The pendulum has swung from being a founder-friendly atmosphere moving along at a frenetic clip, to that of a slower pace with longer diligence cycles. 2023’s investor-friendly dealmaking environment marks a departure from the trajectory that, since 2010, has favored startups. And after many high-profile public snafus it’s shaping up to be a welcomed shift.
In the fourteen months since the NASDAQ peaked in November 2021, tech valuations have declined precipitously, IPOs have ground to a near halt (dollars raised fell 95% in 2022 versus 2021), and venture dollars deployed fell 30% year over year.
In private equity and venture capital, the pendulum has swung from being a founder-friendly atmosphere moving along at a frenetic clip, to that of a slower pace with longer diligence cycles. 2023’s investor-friendly dealmaking environment marks a departure from the trajectory that, since 2010, has favored startups. And after many high-profile public snafus – FTX, WeWork, Theranos – it’s shaping up to be a welcomed shift.
The current environment will present investors with the opportunity to conduct deep investment research and increase their conviction in their decision making. That means more time spent with management teams over the course of months, not days. It means deeper dives into the competitive landscape and conversations with former executives, competitors and customers. It means more demanding financial data requests, more intense scrutiny of company performance and comprehensive benchmarking against peers.
2020 and 2021 were a seller’s market, and processes moved quickly. Speed was an advantage, and pre-empting processes with generous term sheets was typical. We’ve entered a different era. Term sheets are delivered only after substantial diligence is complete. With more time on their side, investors are seeking higher conviction and building in greater margins of safety.
Successfully navigating the treacherous road to conviction requires pressure testing a thesis, a complex process that involves evaluating options at multiple angles and considering not only what can go right, but what can go wrong. To build conviction, an investor must develop a strong view on customer pain points, flesh out a product’s value proposition, digest a company’s evolving unit economics and understand the total addressable market (TAM). The pursuit of conviction requires turning over every possible stone, aggregating as much relevant information as possible and then separating the signals from the noise.
Investing in private companies can be particularly challenging because of the lack of available information on a particular business, or even the industry as a whole. Private companies often operate in new and emerging end markets without much published data in the traditional public company model of sell-side reports, market research and/or public comps. Given this opacity, expert calls and insights can be particularly impactful for private equity and venture capital investors. Typically used to quickly ramp knowledge and understanding of new companies or sectors, conducting expert calls is an efficient way to accelerate qualitative understanding, speed up diligence and develop differentiated insights quickly.
While the management team at a potential investment can offer important perspectives and answer pressing questions, good investors can not just trust but also verify. It is critical that investors test their theses further by seeking supporting or alternative views to the assertions of the founders and management team, and nothing beats the unfiltered views of customers or prospects. Additionally, former employees can provide insights into a company’s culture, the quality of a management team and its prospects for growth, helping to further refine and solidify an investor’s thesis and strengthen their conviction in their views.
As deal flows bounce back, investors will be more focused on efficiencies and any opportunity to stretch budgets further as they seek to make the most of their time. At the same time, vendors are also under pressure, with Bloomberg recently increasing the subscription pricing for their terminals to $30,000 per year. Budgets are under scrutiny, and firms are pushing their teams to do more with less and to stretch their research dollars further.
We live in the era of The Great Unbundling, and increasingly investors find that alternative, lower cost solutions often solve some of their most pressing research challenges far better than high-cost incumbent platforms. Power user workflow tools for SEC filings and financial disclosures have found success by solving acute pain points and allowing firms to reduce the number of expensive platform licenses necessary for their teams. Innovative KPI and modeling products do the heavy lifting of aggregating hundreds of company-disclosed data points, enabling analysts to spend less time on rote work and more time on deep analysis, allowing them to be far more productive and cover more ground than previously possible.
Expert calls are a key component of any fundamental research process, but historically have been prohibitively expensive for all but the largest firms - with a typical average price point of more than $1,000 per call. In the last few years, the introduction of expert call transcript platforms have, for the first time, allowed investors to save an immense amount of preparation work and logistical effort, enabling rapid and cost-effective access to expert insights at a fraction of the cost of a traditional call.
With hundreds of billions of dollars of dry powder on the side lines, deal volumes are bound to return. A new generation of data products and tools will put the leading investors in position to conduct better, more efficient research – and to make smart investments that will stand the test of time.