An introduction to our diligence methodology

Traditional approaches to evaluating the technology of a business provide relatively limited, surface-level insights. The underlying problem is that key areas like data, technology, customer experience and company values are often considered independently. We’ve pioneered a methodology for bringing these seemingly disparate topics together into a framework that aligns both qualitative and quantitative aspects of value.

We use our proprietary methodology during pre-diligence and post-term sheet due diligence to help investors quantify the value of investing in or acquiring a target company. This article introduces our framework which covers four areas: data, technology, customer experience and company values. We will also share some of the specific diligence questions that we as in order to produce insightful valuation intelligence.

Data

A company’s data is increasingly one of its most important competitive advantages. It is through data that companies design and build cutting-edge customer and employee experiences. And yet most diligence investigations around data aren’t designed to uncover the relationship between a company’s data and its revenue-driving products, or between data strategies and customer value. That creates a huge knowledge gap.

…most diligence investigations around data aren’t designed to uncover the relationship between a company’s data and its revenue-driving products, or between data strategies and customer value.

Consider Amazon’s use of data to power machine learning algorithms that predict when a shopper is going to repeat their purchase. These algorithms make customers less likely to consider shopping elsewhere, and only Amazon has access to this data. That means Amazon has built a moat that competitors essentially can’t breach–even if they went to market with the same product. Every business has valuable data. In our diligence, we focus on the underlying properties of data that give rise to revenue-driving products. Key questions we ask about data include:

What data does the company have that would allow for differentiated product experiences?

How well structured is the data, are there API endpoints that make it easy for supporting technologies to use?

Is the company collecting sufficient data across the customer journey?

Can the company use data to show the biggest gaps in CX?

How often is the data being refreshed?

How automated is the data collection process?

How proprietary is the data, does the company own the data or is it being licensed?

Technology and tools

Technology can 10x workforce productivity and form the underpinning of great products when used correctly. Conversely, it can hinder productivity and upset customers when it’s not properly managed. An example is conversational AI. One of the most successful use cases of this technology is Google’s search algorithm that indexes pages of text so that customers can find information faster. As a testament to Google’s understanding of the limits to this approach, Google offers two buttons on its home page: “Search” and “I’m feeling lucky” which takes you to the first result. No one clicks the latter because the technology rarely sends the user where they want to go.

Compare this with many of the chatbots on the market today. Many businesses have gotten caught up in the hype from AI vendors claiming their technology could have natural dialogue with customers. Companies who have piloted these approaches found the technology did not work as promised leading to frustrated customers who have abandoned shopping carts or called into customer support with greater likelihood of leaving a negative NPS survey. Most companies have now learned to treat these chatbots more like Google’s search results, and less like they’re feeling lucky.

…it can be easy for investors to be misled into the promises of digital capabilities that turn out not to be ready for market.

With the pace of technology moving faster than ever, it can be easy for investors to be misled into the promises of digital capabilities that turn out not to be ready for market. That’s why we focus our due-diligence questions around assessing whether underlying technology is truly viable now, and quantifying a company’s capacity to continue rolling out market-ready, value-add digital solutions. Unlike the “check-the-box” approach of most tech diligence today, we report on the quality of tech as it relates to supporting business objectives. Our questions focus on:

How credible are the technology claims in their pitch deck/website/whitepaper?

Is the technology feasible?

Does the company have a data strategy to support their technology goals?

Do the technologies, tools and architecture make sense for the company’s scale needs over the next phase of growth?

Where are the single points of failure that could impact the business goals?

Are there new tools that the company should consider using to address customer friction points?

Is the company leveraging best-in-class third-party tools where appropriate?

What are the costs of maintenance, training, expansion, and support?

CX/EX

Technology turns into value when it improves the experience of customers (CX) and employees (EX). Better CX translates to customers purchasing more. Better EX leads to higher productivity.

94% of consumers who give a company a “very good” CX rating are likely to purchase more products or services from that company in the future. In comparison, only one in five of those who gave a company a “very poor” CX rating say the same.

Qualtrics

An example of superior CX is Amazon’s self-service process that has set the bar for all cloud-based CX/EX. It’s not easy to reach a customer service rep at Amazon, but not because Amazon declines to make its employees accessible. Rather, Amazon has productized an extraordinarily smooth CX for common customer inquiries. When customers want to know “Where’s my package?” the answer is instantly available in an intuitively designed “Orders” tab. Need to “Start a return?” All it takes is one click in the Amazon app. All of this self-service and removal of friction leads to lower costs, and advances Amazon’s mission to “provide customers the lowest possible prices, the best available selection, and the utmost convenience.” SVSG focuses on quantifying how technology delivers more revenue through improved CX and how technology streamlines workflow efficiencies through EX. We do this by mapping the connections between data, technology and the experiences that drive value. Our diligence questions center around:

How mature are the customer lifecycle and customer journey models?

Have digital touchpoints been incorporated?

Does the product roadmap line up with CX pain points?

How is data being used to prioritize new product features?

Is the company collecting sufficient data at each touchpoint?

What are digital first competitors doing that the company could replicate?

Culture/team

People spend money and choose to work for companies that align with and deliver on their values, and this is where digital technologies can be transformational. Digital products allow a brand to reach customers in more places, and to give personalized experiences tailored to more granular cohorts of customers than in the offline world.

Further, digital technologies allow for data to be captured during each interaction the customer has with the company’s products and people. This data can be used as described in our “data” section to form a virtuous cycle, where the company is able to constantly hone in on the areas of the customer journey that need improvement in order gain, retain, and increase customer spend.

A notable example is Tesla. They have digitized many of the experiences in what was once a mostly offline mechanical device: passenger vehicles. In doing so, they have opened up numerous touchpoints with the consumer that allow them to propagate their brand values. By embedding a digital connection into each car, Tesla is able to transmit software updates instantaneously, allowing the customers to see first-hand how Tesla is always innovating, which is one of their core values. This value as written on the website means little, but as experienced by a Tesla owner that values innovation, the impact is a repeat customer and a customer advocate.

SVSG focuses on assessing how well the company’s values are shaping—and are being reflected within—customer and employee experiences. Our diligence questions center around:

How aligned is CX with the company’s values?

How well with customer’s values?

Does everyone on the team understand how their work will improve the customer experience?

Is there a clearly defined customer journey that any department can reference?

Which staff have potential to 10x, what training is required, and which need to find new employment?

Final thoughts

Digital technologies have upended the marketplace, but traditional approaches to diligence do not adequately account for these impacts. The result is increased risk profiles for PE investments. SVSG approaches diligence differently, with a digital first mindset. To this effect, we have developed a comprehensive framework that takes into account data, technology/tool, CX/EX and culture/team. The due-diligence questions embedded into our methodology are designed to probe deep and uncover the critical factors that drive a company’s valuation and determine its long-term potential.