Luminii Consulting's managing director Lushani Kodituwakku, discusses what makes good commercial due diligence in the technology sector and  how to create strategic value for investors and portfolios.

Which types of technology are becoming increasingly attractive? Where are you seeing the most focus from investors?

That is a deceptively easy question. Technology has changed how we live, but maybe never more so than over the past year when it has sustained us through the pandemic and is continuing to redefine how we work and interact. There are countless “hot” segments or niches in technology, some of which have the potential to rewrite the rules of business or provide solutions to urgent societal issues to the next disruptive technologies in fintech, ecommerce or the potential of AI to revolutionise just about any industry and these trends are ever changing.

An area that has been much talked about in the recent year is digital health, which is a vast and diverse sector, but which through advances in technology, has the potential to revolutionise the healthcare ecosystem, making the healthcare experience predictive, preventative, personalised and participatory. Staying within the health space, mental health has become a bigger priority for those with a duty of care. This has then triggered significant interest from investors with many digital health companies raising finance to support their ambitious growth plans in recent months.

Another key topic is cybersecurity. The risk of cyberattacks is evidenced by the number of reported data breaches. For context, there were over 1 billion recorded breaches in April 2021. The growth potential of this market is large, and it makes sense for investors to continue to rally behind this sector.

Another sector we have seen traction in our recent work revolves around data, in particular first-party data management, data integration and data analytics. Businesses adopt a myriad of software platforms, but extracting value is often inhibited by the fact that they are not well integrated, a factor that often inhibits growth and scalability. Hence, platforms and products that aid digital transformation initiatives and integration are currently generating strong traction and Luminii expects this sector to remain buoyant in the coming years.

Luminii has carved out a specialism providing commercial due diligence on fast-growth technology companies. Which areas have you worked on in the technology space in the last year?

Indeed, we are building a reputation as a go-to CDD provider for technology deals; 70 per cent of the deals we have worked on in the past 12 months have been in the technology space. We have conducted CDD on a varied number of technology assets ranging from data analytics, cyber security, identity and access management, e-marketing, subscription management, automation, ecommerce fulfilment platforms, video conferencing, billing platforms to digital health.

What advice can you offer investors on how to get more out of CDD processes on tech companies?

My first piece of advice is sector agnostic, and it is to focus on end market dynamics and customer feedback, as insights from customer interviews are a very good indicator of future churn and sustainability of demand. In our work at Luminii Consulting, we have countless examples of when customer referencing has been the clincher and sometimes the deal breaker.

Then, looking at the technology sector specifically, many potential targets are on a journey from a traditional piecemeal to a SaaS/ recurring revenue business model. Again, testing the proof of concept and the technology’s differentiation versus competitors through research, especially through discussions with customers and industry is key to assess the technology’s demand in variety of use cases and competitive sustainability. Being able to assess scalability, revenue performance drivers and potential for recurring revenues is key in making an informed investment decision into a technology business, particularly in the assessment and validation of deal multiples. 

One of the problems investors and management teams seem to face is digesting and extracting value from DD outputs post deal. How can managers ensure that value creation plans properly benefit from what you have learned?

I like to think we make it very easy for investors and management teams to extract value post deal from our work. From the very beginning of our existence, this is an area Luminii Consulting has focused on to a large extent, through our CDD. We dedicate an entire section of our report to strategic recommendations and value creation.

For us, it’s very important to provide to our clients with strategic recommendations that are not just good on paper, but recommendations that will result in actionable positive outcomes. For example, on a recent CDD on a tech business, we provided 20 recommendations split into 5 categories: product & roadmap development, operations, people & company culture, sales strategy, business development and marketing and business model scalability. Again, these are quite key areas for technology businesses and targeting those areas appropriately is extremely important.

As a CDD provider, our work should not only assess the investment, but also create value to the business. We speak to a plethora of industry players including customers, partners, suppliers, competitors, and industry associations, so we are able to form evidence-based opinions of what is required from a business operating within a rapidly changing technology sector. Our recommendations are led by the market evidence and they are a prerequisite for business sustainability and growth.