How AI-Driven Financial Analysis Powering Efficient Due Diligence for VCs and Investors

There is a growing trend of some players in the startup world using misrepresented financials to attract an injection of capital into their ventures.

For instance, a recently acquired promising startup was in the news when the acquirer discovered that the business’s financials did not tally up.

The acquirer business, despite all efforts, landed in the corporate governance spotlight; unfortunately, the discovery was made only after the transaction went through.

Venture capital firms and other types of investors, such as angel investors and hedge funds, are also vulnerable to the consequences of misrepresented financials during investing rounds.

This is where leveraging financial analysis solutions can help them be more thorough in the due diligence process and make accurate decisions early on.

This blog explores the growing importance of technology-powered due diligence and the benefits that superior financial analysis solutions bring to the table.

Why Is Due Diligence Important?

Betting on the right businesses is an important decision for venture capitalists and investors. Investors may have diverse goals and portfolios. However, all investors need to understand a potential portfolio company thoroughly.

They must be aware of key financials such as revenues, profits, assets, and liabilities of the business. Access to such information helps investors rationally gauge the real valuation of a business and fix the investment terms and conditions accordingly.

However, investors need to analyse raw financial data accurately to develop a realistic valuation. This is where the real challenge crops up. Today, it is much easier for businesses to fudge data to help boost their valuation and attract investors. While many businesses may be honest in their practices, bad players do exist.

How Can Due Diligence Be Performed Accurately?

Today, digital transformation across industries is helping businesses drive their profitability goals more efficiently. In the domain of investing, venture capitalists and other types of investors make money when their portfolio companies perform well, drive up their revenues, and turn a profit.

Hence, it is important to invest in winning businesses. Investing teams spend a significant amount of time evaluating a company’s financials. However, many investing teams still engage in a large amount of human intervention and manual processes, which can result in errors and inaccurate analysis.

This approach can also make due diligence time-consuming, leading to delays in successfully closing a round with a promising business.

Now, this is where technology comes into play. Today, venture capitalists and other types of investors can leverage state-of-the-art financial data analysis software to make the due diligence process efficient, time-bound, and accurate.

What Is a Financial Data Analysis Software?

Financial data analysis software is a cloud-based, artificial intelligence (AI)-powered software that is helping a wide range of businesses automate the financial analysis process.

This solution combines various technologies such as automation, AI, Machine Learning, cloud computing, and Optical Character Recognition (OCR) to enable efficient, speedy, and value-driven analysis of massive amounts of financial data within a matter of minutes. Businesses can leverage the software to drive diverse outcomes based on their business model.

For instance, lenders leverage financial analysis software to make strategic and accurate underwriting decisions. It also helps them expedite the speed at which decisions are made to help scale the business.

On the other hand, investors – ranging from venture capitalists and angel investors to hedge funds – can leverage the software to do due diligence when investing in a new business.

This process can protect their business from future liabilities. It can enable them to identify potentially profitable ventures to invest in.

AI-Powered Due Diligence: An Overview

There are several ways that businesses can misrepresent their financials. A superior financial analysis software comes with stellar fraud detection capabilities.

Here is a snapshot of how AI-driven financial analysis can be a game-changer for investing businesses.

1. Detection of Irregular Patterns 

The sheer amount of financial data that needs to be analysed makes it impossible for manual interventions to detect inconsistencies. On the other hand, a superior financial analysis can recognise irregular transaction patterns and systematically flag them within minutes.

2. Recognising Identity Fraud 

Another common type of fraud is identity fraud, where an individual impersonates another. Authenticating the identities of founders and other key players in a business is an important aspect of due diligence. Financial analysis software has the capability to detect any inconsistency in identities.

3. Identifying Fake Documents

With access to technology, it is getting easier to print fraudulent documents. However, financial analysis software can detect minute differences in the documentation and flag them instantly. This process is hard to replicate in a sustainable, scalable manner by the human eye.

4. Categorise All Transactions 

Every transaction can be categorised as part of inflow or outflow transactions. Under these two umbrellas, they can be further broken down into several sub-categories.

Hence, every transaction can be scrutinised closely. Any transactions that do not add up can be pulled up for further analysis.

For instance, a business may have missed EMI payments or have too many circular transactions, thus revealing important information about the business culture and true trade values.

5. Drive Data-Driven Investing Decisions  

The overvaluation of startups is a common occurrence in the startup world. Hence, it is tempting for investors to be swayed by hype when making decisions.

However, financial analysis software helps them to make decisions based on hard data that has been sliced and diced in multiple ways.

They have access to an accurate financial picture of the business, based on which they can make well-informed investing decisions.

The Takeaway 

Investors must do due diligence before investing in any new portfolio business. By doing so, they can understand the financial health of the business and all potential liabilities and also weed out potentially fraudulent players.

Investing companies can partner with a financial analysis technology specialist to access customised solutions for their specific needs. This is an important step towards building a successful, winning portfolio of wealth-generating businesses.

Presica’s cloud-based, comprehensive and seamless financial data analysis solution simplifies and speeds up the process through automation. The software provides actionable insights on a customisable dashboard, thus helping companies make informed business decisions.

Request a free demo today!