The Growth of the Virtual Data Room Industry

Virtual data rooms (VDRs) are a specialty niche of the cloud computing and cloud storage industry.

Businesses have relied on data rooms since executives started buying and selling companies. Data rooms provide a secure and controlled environment to conduct due diligence.

VDRs are used by businesses to help store and share business documents. Frequently, businesses leverage VDRs to host proprietary business information required for high profile business objectives, such as mergers and acquisitions, fundraising or during the sales cycle.

Often, companies will set up VDRs during merger and acquisition discussions to host and share materials between various internal and external parties. There are many documents that require review from executives, lawyers, accountants and bankers, among other parties.

Due to the highly confidential and sensitive nature, VDRs are set up because they offer strict security controls and customizable options to help manage the organization and operational requirements of sensitive projects. Businesses can leverage software that maintains tracking and audit trail, along with version control and security features that previously occurred with physical data rooms.

As business leaders continue to gain from the benefits of cloud computing, software providers began to develop virtual data rooms. The best vendors provide software that replicates the strengths of a physical data room.

VDRs continue to gain momentum in the business community because through the power of software, companies can receive the same benefits at a reduced cost.

VDR Market Opportunity

The virtual data room software niche continues to grow at a steady pace. In particular, VDRs have hit their stride over the past five years.

From all industry reports, the VDR market has grown around 16% per year over the last five years and shows no signs of slowing down.

Analysts indicate that there are over 200 businesses that employ close to 3,500 people involved in the VDR market.

In fact, Forbes identifies the virtual data room market as one of the Hot Industries to Watch.

Why?

In the global marketplace, more and more companies are composed of virtual teams or colleagues in different locations that are needed to complete deals. Far-flung virtual teams and increasingly global deals make it harder for dealmakers to get in a room to view confidential documents, so companies must rely on secure online data sharing.

In addition to the global pace of business, there are a few other tailwinds at the back of the VDR market, such as:

• Price of data storage continues to decline.
• Reduced operational costs, such as paper and physical storage.
• No transportation costs for key parties to conduct due diligence.
• Immediate access to review business documents.
• Ambiguous use across various industries, such as accountants, attorneys and bankers.

In general, whereas physical rooms require transportation to the site and on-site security, virtual data rooms negate this hassle. Interested parties can access information from their own computers using security credentials given to them and managed by the hosting party, with usage statistics tracked and monitored.

Due to the significant time and money savings that VDRs offer, their usage has experienced dramatic growth over the past five years.

As companies continue to increase cross-border transactions, the competition to complete deals increases, which requires high bandwidth and is expected to fuel the demand for virtual data rooms into the future.

Yes, the VDR the industry is poised for its continued growth over the next five years. The current trends and transition away from physical data rooms only support the VDR market.

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The Current VDR Market

Multiple industry analysts peg the VDR market growth around 16% per year. In 2012, the VDR market was roughly $625 million.

According to research firm IBIS, located in Santa Monica, CA, the VDR market is expected to reach over $1 trillion by 2017.

Additionally, IBIS also reports that the general margins are roughly 7.5% due to high employment costs. Part of the growth in the VDR market is ensuring the security of corporate information. VDR providers must hire highly trained technology staff, mainly programmers, to ensure the software remains safe and secure.

As the market continues to expand, then the competition will likely increase as well. Currently, there are about a dozen major VDR vendors, which include large public companies (like RR Donnelley and Merrill Corp) and smaller focused niche software providers (like HighQ and CapLinked).

Why the VDR Market is Expanding

The current VDR market has some positive long-term trends and intriguing potential.

Only the most luddites would argue that businesses will move away from web-based technology. It simply makes too much sense because technology and software increases the speed of business and reduces costs.

In the VDR market, there are certain segments that contribute towards the expansion. VDR vendors can target different customers or sectors, which means more specialization or customization and a larger industry scope. Segmentation can be based on things customer organization type or market size.

For example, some VDR providers focus on the legal or accounting profession. While other vendors provide data rooms specifically for mergers and acquisitions or fundraising.

There are plenty of customers, such as investment banks, law firms and government service providers or any company that needs to share documents with outside parties, including potential customers and/or potential buyers.

Plus, there are virtual data room solutions that target startups to small businesses to enterprise level companies. The VDR market offers companies with a few different pricing tiers and levels of expected customer service to compete and find significant customer traction

Add in that the VDR market is lightly regulated and the foundation for promising growth is evident.

As the industry expands, there are opportunities to provide more niche markets that only contribute to the rising the tide of the overall market.

In fact, Global Industry Analysts, Inc. highlights some of the global growth drivers for virtual data rooms.

1. Significant Venture Capital

Over the past five to ten years, venture capital firms flocked to cloud computing companies. Household names such as Dropbox and Box were funded with hundreds of millions of dollars in VC investment.

To date, most venture capital firms have not investing in many pure play virtual data room providers, but analysts expect that trend to change. As newer VDR software companies continue to grow and need to raise money, VC firms should find a sufficient market opportunity to invest.

As an added benefit, many investors like to invest in product they know. Venture capitalists rely on virtual data rooms to conduct due diligence on investment opportunities, so there is plenty of synergies in potential investments.

However, online data security is a key concern hindering the market growth. Companies across the globe are innovating solutions to have enhanced secure access to the digital data. Furthermore, cloud services for virtual data rooms are emerging as a key trend for companies to invest in this market.

