How to Stop Others From “Faking It”- or How Due Diligence Leaders Protect Their Firms

Obviously, no one wants to be the investor that was duped. Better due diligence can save you from financial loss…and reputational risk. Here are the emerging due diligence trends you need to consider adopting…pronto.
By Sara Chertoff
April 19, 2023

The End of Faking It in Silicon Valley,” the New York Times announced this week. In times past, it seems that various red flags were ignored by investors eager to believe the hype, the celebrity exec’s, the promises…or all of the above. My, how times have changed.

Now: Scrutiny is up…fraud needs to be down…and strong operational due diligence is even more in the spotlight. By contrast, inadequate due diligence can leave investors way open to risk, especially in today’s high-risk environment. Best in class processes and systems make a world of difference – we highlight some of these, below.

With this in mind, we’re also excited to be coming to GAIMOps Cayman this year to share what we’ve learned, empowering Operational Due Diligence teams in leading institutional investors around the world. . Please join us at our roundtable discussion about Due Diligence in this Era of Risk. We look forward to sharing together and hearing your insights.


Technology Wins

In a world where people update to the latest iPhone version as soon as it’s available, it’s amazing how many companies are relying on due diligence approaches and providers offering incredibly outdated technology.

Due diligence processes and workflows need to match the requirements and thoroughness of the investment teams, while also matching the speed and other realities of the investment climate. Thankfully recent years have seen the development of automated, smart due diligence platforms that free up ODD professionals to focus on analysis and decision-making, rather than data entry and collecting.

Outdated tools and procedures not only waste precious time but can be a hindrance to a smooth deal flow. Even things that sound as simple as report delivery or billing can slow down the due diligence process when performed with outdated systems. Among other signs: Too many due diligence teams rely on spreadsheets and email for communication to manage complex processes, which can be time-consuming and inefficient.

Poor Communication Kills

The whole due diligence process is undermined by poor communications. This is exacerbated when multiple teams are working on the same project, using outdated tools like spreadsheets and emails to communicate. Then, the situation is ripe for miscommunications, misunderstandings, and delays. Nobody wants to admit that the information that would have prevented a bad investment was lost in an email chain!

If teams cannot be brought together physically, their work can be unified online with virtual deal rooms and/or collaboration platforms. These can smooth out communication challenges, un-silo information, and allow the team to share insights. The full team will see how due diligence is progressing and gain from the transparency in the process.


Speed Drives

The market might be down, but that just means that the pressure to find the best deals is up. Today investment teams often need to make decisions in a matter of days. Pressure to make hasty decisions is real….yet can be dangerous.

The 3-4 weeks that traditional background checks take to complete is often too long to wait to assess an executive or an investment. Further, long, unwieldy documents that require hours to digest further delay decision-making and are a burden on due diligence professionals.

When getting the information needed to make a sound decision takes ‘too long’ or is ‘too hard’, then many teams move ahead without the information they need. Smarter teams let AI-based automated background check platforms conduct the search for them, bringing the necessary data for analysis within days, or even hours, in an easily digestible format.

Expertise Thrives

With deals being made around the world in complex industries, there is a huge amount of information that requires an expert to decode. Understandably, the members of an in-house due diligence team are unlikely to be experts in every geography or regulation. But the gap in understanding, either in the language barrier or domain knowledge, can prevent essential information from coming to light.

Working with an expert provider of “enhanced due diligence solutions” gives in-house teams the support they need to fill any knowledge gaps. Further, getting direct access to in-market analysts can make all the difference.

Security Protects

Malicious attempts to steal data are rampant – and this is especially risky in high value transactions and investments. As you collect sensitive information on potential business partners, you want to be sure that you are keeping their data secure.

Email isn’t secure, yet curiously many providers of background checks and monitoring solutions don’t offer secure technology platforms and data rooms for transmitting data. Investors must also ensure that all parties involved in the due diligence process, such as lawyers, consultants, and third-party service providers, are compliant with data privacy regulations.

Facts change

If your risk mitigation process stops at one background check, then you may be missing something. Realities change…new information comes to light…and refreshing diligence is a key in staying on top of reputational risk. Don’t miss the chance to monitor and respond, immediately, to new developments.

Automated diligence processes allow for ongoing monitoring of key executives and company developments. If anything adverse happens, whether legal, regulatory or otherwise newsworthy, it is immediately flagged for ODD teams to review. This gives you the ability to react to events in real-time, instead of waiting for the news to hit the press.

Together we are stronger

At the end of the day, the investment community is a small one and everyone is working toward the same goals. Making sure investments are made in a responsible and safe manner benefits the entire ecosystem.

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