Setting Up a Virtual Data Room for Your Next Deal or Investment Round

Virtual data rooms are often used during mergers and acquisitions, fundraising, initial public offerings, regulatory audits, or other business transactions that require a secure and accessible space for collaboration. In case of fundraising, startups and companies that seek funding use data rooms to share business plans, cap tables, and financials with potential investors, keeping the confidential documents safe.

This guide offers a step-by-step instruction on how to setup a virtual data room and create a data room structure that will streamline the due diligence process for potential investors and even increase the chances of closing the investment round faster.

Step 1: Choose a reliable VDR provider

Choosing the right VDR provider is the first and crucial step of setting up an investment data room. The data room can directly impact security, efficiency, compliance, and overall success of your fundraising journey. That is why it is important to start the search by identifying your main needs. For example, a data room for due diligence must have advanced security features, controlled access functionality, and be compliant with regulatory requirements.

The key things to consider when selecting an effective data room for fundraising include:

• Security features: robust encryption, compliance with standards like GDPR, and geo-redundant servers.​
• User experience: an intuitive interface that facilitates ease of use.​
• Advanced features: auto-indexing, AI-powered analytics, granular access controls, chatbots, and customizable notifications elevate the efficiency of the collaboration.
• Support services: 24/7 customer support and onboarding assistance are crucial to make sure the data room functions as it should.​

Comparison of leading data room providers

To make your investigation process a little bit easier, we have selected the best virtual data rooms based on G2 and Software reviews ratings:

Step 2: Organize and prepare documents

Organizing an online data room is much easier and faster than working with physical data rooms. All the confidential documents can be uploaded, organized, and shared digitally, within minutes, rather than hours or even days, as in the case with physical data rooms. Here are the essential actions to keep the data room organized:

• Digitize and verify documents: scan physical documents into high-quality PDFs (OCR-enabled for searchability).
• Check if all files are updated (e.g., latest financial statements, contracts, patents, etc).
• Remove outdated, duplicate, or irrelevant files to avoid clutter.
• Name documents clearly (e.g., [Document Type]_[Date]_[Version] → NDA_2024-03_V2.pdf).
• To keep a clear data room structure, group files into logical folders (e.g., Legal documents/Contracts, Financials/Audits).
• Maintain consistent formatting across all documents (e.g., dates as YYYY-MM-DD).

Step 3: Upload documents to the data room

Many VDR providers, such as Ideals, offer bulk upload features like drag and drop. This functionality allows users to upload documents within seconds. The document structure should mirror the framework organized earlier to provide consistency. This will help potential investors find documents fast, speeding up their due diligence process.

• Drag-and-drop files/folders directly into the VDR.
• For large datasets, use ZIP upload (if supported) to maintain folder hierarchy.
• Ensure uploaded files align with your master index (e.g., Legal/Contracts/).
• Verify that no files are misplaced during transfer.
• Confirm all documents uploaded completely (no errors/corruptions).
• Ensure OCR-scanned PDFs are searchable.

Tip: Some VDRs (like Firmex or Ideals) auto-generate thumbnails/indexes — enable this feature to save time.

Step 4: Set user permissions and access controls

Define roles and permissions for all users to maintain document security:​

If needed, it is possible to restrict access to specific folders (e.g., hide financial statements from legal teams) to avoid oversharing and streamline the due diligence.

Set up time-based access to automatically revoke access after critical milestones (e.g., deal closing or due diligence deadlines). This reduces post-transaction data leaks and breaches.

To make sure that only authorized users can access the data room, enable multi-factor authentication. This is advisable for all users, regardless of their role. As the Verizon Data Breach Investigations report highlights, multi-factor authentication is a powerful defense against multiple types of attacks.

Step 5: Set non-disclosure agreements (NDAs)

Before granting access to external parties, it is crucial to check if all the appropriate NDAs are in place to protect confidential information. This is how to establish NDAs in a data room:

• Upload signed NDAs to a Compliance folder in the data room.
• Use e-signature tools (e.g., DocuSign) for remote signing.
• Configure the data room to require NDA acceptance before granting access.
• Track acknowledgments via audit logs.

