# A digital-first world means Investors should look to digital due diligence first too
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2022-02-08
Category: INVESTING
Category URL: https://financedigest.com/category/investing
Meta Title: Data Due Diligence: The New Key to Successful Investments
Meta Description: Discover how savvy investors can leverage data infrastructure and predictive modelling to identify growth opportunities and make informed investment decisions.
URL: https://financedigest.com/a-digital-first-world-means-investors-should-look-to-digital-due-diligence-first-toohtml

_By **Fran Quilty,** CEO and co-founder, Conjura_

Due diligence has always been a key part of the overall investment or acquisition process, but data has taken this up a significant notch. While human chemistry and killer marketing materials still have their parts to play ahead of M&A or a funding round, an investor should now spend more time evaluating the target’s data than the senior leadership team. Indeed, data should be the defining factor between a deal or a dud.

The four pillars of due diligence – legal, operational, commercial, and technical – still stand. However, savvy [investors will be looking to the data to identify where the opportunities for future growth lie  and benchmark that potential](https://www.financedigest.com/virgin-orbit-says-space-startup-in-talks-with-potential-investors.html "Virgin Orbit says space startup in talks with potential investors") against the target’s peers.

But it’s not just the data itself that should be reviewed, it’s the data infrastructure too. How data is captured, stored and [managed demonstrates how well-prepared a business](https://www.financedigest.com/finance-management-for-small-business.html "Finance management for small business") is to use that data to inform its longer-term strategy. This is a key measure of value, especially in a competitive sector like e-commerce.

Understanding where a business is on its data-transformation journey helps the [investor understand if the target has been valued fairly and whether it’s a safe bet](https://www.financedigest.com/investors-trim-bets-for-peak-bank-of-england-rate.html "Investors trim bets for peak Bank of England rate"). Whilst the data itself is immensely valuable, the processes and thinking in [place should be viewed as equally important when it comes to reaching a final](https://www.financedigest.com/queens-final-resting-place-is-a-small-chapel-in-historic-windsor-castle.html "Queen’s final resting place is a small chapel in historic Windsor Castle") decision.

**Think longer-term by looking beyond revenue figures**

Revenue figures only tell half the story in a [digital-first world](https://www.financedigest.com/the-digital-first-world-financial-services-predictions-for-2022.html "The digital-first world: financial services predictions for 2022"). As we’ve seen, the bigger picture is how successfully a target can ‘read’ behavioural [data to uncover growth](https://www.financedigest.com/bridge-the-gaps-in-big-data-and-cross-into-a-world-of-growth.html "Bridge the gaps in Big Data – and cross into a world of growth") potential at a customer, cohort, product, or industry level.

This is predicated on a business having a sufficient volume of historical customer data and the means to analyse it at a granular level. In practice, this means having a  firm handle on unit economics to react to customer and competitor activity; for example, they should be [tracking metrics](https://www.financedigest.com/5-fx-metrics-your-business-should-be-tracking.html "5 FX METRICS YOUR BUSINESS SHOULD BE TRACKING") like gross margin, conversion rates, cost per acquisition, customer lifetime value and so on.

[Investors should work on the assumption that this level of commercial](https://www.financedigest.com/certainty-in-an-uncertain-world-post-brexit-investors-turn-to-commercial-property-and-fixed-returns.html "Certainty in an uncertain world – post-Brexit investors turn to commercial property and fixed returns") application of data is now a given. If the target doesn’t know it’s CPAs from its CLVs then that’s a red flag.

Tier one [targets will also have the ability to use predictive modelling to forecast and plan for growth](https://www.financedigest.com/puma-expects-q2-sales-growth-below-full-year-target.html "Puma expects Q2 sales growth below full-year target"). So, ask for evidence of how [data science is being used – or will be used – to inform strategies](https://www.financedigest.com/investing-in-a-first-party-data-strategy-can-save-the-day-for-retailers.html "Investing in a first-party data strategy can save the day for retailers") for the mid and longer terms. Ideally, the target should be able to demonstrate how this informs factors like product diversification to [grow share in the domestic market](https://www.financedigest.com/the-edible-oils-market-to-grow-on-an-innovation-revealing-spree.html "The Edible Oils Market To Grow On An Innovation Revealing Spree"), and/or to guide internationalisation.

**A well-run business has nothing to hide**

Data transparency has profound implications, particularly for the traditional three-step [acquisition process](https://www.financedigest.com/how-decentralized-finance-can-aid-in-the-acquisition-process.html "How Decentralized Finance can aid in the acquisition process"), as it renders the marketing phase a mere formality.

Data due diligence doesn’t have to take months and an army of auditors. There is now a wide array of due diligence tools available to acquirers that plug into the APIs of their target’s [ERP and related cloud-based systems](https://www.financedigest.com/is-your-erp-system-industry-4-0-compatible.html "Is your ERP system Industry 4.0 compatible?"). This allows  (anonymised) unit economics to be analysed directly – and on a ‘live’ basis – so there’s no gaming the system.

