How We’ve Shifted Our Due Diligence Process During the COVID-19 Pandemic
COVID-19 has left no industry untouched. While we at FINCA Ventures consider ourselves very lucky to be among those who can continue to do their jobs, as the impact investing industry has acknowledged over the past couple of months, COVID-19 has presented unforeseen challenges to deploying capital and monitoring investments. New obstacles exist throughout the investment process, however interference with conducting due diligence on new investment opportunities has been the most pronounced for us at FINCA Ventures. We, like many in the sector, are eager to deploy capital, but are left with questions around how to do so without sacrificing efficiency and completeness.
Last week, the Response, Recovery, and Resilience Investment Coalition (R3 Coalition) released its second issue brief: The Impact Investing Market in the COVID-19 Context: Due Diligence that covers the specific factors hampering investors’ abilities to conduct due diligence in the current climate and highlights strategies that investors have tested to overcome these challenges. While FINCA Ventures participated in stakeholder interviews for this issue brief (alongside 40 other industry participants), we wanted to take this time to highlight more specifics around how our process has changed.
Travel restrictions have significantly impacted our investment process for new investments, as in-person due diligence is the single most important step. We typically use these site visits to get to know the extended team (as we usually only interact with the founders on the initial calls), see the business model in action, and meet with key stakeholders such as customers (especially customers!), suppliers, and implementing partners. We spend 2–3 days with the entrepreneur and the team, share many meals and long car rides, and really try to better understand the business and surface the areas where we can bring value. While we try to keep a constant pulse on the markets we invest in, different business models have different realities on the ground, and we would be wrong not to prioritize these trips.
But the realities of the pandemic left us with two choices: adapt to a world where we can’t do in-person diligence trips or hunker down and cease investment activity for the duration. We chose to adapt. We’ve been able to alter our investment process to rely more heavily on Zoom calls and close partnerships that we’ve built with co-investors. Since March, we have brought one new company through our revised investment process (stay tuned for the release of the Why We Invested piece later this month). With a site visit planned (and then cancelled) in March, we’ve spent many hours over the past couple of months conducting virtual due diligence and have relied heavily on a trusted co-investor (who we have co-invested with in two other deals) who had the opportunity to see day-to-day operations in person and meet the team on the ground before the pandemic. We were able to aggregate insights gleaned from their field visits to inform our own due diligence. This process has only reemphasized how relationships play such a critical role in due diligence and we are grateful for the ability to leverage existing connections that we’ve built over the years.
Given the changing market dynamics, we also needed to dig deeper into the financial model to understand how uncertain health and economic impacts could continue to affect business operations, and future fundraising ability. As a team we had to rethink sales assumptions and walk through multiple iterations of the model and cash flow forecasts to get comfortable with the shifting opportunity and assess whether they could weather the storm and have sufficient runway for the next 18 months.
In this instance, we were able to get comfortable enough to proceed with the investment and we couldn’t be more excited about it. In another example, a cancelled visit led to the lead investor willingly sharing their full diligence and investment memo for us to review. When we as a team dug in, we ultimately decided the fit wasn’t there for us, and we were able to give the entrepreneurs a quick “no” so that they could plan accordingly, rather than waiting for us to reschedule a visit once travel became safe again.
With one new investment in the books, we are eager to continue to evolve our investment process to deploy more capital this year. That being said, we are very much still learning on the fly. Thanks to the GIIN for coordinating the responses of so many in our space so we can all collectively learn from one another. If you’re an investor, we’d still love to hear how you are shifting your process to continue to effectively support the companies that need it the most. But even more so, we’d love to hear from entrepreneurs on how they are adapting to new diligence processes: what seems to be working, what seems to be not working, and what is just too time consuming? We are looking forward to learning from each of you and continuing to adapt as we go during this unprecedented time.