Due diligence versus due dilligence

Due diligence versus due dilligence

In recent years low interest rates as well as our increased reliance on technology have resulted in an increased amount of capital being piled into technology companies of all sizes and in different industries. And all of these investments have been based upon a “due diligence” process that preceded it. So why, would you ask, is the rate of failure – “failure” in this case being defined as not meeting investor expectations – still this high, we ask ourselves?

Upon further analysis, we have identified a few key factors that contribute:

  • The investors Investors should not just provide capital, but must have an understanding of the technology and market they are investing in, and should have a relevant network they can bring to bear to advise and support the vehicle they invest in. The worst investor is an investor that invests in technology because of its “bling” effect, that lacks understanding, has inflated expectations and turns activist the moment things don’t go according to their imaginary “plan”.
  • Lack of clear strategy While it sounds obvious, the amount of failing organizations we have come by that lacked a fundamental strategy they were executing against is concerning. Developing a real business strategy takes effort, time and a dialogue between the different stakeholders but is fundamental to providing a shared view of direction, purpose as well as definition of success.
  • Lack of skills in management team Another obvious point one would expect, but just because a couple of smart partners have agreed to found a company and may be able to develop some smart, new technology, does not mean they have what it takes. A good management team needs to be a team that can support each other through good and bad times and that has the right combination of hard and soft skills required to succeed. To many technologists finance, legal, marketing and sales may feel like a nuisance, but without these skills, the likelihood of “failure” is very high.
  • Poor board / advisory board Oversight and support are key, from startup to enterprises. Management is a lonely job at times and managers need outside advice at times. At the same time, oversight is equally important to protect all stakeholders’ interests. Not making the effort to have a strong advisory board or not making the effort to put in place good oversight will in most cases result in subpar performance or worse.
  • Disruption Technology creates disruption. And while certain developments have indeed disrupted entire industries, for most technology companies it fundamentally means keeping eyes and ears open and having the willingness and ability to adjust course if need be. Disruption in our analysis is a key factor affecting technology companies but what affects their success fundamentally is their ability to innovate as well as effectively recognize and responding to threats.

Nothing about the process of preparing for a good investment is new, but technology still seems to suffer from a “gold rush” syndrome. Irrespective as to whether we look at examples of start-ups, scale-ups or M&A activity by corporations trying to snap up smaller technology companies to augment their own capabilities, the pattern remains the same: the percentage of poor investment decisions taken in technology is substantially higher than in other industries.

While the issue and the root cause is most certainly more complex than we can outline in a brief blog, it is obvious that it all starts with the “due diligence” process. Due diligence is called “due diligence” for a reason. Prior to investing or acquiring it is imperative to review the strategy pre- and post-investment (not a fairytale, but a strategy supported by analysis and facts), to review the management team and the required skills, to understand the development plan for the organization, dependencies and needs and build a solid financial model around the vehicle. It is equally important to be aware that execution will never go to plan, and regular reviews of plans will be required with all key stakeholders.

Investing in technology companies can offer substantial returns, is exciting and the pace of change is fascinating at times. But remember that unless you plan and base your actions on a well thought out plan, you are gambling – and the house always wins!