If you are reading this, you’re probably involved on an ongoing basis with conducting due diligence on potential acquisitions, and you’re probably frequently defending your investment theses regarding these acquisitions.
As the crux of this blog is to discuss tools and techniques that facilitate and improve the quality of buy-side analyses, it is greatly time to introduce the concept of “expert networks”. As the economist put it in a 2011 article, expert networks are “the matchmakers for the information age”. While their subscription and billing models vary, these networks offer the same basic service, that of matching an investor with an expert possessing information, knowledge or insights sought by the investor. These networks are a primary research tool in which the end-product is not a custom report but rather the set-up of a custom conversation with a targeted individual. These networks can indeed provide a useful input in your decision-making process, as long as you use them properly and have reasonable expectations.
First and foremost, these networks can be a valuable substitute for something that used to be prevalent in the industry: publicly-available quality research authored by equity analysts. The old trick used to be that by finding a few unbiased sources and going through a few reports on companies active in the same market space as your target, you could develop a generic, high-level understanding of industry trends, opportunities and threats. An expert consultation will help you construct such a general high-level mapping of the industry.
However, this is no substitute to a full strategic due diligence. Using an expert does not relieve you from the hard and essential work of analyzing an industry, understanding its key players’ market and value-chain positioning, anticipating both key and emerging players’ next strategic moves as they relate to the target, and assigning probabilities to these moves. The expert can not do this work for you as 1) he is (most probably) not a business strategist but rather an industry executive with an operating bias and 2) you have probably kept the target’s name confidential anyways, making such analysis impossible even to a strategist.
So, is the expert consultation’s value therefore limited to replacing a bunch of generic industry research reports ? No it is not. As we just saw, the expert will typically be an operating executive. This will allow him/her to provide “operating” and “tactical” industry views that will be more accurate and insightful than those provided by a typical strategist or market researcher. The key is to build a well thought-out questionnaire will allow you to extract useful information from the expert and interpret it in light of your target’s context. You need to study the ground and mark the ground with your Xs, the expert will help you dig. Indeed, if asked the right questions, the expert will help you go past generic industry analysis and provide leads that will help you assess the extent of your target’s intrinsic product and competitive advantage. But it should be obvious at this point that the quality of the expert consultation entirely rests on the quality of the questions you bring to the table. Mark the wrong spots and you will retrieve useless, un-strategic material.
Now, will expert networks provide you with a contact which you could not have found by yourself through linkedin ? Probably not. But the expert network provides the following benefits:
- Speed to expertise (the networks live and die by their ability to rapidly provide you with leads that meet your criteria. As such, I consider them to be “research accelerators”)
- Clear terms of engagement (pricing and service features are standardized and understood upfront by both the expert and the investor, which again removes friction from the process)
- Trusted middleman with the incentive to ensure quality control (the expert network has the built-in incentive to connect you with a quality resource)
Final two tips before we part:
- resist the urge to go into the conversation with the sole agenda of validating your pre-existing thesis. This would be a blatant case of confirmation bias, which I’ve written about in the past. Rather, do try to open-up the discussion and have the expert provide his own views on what he would look for in an investment target in the space. Again, while the expert can’t and should not replace you as the ultimate analyst regarding the opportunity at hand, such open questions might bring interesting insights as to how you should assess the “quality” of your target.
- As with most market research, varying sources will provide you with various inputs, and your task is to determine a reasonable zone of overlap between all the information provided. Techniques such as triangulation and cross-verification will therefore be as useful with expert consultations as they are with other types of research. So if you like the expert network approach, get ready to talk with multiple experts during the same due diligence assignment. To help you along the way, I will provide a list and comparative chart of the main industry players in a future post.