Virtual Data Room: The due diligence evolution I
By Francisco Lorca
Published in the July 2009 issue of PLC Magazine
Francisco Lorca of EthosData (previously called DraftSpace) describes why virtual data rooms are now prevalent in the due diligence process and the characteristics of a good virtual data room provider.
Clients and their advisers are always looking for ways to improve how deals are conducted and how information is exchanged. As a result, virtual data rooms (VDRs), which have conventionally been used during the due diligence stage of a transaction, are increasingly playing a more important role in managing the flow of information between parties. This means that, in the near future, they are likely to be called virtual deal rooms instead of virtual data rooms. A further article, which will be published later in 2009, will describe how virtual deal rooms have become a key component of the entire deal flow.
VDRs and due diligence
During the last few years, service providers, such as EthosData and Millnet, have been providing law firms, corporate finance advisers and their clients with a secure online platform to distribute confidential information. In the context of transactions, this service has evolved into VDRs.
VDRs have become the norm in the due diligence stage in most transactions: substituting the paper-based data rooms that were traditionally set up in law firm offices or even in hotel rooms. This is true both in more developed markets like the US and the UK, and, increasingly, in markets like India, China and Latin America. In fact, we have found that the speed of adoption in these emerging markets is larger than it was in the more developed markets.
In the last two years, we have seen the use of VDRs evolve very rapidly. Our clients are using VDRs much earlier in the life of a transaction and are even using them internally between advisers and sell side clients to prepare documents before initiating discussions with potential investors or bidders. We believe that this shift in the role of VDRs is driven by the positive experiences that advisers and clients have had with the convenience, simplicity and functionality of the main platforms and with their satisfaction and trust in the level of service provided by the VDR specialists.
There are a number of reasons that are driving the wide adoption of VDRs in the due diligence stage of a deal, in particular:
• Cost savings. The due diligence process is run at a fraction of the cost when carried out on a VDR. Traditional physical data rooms require the bankers and lawyers to be present from both the buy and sell side of the transaction. As a result, there are a number of expenses that can become very significant, such as the time dedicated by professionals going back and forward to the data room, travel costs, printing and the cost of the physical space in a hotel or office.
• Time savings. Using a VDR also reduces the time necessary to complete the due diligence process. The process does not have to be linear: parties can access all documents simultaneously and focus on the areas that are more relevant to the transaction. Also, advisers can review and work on the documents in the same location. The traditional process of going back to the data room a number of times as more questions arise is substituted by a more interactive, real-time process.
• Improved security. During the due diligence process, companies have to share critical strategic information. A VDR provides the ability to easily and securely restrict the opening, sharing and printing of documents. Key documents can be made available during a limited time and watermarked for each individual user.
• Compliance and transparency. VDRs keep track of all the activities of the buyers and sellers during the diligence process. This produces a much smaller number of potential interpretation mistakes as compared with the multiple informal sharing processes used in physical data rooms. The ability to digitally record and store all actions and documents that are disclosed also produces a more reliable and easy-to-use source of data during any potential litigation.
A high-quality VDR service provider is much more than a secure platform. We feel that, to be successful and gain a broad acceptance with users and clients, a VDR provider needs to invest heavily in two aspects: the platform; and service levels.
Platform. The following elements are essential to the success of a VDR platform:
• Simplicity: a VDR platform needs to be easy to use. Bankers, lawyers and clients do not have time to learn yet another tool or interface. A good VDR platform does not even require a help function.
• Security: confidentiality and security are paramount for a VDR platform. Security is not only guaranteed by the robustness of the code and the hosting environment but also by the processes used to handle the data.
• Small footprint: a good VDR platform has a minimal technological footprint. VDRs are used by large and small global corporations, law firms and investment banks. These institutions have very strict IT security and compliance policies regarding new technology and plug-ins. There is nothing more painful than inviting a participant to a VDR and finding out that he is not allowed to use a given technology.
• Functionality: a successful VDR provider is continuously thinking about and implementing new functionality to make VDRs more useful for transactions. For example, in the last few years we have seen the wide adoption of, among other things, text search, reporting, and Q&A functionality.
Service: Technology is not enough to create a good VDR. A VDR provider needs to be service-focused, using experience and deal knowledge to understand the needs of the bankers, lawyers and funds that use the VDR. A good VDR provider should also offer:
• Dedicated project managers. A good VDR provider will have a knowledgeable coordinator assigned to the transaction from the inception to the closing of the VDR. The VDR coordinator will become the go-to person for all tasks related to the VDR, minimizing the time that advisers or clients need to dedicate to administration. A good coordinator will have relevant experience in different types of transaction and will provide advice and new ideas on how to use the VDR to save the client’s time.
• Around the clock dedication. Transactions are very time sensitive, so a good VDR provider will have true 24/7 support that can react, and make changes, to the VDR within minutes.
• Flexibility. Just as there is no standard transaction process, there should not be a formula to run a VDR. VDR providers need to be able to adapt to the different nature of each deal, using the experience and wisdom of past deals and a solid process, while adapting continuously to the client’s needs.
Just as the Internet revolutionized the way that people communicate and share information, VDRs are revolutionizing the transaction process. We believe that VDRs are the future meeting place of all the parties who have a vested interest in making a transaction go through successfully.
The shift to an online platform was inevitable. Even though the traditional method of doing deals at the company’s or lawyers’ premises is still in use, it is fast becoming the exception rather than the norm. We believe that this is just the beginning. We are convinced that the role of VDRs will undergo a very significant change in the coming years, with each and every step of the transaction, from circulating information memoranda to distributing research reports, being carried out in virtual form.
Francisco Lorca is the Chief Executive Officer of EthosData, a global provider of VDR services with offices in Asia, Europe and the US. In the UK, EthosData has recently established a joint venture with Millnet. Francisco Lorca can be contacted at
This article first appeared in the July 2009 issue of PLC Magazine.
©Legal & Commercial Publishing Limited 2009. Subscriptions +44 (0)20 7202 1200
[EthosData was previously called DraftSpace UK Limited]