Any and all assertions on performance and growth made by the target  can thus be qualified quickly and easily. [Digital due diligence](https://www.financedigest.com/the-dialysis-machines-market-to-be-diligently-digital.html "The Dialysis Machines Market to be diligently digital") has become purely a set of checks and measures.

**The data warning signs to watch out for**

Businesses that aren’t [data savvy can easily fall](https://www.financedigest.com/stocks-climb-yields-fall-with-dollar-on-inflation-data.html "Stocks climb, yields fall with dollar on inflation data") into the trap of making poor qualitative assumptions, notably about target markets and audiences. But there are other ways to spot the bad apples.

Firstly, pay attention to how data is stored, and managed within that set-up. Data hygiene can be a [powerful indicator of the quality of the business](https://www.financedigest.com/ceo-riggs-eckelberry-of-originclear-discusses-the-power-of-intuition-in-running-a-successful-business.html "CEO Riggs Eckelberry of OriginClear Discusses the Power of Intuition in Running a Successful Business ") attitudes to data, so watch out for data duplication and inaccuracies.

Next, check how often data is reviewed to spot opportunities as they emerge or to identify and react to anomalous [trends that could result in lost sales](https://www.financedigest.com/why-sales-enablement-is-the-trend-to-watch-out-for-in-2023.html "Why sales enablement is THE trend to watch out for in 2023"). At the most basic level, this should be done on at least a daily basis. If not, this raises questions around a business’ agility – and its leadership.

Ask what metrics are most [important to growth](https://www.financedigest.com/china-nov-export-growth-slows-but-imports-accelerate.html "China Nov export growth slows but imports accelerate")? The ones that should be demonstrably front of mind are repurchase rates and lifetime value metrics . Not taking your high value audiences into [account highlights poor business](https://www.financedigest.com/making-your-accountant-an-invaluable-asset-to-your-business.html "MAKING YOUR ACCOUNTANT AN INVALUABLE ASSET TO YOUR BUSINESS") acumen.

Both customer acquisition and retention marketing strategies should clearly be led by [data to ensure](https://www.financedigest.com/finance-firms-must-ensure-they-fix-data-fundamentals.html "Finance firms must ensure they fix data fundamentals") outreach strategies are balanced with ROI. Be on the lookout for any evidence that  [customer acquisition costs are regularly – or indeed ever – more than the purchase price](https://www.financedigest.com/shell-energy-to-pay-for-overcharging-price-cap-customers-ofgem.html "Shell Energy to pay for overcharging price cap customers -Ofgem").

**Data culture, or ‘me’ culture?**

How data is viewed within the [business culture is a good way to gauge how far along the target](https://www.financedigest.com/julius-baer-2022-profits-fall-as-it-hits-business-cycle-targets.html "Julius Baer 2022 profits fall as it hits business cycle targets") is on its data journey. If the  C-suite doesn’t understand, or appreciate data then the [growth potential](https://www.financedigest.com/intracranial-pressure-monitors-market-is-set-for-a-potential-growth-worldwide.html "Intracranial Pressure Monitors Market is Set for a Potential Growth Worldwide") is immediately at question.

Also, look for how teams collaborate around the [data they hold](https://www.financedigest.com/sterling-holds-firm-after-uk-jobs-data-muddies-rate-outlook.html "Sterling holds firm after UK jobs data muddies rate outlook"), the organisational KPIs and remuneration structures. The best target businesses [share data](https://www.financedigest.com/shares-slip-yields-rise-as-u-s-data-sparks-rate-hike-concerns.html "Shares slip, yields rise as U.S. data sparks rate hike concerns") and work together towards common goals and rewards. Any [suggestion that data](https://www.financedigest.com/big-data-suggests-leicesters-football-success-could-usher-in-economic-boom.html "Big data suggests Leicester’s football success could usher in economic boom") is held within departmental silos could be a clue you’d  be investing in a company that is plagued with internal politics.

**[Thinking big?](https://www.financedigest.com/think-big-make-your-new-years-resolutions-to-buy-a-holiday-home-in-2017.html "Think big – make your New Year’s resolutions to buy a holiday home in 2017!") Start small**

We’ve all heard [data is the digital](https://www.financedigest.com/why-data-is-the-best-weapon-in-the-war-for-digital-talent.html "Why data is the best weapon in the war for digital talent") equivalent to gold, but even businesses with a stockpile like that of the national reserve need to have the means to extract, analyse and act upon it. Any target should be measured by its potential, but if they can’t access it, then its value is questionable at best.

It takes time, energy and (most importantly) money to get to the inherent value in data, and if the effort is going to be too significant to [see a reasonable return](https://www.financedigest.com/delta-sees-return-to-profit-as-travel-demand-hits-historic-levels.html "Delta sees return to profit as travel demand hits ‘historic’ levels"), then it is often prudent to step away. From that perspective, the best [targets are often the data-savvy challenger businesses over the market leaders](https://www.financedigest.com/us-ftc-leaders-will-target-ai-that-violates-civil-rights-or-is-deceptive.html "US FTC leaders will target AI that violates civil rights or is deceptive")


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