The one thing you don’t want to say to Elon Musk?
(Aaand the answer is: “We are not ready for due diligence.”)
Heikki Kauppinen is the CEO and co-founder of Diligent Solutions, the company behind the DD-Ready platform and the Asset Verification Protocol concept. He’s also an entrepreneurial lawyer with over a decade of experience in various aspects of due diligence.
In part one of our interview, Heikki explains the importance of due diligence, why time kills deals….and the thing that Elon Musk never wants to hear.
Hello, Heikki! First things first – what exactly is due diligence and why is it so important?
In essence it’s an examination of a target – usually a company. There is no single definition. A lot depends on the profession of the person using the term. Lawyers will be looking at legal matters, auditors and financial matters, human resources will be looking at employment contracts, and so on.
It’s carrying out the background. If an entity enters into a transaction without having carried out due diligence then they’ll be exposed to significant legal risk.
For example, the job interview process is very similar to a due diligence examination. You’re seeking info about the person, seeing if they’re a fit, if their references check out. Now imagine hiring someone without that process and the risk that would entail. That’s how important due diligence is.
What does being ready for due diligence mean?
It means that you are ready to commence the due diligence process. Why is that crucial? Over the ten years or so that I’ve been working with due diligence I’ve seen countless occasions where a company is seeking investment and a counterparty is willing to provide that investment. The counterparty wants to start the due diligence process. At this point the company seeking investment gets stuck. They realize that ten or even fifty documents are missing. Lawyers are waiting for those documents. The process stalls. And such a stall creates mistrust and often kills the deal. Being ready for due diligence means the process can start immediately and without delays.
And what are the downsides to not being ready for due diligence?
Missing deals. Say a tech startup goes to an event where they meet, for example, Elon Musk. He states an interest in the company, discussions progress fast, they sign a term sheet and he wants to proceed to due diligence…and then it takes the startup two months to pull the documentation together. By that time Elon Musk and team will have moved on to project number one hundred and the tech startup is left behind and forgotten.
Then there’s legal requirements that can be missed, such as data privacy regulations. Not being ready for those has legal consequences. That’s something you always want to avoid.
In a merger and acquisition (M&A) scenario, the entity conducting the due diligence examination will create a report on the documentation that’s been provided. If some of the required documents are not provided, this can have a negative impact on the corporate valuation.
You can compare it to a cluttered desk with disordered papers everywhere. Effective due diligence means that all those papers are organized and you can find what you want, when you need it.
Thank you, Heikki!
In part two of our interview, Heikki will explore how automation is set to shake up due diligence forever!
Big question: do you think due diligence processes need to modernize?