How Data Rooms Facilitate Venture Capital Deals

A recent VC report states that 75% of VC firms will use data rooms, data analytics, and AI for fundraising processes by 2025. So, what’s the place of virtual data rooms (VDRs) in VC’s tech stack, and how do you maximize VDR benefits for your fundraising efforts? Keep reading to learn the following:

• 4 benefits of venture capital data rooms
• 7 best practices to manage an organized data room for venture capital deals
• 3 tips to choose the best VDR provider

Managing venture capital with a virtual data room: 4 striking benefits

VC deals take massive analytical and networking effort with early-stage companies. A venture capital firm typically reviews 100 opportunities to make one venture capital investment. And that takes 83 days of management meetings, due diligence reviews, and negotiations. Approaching all this with just a few disconnected apps, back-and-forth emails, Google Drive, or even physical data rooms is the management’s worst nightmare.

A venture capital data room, on the other hand, channels all VC workflows into a synced, secure, and highly efficient working environment. Let’s take a closer look at the benefits of venture capital data rooms:

1. Ironclad security
2. Effective data room collaboration
3. Effective due diligence
4. Deal transparency

Ironclad security

Security is more than a concern for high-risk industries like venture capital, especially when sensitive data breach costs have reached $4.88 million per incident (IBM). IBM also names the top 4 security factors, which are VDR features, that collectively reduce data breach costs by ~ $908,000 or 18%.

Data room security feature	Data breach cost reduction
Security information and event management	–$255,932
Encryption	–$243,914
Identity and access management	–$222,883
Endpoint detection and response tools	–$185,533

Effective data room collaboration

You can easily adapt a virtual data room to your business model and activities, such as investor relations, board management, startup funding, or due diligence. Let’s briefly map VDR collaboration capabilities:

• Centralized storage space. Upload entire indexes from PCs, mobile devices, FTP servers, and file-sharing tools. 
• Multi-project tools. Create unlimited projects tailored to investor communications, due diligence, or deal screening. Copy and bulk-rename files across an investor,board management, or startup data room.
• User groups and roles. Build custom, workflow-based user groups and assign role-based data access permissions.

👁️‍🗨️ Important: Explore the contents to include in a virtual data room for startups.

Effective due diligence

A startup raising venture capital typically undergoes 118 hours of rigorous due diligence. A data room for investors and venture capitalists makes it much easier to coordinate and execute the due diligence process, effectively cutting contract review time by 2 or 3 times due to the following:

• Data redaction. It’s easy to censor PII inside financial documents and other materials with built-in redaction tools.
• Q&A workflows. Automated workflows make it easy to make due diligence requests and review vital company documents.
• Auto-conversions. Data rooms convert various file formats into unified, easy-to-work PDFs while retaining original files.
• Document indexing. Automatic index numbering saves time on document retrieval and categorization.
• Full-text search. Optical character recognition (OCR) tools allow quick searching for content in critical documents and visuals in a well-organized data room.

👁️‍🗨️ Important: Discover the due diligence checklist for startup funding.

Deal transparency

The following VDR capabilities help venture capitalists leverage the much-needed transparency in the investment process:

• Full audit trails. A VDR records all user actions within the system, such as logins, document uploads, redactions, and settings changes.
• Unlimited version control. Tracking file versions helps immensely with managing accounting errors or compiling reports.
• Drill-down activity reports. Universal traceability simplifies root cause analyses (RCA), helping to identify specific success or failure drivers. That lays a strong foundation for corrective actions in all aspects of VC deals.

7 best practices for managing data rooms in VC transactions

Here are several industry-leading practices for using a VDR for venture capital deals:

1. Enforce traffic protection.
2. Enable 2FA properly.
3. Configure SSO.
4. Set data room access permissions.
5. Upload Terms of Use.
6. Enable Q&A auto forwarding.
7. Enable regular activity reports.

Enforce traffic protection

You can control which IP addresses and email domains can access your data room. It can be achieved through project settings. Here are the steps:

• Locate project security settings.
• Locate the IP address and email domain settings.
• Whitelist IP addresses and email domains of VDR participants.

👁️‍🗨️ Important: Don’t forget to add your IP address. Otherwise, you will unintentionally block the connection from your device.

Enable 2FA properly

Two-factor authentication (2FA) protects user accounts from password breaches and phishing attacks. Most VDRs have 2FA via SMS enabled by default. However, authenticator apps are considered more secure than SMS because the latter is prone to SIM swapping.

