Asking difficult questions

Back in the 2000s, “discreet enquiries” were all the rage. Due diligence was a festival of smokes & mirrors. Providers would “tap into our source network.” Reports would be peppered with “a well-placed source claimed…” 20 years later, most companies expect to go through due diligence during pivotal partnerships. It’s not a big mystery anymore. So, how are we doing on “overt enquiries”? Patchy, it seems.

Take this example: A fund is considering investment in another impact fund (focused on environmental projects across Africa). The due diligence is the usual blend of:

👉 Reviewing disclosures

👉 Public record & media review

👉 Limited human enquiries (‘background check’)

👉 Contextual risk assessment

👉 Interviews with the management team

These days, I’ve had to become very selective about any background sleuthing we do (public records, media, source enquiries, etc.). It’s seldom strategic, often commoditised, and sometimes messy (fixing a botch from an existing provider). Some of the common gripes about the state of the DD market include:

🤷🏻‍♂️ Lack of context (decisions without relative comparison are hard)

🤷🏻‍♂️ Lots of padding, little substance (DD treated like a ‘show your workings’ mathematics test)

🤷🏻‍♂️ Sources not qualified (is that media biased, did the person have a grudge, etc.)

🤷🏻‍♂️ Throwaway grenades (‘red flags’ cited but without qualified data)

🤷🏻‍♂️ Written without considering the reader

On that last point, I see both sides. When I did a lot of DD, we’d have very different customer personas. Compliance officers and deal teams in investment banks can want very different things from a report, so who are we writing for? But when the writer doesn’t help the reader, that’s a missed opportunity.

For instance, in this fund project, a regular and great client asked if we’d help with the background check bit. The media was all relatively benign and curated (puff pieces, press releases). The corporate information seemed convoluted. Without boring you with the minutia, what concerned me was why a chain of corporate ownership led to a filing where directors had come and gone rapidly. Most held their directorships for less than a year. In itself, it is not necessarily an issue. However, some were still listed as current employees on the company’s website.

If I’d highlighted this issue and left it at that, it’s essentially useless information. So what? Leaping to conclusions might have been worse. Perhaps there had been a falling out between founders (not uncommon). Or maybe a change in corporate structuring as the firm internationalised (e.g., placing some directors within local portfolio companies). The core founders might have initially inflated the company headcount to get funding (appear bigger than they are) before downsizing and discarding a cardboard cutout army of directors. Again, pontificating is useless.

Instead, I spoke to the head of the deal and discussed some options, such as asking for an org chart and comparing it to corporate records and the website’s cast of thousands. Luckily, the investment director was comfortable with the most straightforward approach: being direct. We’d set up a call with the CEO, highlight the confusion, and ask some questions (the model above is a safe and benign way to structure such questions if you’re worried about it getting adversarial).

It’s trickier if you oversee hundreds (thousands) of due diligences a year (big supplier pool, etc.). However, for high-stakes relationships (investments, acquisitions, partners, exclusive suppliers, distributors, etc.), we can wage a war of email and disclosure attrition (asking for documents) or get on a call and see the whites in their eyes. It’s much harder to be deceptive in person.

If your DD (or DD provider) leaves you stuck, hanging, or confused, requesting questions or tactics to clarify those lingering questions is perfectly reasonable. Many of us do this naturally in other areas. Maybe you’ve asked a professional (doctor, lawyer, vet, accountant, etc.), “What would you do in my situation?” Try it with DD firms and see what they say…