No matter the type of investment, buying or investing in a company is a huge financial gamble. When it comes to fintech, it’s important that the investor is sure they have completed comprehensive commercial and technical due diligence. Due diligence (DD) is only effective when the specialists called in already have the required depth and breadth of knowledge to fully understand the target company’s business model and its future potential.
Penser takes a look at some common pitfalls to avoid when conducting due diligence within fintech:
Evaluate finances thoroughly
While trust is an important part of any business deal, when making a financial investment it is also just as imperative to make sure you’re evaluating every aspect of their financials, so you can get a clear picture of what you’re investing into. Therefore, the investor should make sure that their fintech due diligence (DD) agency thoroughly evaluates the target company’s financials. Make sure to inspect monthly, quarterly, and yearly financial statements going back three to five years, if applicable to fully understand their performance and optimal profit-making capacity.
In addition, while evaluating current and past finances is fundamental to the success of any investment, the potential for future profit and success should not be underestimated. A thorough commercial due diligence (CDD) should assess the product value proposition and innovation, take into account their plans for future growth and development and evaluate how the proposition meets customer needs.
Make sure you’ve got a plan for the future
An investment or merger involves a considerable amount of capital (and labour), so proper commercial due diligence (CDD) must be done to make sure that the investment can provide future returns. In terms of evaluating the business, vendor (VDD) and M&A due diligence (M&ADD) must consider the current market, the scope, its potential for growth and the competition. Other vital aspects that should be evaluated are the level of current customer satisfaction, the potential for improvement with new products/services, innovations, and the ability to adapt to changing needs. For instance, when considering an investment in the payments sector, it is important to take into account the variety of digital payments methods, alternative payments, upcoming innovative services by competitors offering the same type of product, etc.
A well-laid-out business plan might look good on paper, but it is necessary to evaluate how it works out when you take into account actual feasibility, costs, returns and the need for the product or service in the market. It is also useful to check supplier and customer relations, future marketing strategies, customer acquisition and retention channels to make sure that your investment is committed to success.
Don’t Ignore Tech
Fintech due diligence can sometimes get caught up in finances and ignore the technological aspects of an investment which can later manifest in a huge problem, because the success of the product is inextricably linked with the strength of the technology platforms and architecture. Technical due diligence (TDD) should take the time out to assess any tech associated with the company – both hardware and software. This is especially important when it comes to investments in digital banking alternatives and fintech start-ups providing digital-only services. Making sure than the architecture is built to be scalable and resilient, along with backup plans and modern development practices is also something that technical due diligence should be able to tell you about the company you’re investing into.
IT due diligence (IT DD) should also evaluate any security and compliance issues; there might be red flags at the eleventh hour, resulting in unnecessary delays and issues with the investment. Your technical due diligence partner could also evaluate the intellectual property of the target company: gauging whether the company has technology that is truly innovative and perhaps patented as it may affect the value of the investment at a later stage.
Choose your fintech due diligence team wisely
Although one would hope there aren’t any, red flags can be an issue that can make or break a potential investment. Often, these red flags are hidden and without proper industry knowledge, it can slip past scrutiny. Choosing a team with the right knowledge and experience in business due diligence can catch those red flags in time. It is also important to make sure that the people working on your project are industry experts who know what they’re doing and what to look for; this can help you make a more informed decision.
Finding a team that to make sure your investment is secure and has the potential for success can play a significant role. Having a team that that not only works for you, but also with you can make a world of difference. The right fintech due diligence partner will provide a customised analysis of the target company, and not apply a standard and unsatisfactory “one-size-fits-all” checklist. Your commercial due diligence partner (CDD) or technical due diligence (TDD) partner should be able to clearly communicate the information you need to know – what is good, what needs work, and what red flags are on the horizon.
If you’re looking for a competent and well-versed business (CDD) and IT due diligence (ITDD) partner to guide either your company’s or your private equity or venture capital investment in the fintech or payments space, Penser might be the perfect fit for you. We have extensive experience conducting commercial and technical due diligence on companies offering financial and payment services focusing on m&add, private equity due diligence (PE DD) and venture capital due diligence (VC DD).
For a better understanding of what we do, check out this (anonymized) due diligence study we conducted for a client recently.
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