This is how to configure 2FA in data rooms:

1. Locate security settings.
2. Locate 2FA settings.
3. Download an authenticator app.
4. Scan the VDR-provided QR code with your authenticator app.
5. Confirm the activation code in the VDR menu.

Configure SSO

With single sign-on (SSO) technology, VDR users can log into the VDR workspace with secure token-based credentials generated by the SSO identity provider. 

It helps venture capital firms hedge against account takeovers and compromised passwords that 52% of people reuse across apps. Our findings indicate that SSO is usually available with enterprise-level subscriptions and can be configured on the project level by VDR’s technical team.

Set data room access permissions

Access permissions allow you to decide how deal parties interact with confidential information. Our market research shows that the best data room providers have from 3 to 8 levels of access permissions. Access permissions can be applied to folders, subfolders, and individual files when you create role-based user groups.

Considering user roles in the upcoming project will help you maintain confidentiality of sensitive information at the start (although you can update permissions anytime). For instance:

• DD group has “manage” permissions for due diligence data room documents but is restricted from uploading and downloading original files in other parts of the project.

Upload Terms of Use

Venture capital firms often sign NDAs. Such agreements are time-consuming to manage and review, especially with portfolio companies, contractor employees, or advisory firms.

With a comprehensive data room, you can force all VDR users to accept NDAs, Terms of Use, confidentiality, and other agreements on the first or every login. Here is how to do it:

1. Go to project settings.
2. Locate terms of use.
3. Select the agreement type.
4. Select display frequency.
5. Assign groups to accept the agreement.
6. Paste the agreement text.

Enable Q&A auto-forwarding

The necessity of facilitating interactions between startups and investors is often overwhelming. You can set up Questions and Answers (Q&A) workflows to make the fundraising process more structured and streamlined.

It’s when questions and answers get automatically routed from question drafters to subject-matter experts, approvers, and coordinators. Here is how to make this work:

1. Go to Q&A settings.
2. Check Q&A roles.
3. Assign participants.
4. Test your setup.

Enable regular activity reports

A VDR-powered full audit trail is the best way to demonstrate investor transparency. It maintains comprehensive action logs for internal decision-making and automatically generates color-coded reports. You can schedule deliverable reports to make reporting even smoother and boost investor confidence. Here is how to do it:

1. Go to report settings
2. Go to scheduling settings
3. Check the delivery frequency and reporting period

👁️‍🗨️ Important: Wondering, what is a data room for investors? Check our guide on building an investor data room.

How to choose the best data room provider for venture capital: 3 best practices

Check the following practices to choose the best venture capital data room:

1. Compare providers.
2. Use free trials.
3. Consider security reputation.

Compare providers

While VDR companies are plentiful, it may be worth focusing on the top 10 or 15 market leaders first. Those providers generally offer industry-leading, compliant technology. It’s worth comparing providers based on the following features:

Feature category	Sample feature checklist
Data security	IP and domain restrictions2FASSOAccess permissionsEncrypted downloadRemote wipeWatermarkingBuilt-in redactionViews as another userISO 27001, SOC 2 & SOC 3, GDPR, CCPA, HIPAA
Document management	Unlimited storageUnlimited upload sizeSecure linksAutomatic index numberingOCR searchFull-text searchDocument labelsBulk rename
Collaboration and reporting	Q&A workflowsFAQ sectionNotes and commentsFull audit trailScheduled reportsCopy files across projectsCross-project user managementProject templates

If you seek top-tier security and seamless collaboration, consider iDeals VDR, a market leader that empowers 175,000 organizations and one million users.

Start a free trial

When choosing a data room for venture capital deals, opt for one with an unrestricted free trial. Thirty days of testing VDR capabilities is enough to make an informed decision in most cases. If your own data room fails your expectations, you can close your trial account anytime, commitment-free.

Consider security reputation

Evaluate the VDR provider’s operating history for data breaches. For example, Citrix Sharefile was compromised in 2019, 2022, and 2023. That’s why it’s crucial to choose venture capital and investor data rooms with a clean track record.

Bottom line

• Data rooms for venture capital firms ensure secure data sharing, cost-effective due diligence, and seamless deal coordination. 
• You can tailor a VDR to any project you need, from deal sourcing and due diligence to investor relations and financial reporting.
• IP and domain restrictions, 2FA integration, SSO, access permissions, NDAs, Q&A workflows, and regular activity reports are the best attributes of professional VDR setup for venture capital transactions.
• Comparing VDR features, using free trials, and evaluating security posture are the best ways to choose a perfect venture capital data room.