WHO USES A VIRTUAL DATA ROOM?

PART ONE: FUNDRAISING

The virtual data room has been around for over 20 years, but if you haven’t ever had the need to use one, you might be wondering, what are they used for? The most common use of a data room is an M&A project. Typically, it is set-up by the selling company for buyers to conduct their due diligence prior to making any formal offer. However, this is only one of the use cases of a data room, over the next few posts we will detail other ways our clients are using our data room, starting with another common use: fundraising!

Investor Fundraising

Private Equity (PE) and Venture Capitalists (VC) have expertise in specific verticals or geographies and are always looking at investment opportunities that will deliver maximum returns.  However, in order to invest, they first have to fundraise. Larger PE and VC will have an Investor Relations (IR) team that lead the process for raising funds and managing the relationship with the investors afterwards. Smaller PE and VC will typically undertake both the fundraising and the investing themselves!

Where does the money come from?

Pension funds, university endowments, high net worth individuals, insurance companies and sovereign wealth funds are the usual sources for PE and VC. These are known as the Limited Partners (LPs). LPs need to invest their money in order to secure maximum returns and will look to PE and VC to pitch on the best options. PE / VC will utilise a Virtual Data Room (VDR) at this point, loading an information pack containing the focus of the fund, timeframes and expected returns for the LPs to review.

Once invested, the LPs will require regular updates on how the fund is performing. This is usually conducted quarterly and the information flow is managed through the VDR. An information document is uploaded each quarter for the life of the fund, which is typically about 7 years!

Company Fundraising

Companies are also likely to fundraise for growth purposes, in fact you will be hard pushed to find a one that hasn’t looked to raise funds from external sources especially in the time leading up to an IPO or trade sale. Companies typically go through different fundraising rounds:

• A start-up looking for an Angel Investor to help them get their idea off the ground to
• Round A ($2 million to $15 million) where the idea is proven but they need investment to grow.
• Round C (circa, $50 million) where an already successful company might need an injection of capital to fund inorganic growth or to invest and fuel growth pre-IPO.

When a company is looking to raise funds, they will conduct a review to understand their market value, typically performed by an external analyst. It tells them how much equity they will need to part with in order to raise the funds they need. This initial internal due diligence is where many companies first set-up a VDR. In addition, they are also ready go at short notice for any possible external investors. This VDR is kept open permanently as an ongoing corporate repository. It sits outside the companies own IT infrastructure and the access can be managed by the senior leadership team meaning there is no concern over information being accessed by IT managers for example.

Virtual Data Rooms for fundraising

Hopefully, this article has explained how some of the different parties involved in the fundraising process use and interact with VDRs. The flow of information is key. In providing a secure and manageable central repository for the information, VDRs help speed up investment decisions, and widen the pool of interested parties leading to an increase in demand and therefore value.

We will continue to explore other use cases in future pieces but in the mean time would love to know what you are using your data room for!