The more I think about due diligence, the more flawed I realise it is.
Not because the act of due diligence itself is a bad idea – it’s not – but more that the process and steps that are taken to achieve it are so outdated and inefficient.
As an example, let’s consider a pension fund, who decides to invest in a mid-size businesses in the airport space. They might choose to do this as an experiment, or because they are being encouraged from a political/social perspective to deploy more capital into the business sector, as banks retreat. Rather than hand out the cash to private equity, this one they do direct.
In this instance, there are likely to be a few consistent factors.
- It is highly likely the pension fund has never invested in the space, therefore has no internal due diligence experience
- We can imagine the ticket size will be relatively small, compared to traditional investments
- The cost to upskill the internal investment team, or hire consultants will impact ROI more than traditional listed equity investments, harming the deal optics
If we assume the project was run well, then once due diligence is completed, some very good and useful intellectual capital will now exist inside the fund. However given it’s not every day an airport goes out looking for investment, that intellectual capital is likely to sit unused, gathering dust.
Not terribly productive.
But surely there is another way? I mean, if AirBnB can help us rent out spare rooms, is there something similar that could help a fund ‘rent’ out its knowledge?
And if we take this one step further, who’s to say the investment team needed the knowledge at all in the first place – could they have simply rented it from others to start off with?
Investing in businesses is often deemed a due diligence problem. It’s getting worse, as the rate at which new business models are emerging is increasing, and digital complexity is compounding. The gap between traditional bankers and even fintech lenders, private equity firms and VCs will continue to grow – so long as we keep the same in-house model of due diligence. No man is an island. Or more aptly, no fund.
I think there may be a solution, powered by the crowd and underpinned by cryptoeconomics. There is a powerful collective wisdom in the market, that simply needs to be structured in a way that aligns incentives correctly throughout the entire process.
For those more complex, finicky deals, that just fall into the ‘too hard basket’, there must be a better way forward.
Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech. Jessica Ellerm is a thought leader specializing in Small Business and the Gig Economy and is the CEO and Co-Founder of Zuper, a new superannuation startup in Australia.