Over the past months, we have been intensively working with the PE, Growth Equity, and VC funds to understand the importance of technology-related data at different stages in the investment process. Our methodology involved interviews and a thorough statistical analysis of the data gathered. The objective of conducting this research was to gain a comprehensive understanding of our client's specific requirements, in order to optimize and improve the functionality of our Sonar product. Based on the results, we have put together this blog post, explaining some of the main trends in the market and analyzing where the technology DD market will be moving in the near future.
Time Is of the Essence
Today, a sizable chunk of investment teams’ time is spent preparing investment committee slides. According to the participants in our research, a PE fund can spend up to 4 weeks on this task, depending on the number of IC meetings, the size of the deal team, and the fund itself. In fact, 100% of our interviewees found that automating some parts of this task would be essential and save them valuable time. Overall, there is no doubt that automation will be the key to optimizing the time spent on closing deals.
89% of the PE and VC funds reported that understanding the target’s technology profile at the early stage in the investment process puts them in a better position for closing a successful deal. We believe that data, such as the software stack composition or infrastructure architecture, that historically due to strong business and financial focus were only available in the later stage in the tech DD should be available for the investors already at the Screening stage, helping them to carve out a successful investment thesis.
A Stronger Position for Negotiating the Deal
Let’s take an example. Typically, to fulfill the investor’s investment thesis and support the ambitious goals for growth to different segments or markets, the product has to have a sufficient set of public APIs. Unfortunately, in the case of this example, it turned out that the target company did not have an adequate set of APIs and client SDKs in place, which indicates the inability of the tech stack to evolve in the future and possibly hinders the expected growth.
In fact, here comes the ability to ask the right questions from the target's management team. Similarly, the results from our research support this claim: every PE fund that we spoke with found that the adequate technical-focused questions to ask in the management meeting would be a valuable asset at hand. Gaining access to this data early in the process and understanding the limitations of the technology and scalability aspects allows PE and VC funds to identify potential red flags and address the unknown with the management. Moreover, having adequate insight into the target’s technology profile is an excellent way to kickstart the investment thesis and value creation buildup.
So coming back to our example, having the data at hand that modernizing the SDKs and adding adequate APIs needs additional investments, the investor could negotiate a better valuation for the deal that allowed the surplus to be allocated for the enhancement of the tech stack.
Leveraging the Technology to Gain a Competitive Advantage
We often hear from the PE and VC funds that it’s important to them to harvest the power of technology to get better deals and ultimately aid them in value creation. As a matter of fact, all PE funds in our research group indicated that value creation is something they have paid very close attention to since the beginning of assessing any investment opportunity.
Unfortunately, as the data is usually scattered and comes from multiple sources, especially in the earlier stages of the process, it’s very complicated for deal teams to see the big picture. To develop a strong value-creation strategy, we need to consolidate this diverse technical data and create a solid technology profile of the target, ultimately translating this into business opportunities that support rapid growth.
So, the sooner the fund has access to readily-usable tech-related data, the better equipped they are to make the best decision regarding the value creation strategy going forward, giving them a powerful competitive advantage.
What’s Next? Introducing Sonar Profiler
Essentially, we at Intium practice what we preach. Similarly to evaluating if the investor’s target company is developing a product that derives from real market needs, we are also developing our product based on real customer input and feedback.
Our focus will be to continue developing the Sonar Profiler - a fully automated product that delivers the target’s technology profile earlier in the investment process. We aim to offer the PE and VC funds a tool that allows them to gain a competitive advantage, by delivering quality data to them faster and more cost-effectively compared to conventional tech DD. Fundamentally, we help them to push technology-centered value creation business plans more upstream.
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Additionally, the investors can rely on qualified Intium’s experts to guide them through all stages of the investment process and support them throughout the full value chain.
If you are interested in working with us in automating the tech DD process and gaining exclusive access to the private beta, feel free to contact us at contact@intiumtech.com