Investing Proactively: Back to the Future

Written by Nicolas Sauvage

Due diligence is back. According to a survey of 700 venture capital firms, the average sale once took 83 days to complete. On average, VCs would spend 118 hours of hard work and cost 10 referrals.

During the “funding party” in 2021, VCs started prioritizing speed and cutting themselves, which leads to compressed cycles and less energy analysis. Often the assumption was that someone had already made the sacrifice. As interest rates rose and liquidity dwindled, the results became clearer.

In all four quarters of 2023, 19% to 20% of stock returns were down — well above the 10% to 12% pre-pandemic trend. While this was a sign of a tight capital environment, it was also a sign that the “strange values” of 2021 were returning to normal.

With that, high-level dynamics is back, and it’s an art and a science. In business investing, the goal of dedication is to fully evaluate the opportunity and create a high-confidence investment thesis.

Getting Started

There are no hard and fast rules. A checklist can be useful but the “art” of being careful is to talk about the important factors involved in the opportunity. For one startup, this could be about ensuring market performance; for another, it may be through unit economics.

There are examples when it comes to motivation. In a survey of VCs, founders were cited most often as the most important factor, with 95% of VCs agreeing.

Other areas for investors to consider include competitors and market forces, technology/IP, customers, finances, performance metrics, regulatory risk, governance, cash flow and sales terms.

Reference calls are often required, both with initial contact and background checks. A thorough promotion may involve many phone calls with customers, supplemented by interviews with employees and analysts.

Opportunities can look very different in early stage investing, with investors focusing more on the founders and the market; 31% of early-stage VCs don’t foresee funding, instead looking for a large exit and return on investment. When time is of the essence, such as in competitive situations, investors may shift more effort to the after page.

Later investments take longer to close and may look like private equity and data center transactions. Investors will look for detailed financial information, revenue sharing, contracts, business documents and IP portfolio, and immerse themselves in technical commitments.

Due diligence looks different for CVC, or venture capital, firms. In one survey of CVCs, 66 percent had “most” or “only” strategic intent. These CVCs spend a lot of time cementing the relationship between the initiates and their parent. They may consider product portfolios, channel and customer partnerships, R&D collaboration or exclusive access, and licensing or acquisition options. CVCs are exploring how the cultures will meet.

Due diligence reduces risk not only for investors but also for founders. If managed well, it can be a great experience for all teams – a process that balances speed and rigor, and both parties can emerge with greater insight into the business and the challenges ahead.

As the reality recedes, investors are reviving the essential concept of hard-working muscle – the yeoman’s work of corporate trading. Looking ahead, 2024 has the potential to be one of the official vintages – assuming that the values ​​remain reasonable and we learn our lesson from 2021. It is not surprising that “active I’m a new guy.”‘

Nicolas Sauvage is the president of TDK Ventures, a technology-focused fund that invests globally in early stage applications that use material technologies to unlock a sustainable global future. He founded TDK Ventures five years ago with $350 million in assets under management and several investments, including unicorn Groq. Previously, Sauvage worked at InvenSense and was responsible for regional strategic partnerships including Google and Qualcomm. He was also part of the management team at NXP Software. He is an alumnus of Stanford, Insead, Institut supérieur d’électronique et du numérique and London Business School.

Photo: Dom Guzman