Case Study – M&A Due Diligence on Social Media Monitoring Platform
An angel investor asked us to evaluate the risk of a potential investment in a social media monitoring and big data collection application.
An angel investor was approached by a five-person start-up in Tel Aviv with an innovative social media data harvesting application. The investor asked us to evaluate the technology and team competence. Since the desired seed investment was relatively small, the investor asked us to move much quicker than usual and present an informal recommendation within three days.
At the time, the technology itself was revolutionary. It collected and organized huge amounts of data for marketers to evaluate consumer mood, sentiment, and affinity by using the top social media platforms as an input source.
On paper, the technology provided a rich prism into consumers’ online lives. If the technology performed as advertised, our investor believed in the potential of his investment. He was seeking an impartial assessment and needed assurance that this start-up was a safe bet. His requested criteria for evaluation included:
- Establish the credibility of the management team
- Understand the market need for the product through customer interviews
- Evaluate the quality of the code and the skill of the development team
With an informal due-diligence period of only three days, it was a challenge to collect as much insight as possible as quickly as possible. Therefore, Sphere provided accelerated M&A Due Diligence services focused on the following:
References — in a seed round, the development team is the only true investable asset. Therefore, references from previous employers were used to understand career longevity, stability, responsibility, and to uncover potential red-flags.
Financial — in a seed stage round, books unencumbered by personal account intermingling allow investors to make a judgment on financial discipline.
Customer calls — to understand the value of the product, it was important to speak with multiple beta users. When only positive references are received, we sought references from other customers.
Code review — the software architecture was scrutinized and a sample of code was examined. The processes employed by the developers were also documented.
With this information collected, a fast report detailing findings and concerns was then delivered to the investor.
The findings and recommendations contained in the report convinced the founder that his valuation expectations were too high. With an understanding reached, the angel investor funded the seed-stage round.