2. Urgent Need for Data Security

Virtually every day the media reports about another data breach that compromises confidential consumer information.

Due to the increased security risks and in-depth focus on providing a secure environment, VDRs are the next-generation of cloud-based document storage and business repository systems.

The best VDR solutions are based on a foundation of security, which contributes to the strong interest and adoption among enterprises.

The compelling benefits of VDR driving its adoption include:

• Automatic Data Backup
• Superior Security Controls
• Permission-Based User Accounts
• Comprehensive Document Control
• Secure Mobile Access
• Industry Level Security and Encryption Measures

Simply, VDR solutions provide companies with a level of security that traditional cloud storage companies do not provide.

3. Continued Need for Collaboration

The expected growth in the VDR market also means more competition. For consumers, this is a good thing because technology development and innovation will continue to remain the two major pillars supporting growth in the market.

As traditional data rooms struggle to adapt to disruptive software companies that focus specifically on the VDR market, the standard software features also expands.

In addition to the standard security features, new VDR provides integrated additional collaboration based services into their VDR offering.

The new tools allow busy executives to share, comment and ask questions on all documents in a secure environment.

VDRs provide a cost effective method to securely store, manage and archive information in an easy to access platform.

4. Global Growth Market

The United State represents the largest regional virtual data room market. However, the expected growth should occur across the globe, and in particular, in the Asia-Pacific region.

Analysts report that Asia-Pacific ranks as the fastest growing global market with annual growth just over 20% in recent years.

Interestingly, the demand for VDR services actually increased during recent economic struggles in Europe. Reports indicate that companies attempted to eliminate the risks associated with currency fluctuations, geopolitical risks, cultural incompatibility and protectionism, by emphasizing a more structured approach to M&A management during market turmoil.

Global economic turmoil appears to be another long-term tailwind for the VDR market.

5. Heightened Compliance Concerns

Related to the economic concerns growing the demand for VDR offerings, governments around the world continue to make corporate compliance a priority.

In general, there is an increased focus on risk management across the global financial landscape. The importance of conducting proper due diligence benefits the VDR market.

The heightened emphasis on compliance impact many different industries because litigators around the world are armed with more information to attempt large class action suits. Due to the increase of readily available information, frequently referenced as e-discovery, corporations rely on VDRs to protect their proprietary information, such as:

• drug development.
• licensing collaborations.
• patent filing activity.

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Future of VDR

There are some significant and growing trends gaining momentum that support the VDR market. From concerns around consumer data and proprietary information to government regulated compliance measures, the VDR market provides a solution.

Successful businesses continue to grow through reducing costs, which means leveraging technology. Virtual data rooms are suitable replacements for physical data rooms because they provide the same services in a mobile environment.

Now that nearly everything has migrated to the Web, VDRs are applicable to basically every company that needs to share information with third parties. The market continues to expand with large new use cases, like:

• Life Science Companies
• Pharmaceutical Firms
• Healthcare Ventures
• Government Agencies

Rob Koplowitz, a vice president and principal analyst at Forrester Research, explains the underlying rationale why work is moving towards the cloud and into the hands of VDRs.

“The space around sharing content externally is being pushed by the nature of our work today across organizations, and pushed by the cloud, which is the natural place where content can be shared.”

The future of the VDR market looks to leverage data security with team collaboration.

The trend is very evident in the newer VDR providers compared to legacy solutions. The VDR providers that were designed for mobile consumption are gaining traction at rates higher than traditional data room offerings.

As the competition increases, look for more specialty focused VDR providers to focus on things like real estate, healthcare or fundraising.

In the current market, many companies rely on data rooms for one-time transactions, such as an acquisition or corporate restructuring, but look for that to change. Virtual data rooms are scalable, which means small companies can grow with the software.

Companies will only continue to store proprietary information online, which indicates that VDR business models will look more like traditional software-as-a-service model.

The current price breaks down to roughly $0.85 per page, but as companies grow, more data will be stored. For VDRs, the cost of storage should continue to decline, so they can maintain prices and expand their margins.

Torgny Gunnarsson, CEO of Imprima, which is a European virtual data room provider, discusses the history and future of the VDR market.

“As organizations and professionals look for efficient, secure and easy-to-use methods of sharing information, the demand for virtual data rooms (VDRs) has soared over the past 10 years.”

Cloud computing and online data sharing are common among consumers who wish to share photos and music with family and friends, which leads to the adoption in the business world. As people become more comfortable with software, they look to utilize the benefits in other parts of their lives.

However, it is worthwhile to note there are key differences between consumer cloud storage offerings and virtual data rooms.

Mainly, VDRs offer security features that provide the ability to structure private information alongside the ability to collaborate as a team.

Anything from secure documents to a complete due-diligence process can be managed and shared through a VDR, and users have ultimate control over who has access.

Gunnarsson validates the forecast that VDRs will continue to move towards collaboration as communication needs continue increase as business priorities.

“Although the traditional use for a virtual data room will always have its heritage in the M&A deal process, we have seen a growing trend in the need for online file sharing from many different sectors that require secure collaboration and communication.”

The future will continue to rely on the history because data rooms must maintain the highest levels of encryption and security.

The ability to store files and set user/group-specific permissions, along with the added benefit of a full reporting and audit trail, enticed several companies to move towards virtual data rooms as a corporate repository.

If virtual data room providers continue to provide secure environments, business leaders will continue to see their value in protecting company data and helping secure company communications and only expand the use of VDRs.

For VDR providers the future looks bright.

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