Have you noticed that some of the best attended events at conferences recently are the investment panels, populated by canny investors talking about where they are currently placing their funds? And so this was the case with Consult Hyperion’s recent webinar The Role of Due Diligence in Investment Cycles, featuring Jonathan Luff Co-Founder of CyLon, Europe’s leading investor in pre-seed and seed stage cyber and security technology startups. Howard Hall, Managing Director of Consult Hyperion North America, and Gary Munro, Technical Director Consult Hyperion and Dave Birch our Global Ambassador, who moderated the discussion.
A recent trend in these sessions is how the market has sped up. Organizations are raising funds earlier, asking for larger amounts of money and negotiating on the date by which the transaction has to be closed. Jonathan gave an example of a six-week old company with a pre-money valuation of $25m.
Some commentators believe that this is due to the introduction of Zoom or similar; meetings can be set up quicker, allowing the target company to meet more investors at minimal cost and effort. Others, including Jonathan and Howard, believe that it is due to the liquidity in the market, driven by the influx of money from other sectors and a range of new investment mechanisms including SPACS and NFTs.
Either way it is apparent that investors are waving their opportunity to complete due diligence on their prospective investment. They are concerned that the delay might prevent them from investing in the next big thing. But are they right? Lightspeed Venture Partner’s investment in NS8 at a time when NS8’s executives were aware that the SEC had launched a fraud investigation into the company, a transaction that was driven by speed, suggests not.
Gary and Howard discussed the range of Due Diligences that Consult Hyperion has completed on Fintechs in UK, Middle East, Africa and America for a cross section of investment companies. For the majority of our clients, the quality of the target’s technology and its ability to scale to meet the investor’s expectations are front of mind initially. However as our analysis matures, our clients become more interested in the people and processes that support the technology and the robustness of the security architecture. For early-stage investors, such as Jonathan, the quality of the management team is paramount in their investment decision. For later-stage companies, the way the company is managed and how it adheres with its polices become more important.
This means that the Due Diligence can be tailored to the size of the investment and the time available to complete it. The shorter audits focus on finding evidence of Sound Practices and good management within the company. The longer audits pull apart the Tech Stack, reviewing source code, auditing the use of Open-Source applications and evaluating the end-to-end security of the service. Both are relevant to an investor in the current market. We will not advise them to invest or not invest in the target company. However, we will provide them with a list of short-term issues that must be fixed within the first six months of their investment allowing them to assess the risk of their investment. For one client this focused on resolving the total disconnect between the target’s management and technical teams. The robustness of their Tech Stack was not the biggest area of concern.
So where did Jonathan, Howard, Gary and Dave think you should look for the next Big Thing? I am sorry, but as with all good reviews, my editors have removed all spoilers. You will have to listen to the discussion. I promise you it will be a good investment of your time.