, and process data for various applications and systems.
- Key Difference: Data rooms focus on secure document sharing and collaboration, while data centers are infrastructure hubs for data storage and computing power.
What is the purpose of a data room?
The purpose of a data room is to provide a secure environment for sharing, reviewing, and managing sensitive documents during transactions like mergers and acquisitions, fundraising, audits, or legal proceedings.
What is a data room in private equity?
In private equity, a data room is a secure online repository where a target company shares critical documents with potential investors or buyers during due diligence. It ensures transparency and facilitates informed investment decisions.
What is a data room in due diligence?
A data room in due diligence is a secure space where all relevant documentation—such as financial statements, contracts, and operational records—is shared with potential buyers or investors to evaluate the risks and opportunities of a deal.
Why are data rooms so expensive?
- Security Features: Advanced security measures to protect sensitive data, including encryption and access controls.
- Customisation: Tailored solutions for specific industries or transaction types.
- Scalability: Ability to handle large volumes of data and users simultaneously.
- Support Services: customer support and training for users.
- Compliance: Ensuring adherence to legal and regulatory requirements for sensitive data.
What is a Deal Room?
A Deal Room is a secure virtual environment where parties involved in a financial transaction, such as mergers and acquisitions, share and review documents, collaborate, and manage the deal process efficiently.
Related Terms
Additional Resources
Cybersecurity – Is This a New Directors’ Duty?
What Directors need to know about Cyber Security
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Better Boards connects the leaders of Australasian non-profit organisations to the knowledge and networks necessary to grow and develop their leadership skills and build a strong governance framework for their organisation.
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