Connecting The Dots: The Pros And Cons Of Virtual Due Diligence
"In many ways, for the VC world, the pandemic is business as usual. Innovation never sleeps, and neither does the money that funds it."
I have written previously on the growing significance of team culture for VCs when making investment decisions, especially in the wake of global, headline-grabbing scandals such as Uber and WeWork. In this time of crisis, that focus on team culture has grown more important than ever before, as fund managers are forced to deploy capital more sparingly and strategically.
But in an age of social distancing and remote working, the all too crucial first step of meeting a founder in person is out of reach for investors. VCs must adapt to this new reality and ask themselves some tough questions. How can you get a gauge of company culture if you can't visit the team? And how can you make an investment decision regarding a founder you've never met?
Yet in many ways, for the VC world, the pandemic is business as usual. Innovation never sleeps, and neither does the money that funds it. If anything, due diligence checks have become more rigorous than before, as the crisis has forced VCs to be more diligent in how they deploy their capital. So much of due diligence today is already conducted online. VCs scour online repositories for data, while physical documents are effectively a thing of the past– and meetings or even office tours can be conducted via video conferencing tools. In short, virtual settings can all but replicate the relationship-building process most fund managers undertake with their founders.
Certainly, deals are still happening. In fact, according to recent analysis from data provider Crunchbase, over March and April 2020 (the period where social distancing took hold in most parts of the world), funding actually increased by as much as US$2 billion to $5 billion per month over the first two months of the year. This is despite global funding in the first four months of 2020 being down by 11%, compared to the same period in 2019. VCs, it seems, are adapting. But in lockdown conditions, it is not just how we communicate that has had to change.
In these unprecedented times, the key factors to look for in an investment prospect have also shifted. Al Waha Fund of Funds, the Bahraini government initiative established to kickstart a VC community across the Middle East, has recently announced a substantial investment in seed stage venture capital firm Shorooq Partners, which now plans to enhance its presence in the island Kingdom, while working to find, support, and enable the next wave of regional founders. The addition of Shorooq Partners to Al Waha's portfolio shows that despite the ongoing global pandemic, investors are actively seeking new opportunities to support startups– but with a renewed focus on sectors such as fintech and healthtech, which have played an increasingly important role during the crisis.
Indeed, the pandemic has seen a surge in the uptake of new technologies across the region. A recent survey by Mastercard found a 70% growth in the use of contactless payments across the Middle East and Africa, as consumers sought to maintain social distancing measures. In fact, this regionwide growth reflects global trends. According to a recent study by financial advisory firm deVere Group, the use of fintech apps in Europe surged by 72% in just one week at the beginning of the crisis. BenefitPay, the Kingdom of Bahrain's national e-wallet, saw a staggering 1257% surge in transactions in March alone. In May, the funding announcements in the Middle East were dominated by e-commerce platforms.
So, the opportunities are still there, and they can still be accessed, studied, and nurtured. But can virtual due diligence ever completely replace the intimacy and candour of human contact? VCs are having to rely more on their own trust circles now than ever before, phoning around their networks to learn what they need to about a prospect. But we must all be conscious of the risk of overreliance on our own networks: the emergence of a closed "old boys club," where funding stays within a circle of known industry players, leaving those attempting to break into the market by the wayside. VCs are having to be more careful than ever before, but that shouldn't mean that real opportunities are lost.