It is advisable to collaborate with legal counsel to tailor NDAs to a specific transaction type, for instance, startup fundraising NDAs, and implement these agreements effectively.

Step 6: Test the VDR setup

Setting up a data room for fundraising is not finished until the data room is thoroughly tested. A pilot test allows users to identify bottlenecks, check if everything works as it should. To conduct a pilot test, perform the following actions:

• Invite 2–3 team members to simulate external users.
• Access permissions: can they see/download restricted files?
• Search functionality: can they find OCR-scanned text?
• Mobile/desktop compatibility.
• Verify logs track user activity (e.g., downloads, logins).
• Adjust permissions and folder structure based on feedback.
• Train internal admins on troubleshooting.
• Run a “fake deadline” test to confirm auto-expiry of access works.

Final checklist before launching the data room for fundraising

1. Documents uploaded in the correct hierarchy.
2. Accessibility across devices and platforms is tested.
3. The project folder structure is clear and makes sense for both fundraisers and investors.
4. File names and formats are double-checked for consistency and clarity.
5. Permissions assigned by role (no oversharing).
6. NDAs signed and archived.
7. Advanced security protocols like two-factor authentication and data encryption are implemented.
8. The data room is customized with branding elements (optionally).
9. Pilot test completed with zero critical issues.

Common mistakes to avoid when setting up a VDR

Proper planning and organization of a data room is essential for any type of business transaction, whether it is a multi-billion-dollar acquisition deal or a series funding round. Clear indexing, robust security, and streamlined access controls can prevent deal setbacks and loss of sensitive data. When learning how to create a data room, avoid these common VDR setup mistakes:

Lack of planning

The data room serves as an organized and secure command center for critical business transactions. Lack of clear planning and structure can lead to disorganization and inefficiency. To avoid this, define the purpose of the VDR, create an index structure, and outline workflows before setup.

Choosing the wrong data room software

If the data room software does not meet specific requirements, for example, it is not HIPAA-compliant, you won’t be able to close the deal, as the confidential data is not secured as it should be. Choose a reputable provider with robust security features, 24/7 support, and tools tailored to your business requirements.

Ignoring user training

Users unfamiliar with VDRs may make errors or overlook security protocols. Even the most easily navigable data room software requires training before using it. It is essential to provide comprehensive training to make sure users understand the features and usage protocols.

Weak data security measures

VDRs offer multiple layers of security to protect sensitive documents. Users should not rely solely on passwords, instead, they need to implement the advanced security measures that their data room provider has to offer.

If ignored, weak data security measures may lead to leaks of confidential data, reputational damage, and failed deals. Multi-factor authentication, watermarking, and expiring links are just some of the security features that help to mitigate those risks. 

Unorganized data management

Not categorizing or labeling all the documents properly leads to confusion and wasted time for both fundraisers and potential investors. Organize financial documents, legal and intellectual property information, HR data, and other documents so that they are easily scanned and explored by authorized parties.

FAQ about how to set up a data room

How long does data room setup take?

The exact timeline depends on the complexity of the deal, customization needs, user access setup, and whether users are familiar with the platform. The data room setup can take from a few hours to several days, if there is a need for additional customization or training. 

Is my sensitive information safe in a VDR?

Yes, data room providers offer robust security measures like 2FA, advanced encryption, watermarks, granular user permissions, etc. These features ensure all confidential documents are safe and only authorized users can access them.

Do I need technical skills to set up a data room?

Most of the data rooms have intuitive interfaces, hence, users do not need to have any technical background to start using them. Additionally, data room providers offer simple and clear virtual data room tutorials that make it easier for novice users to navigate the space. 

Which one is better: Google Drive or a professional data room service?

It depends on the needs and goals. For example, during the M&A transactions, it is advisable to leverage the M&A data room, as this type of software safeguards sensitive documents during this type of business transaction. Google Drive, in turn, is mostly used for day-to-day document management and collaboration between team members.