Challenges faced by Pershing Ventures
Pershing Ventures performs extensive due diligence checks, including understanding the business, learning about its commercial potential and the competitive landscape, and building a relationship with the founders and stakeholders of the company. Due to his traditional credit background, David firmly believes all investments must undergo a rigorous multi-disciplinary financial, legal, and operational due diligence underwriting process. Early-stage companies generally have weaker financial reporting and thus require a broader and deeper analysis to lower the risk of investment failure or fraud.
However, performing due diligence on early-stage investments takes much work. Financial due diligence is time-consuming and unglamorous but essential to ensuring that a prospective company is a wise investment. However, financial due diligence that focused only on historical management reports and audited financial statements may be insufficient to identify the existence or potentiality of fraud in the business.
Statistically, only 4% of financial frauds are uncovered by an audit
Statistically, only 4% of financial frauds are uncovered by an audit. Although auditors have a fiduciary responsibility, they often need to be compensated better to expand their scope. "Big Four" accountants usually charge upwards of US$50,000 to audit and check a sampling of a business's finances, a cost most Pre-Seed, Seed, and Pre-Series A investors cannot bear. For experienced investors, performing more than a simple, routine audit comprising a stratified sampling of a few journals is necessary. Frauds are usually hidden at the transaction level and are challenging to uncover without more digging.
Investors often don’t have the resources to scale underwriting, which can naturally limit the number of deals they can make. Pershing Ventures sought to improve the speed as well the quality of the due diligence. Moreover, they sought software that, at a competitive price point, would use human resources more efficiently and therefore increase the speed that they assess opportunities in their deal funnel.
gini reduces the underwriting time from from 5 or 6 weeks to as little as two weeks after the company connected their accounting software with our personalized landing page.
Why Pershing Ventures chose gini as a due diligence and reporting partner
There are many misconceptions about financial due diligence, and some investors over-rely on a single source of information. gini doesn't replace audited financials. It supplements it and gives me a granularity that would be impossible to achieve any other way.
Several factors influenced Pershing Ventures' decision to use gini for financial due diligence and reporting over portfolio companies.
Pershing Ventures sought the highest quality financial data for potential investment opportunities. gini provides investors, like Pershing Ventures, a white-label landing page for prospective companies to connect their accounting software. This white-label landing page gives Pershing a unique branding opportunity and provides credibility while easing an otherwise tedious due diligence process. Prospective companies go to Pershing Ventures' landing page and use gini's transaction data APIs to sync their data.
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Once the data flows are connected, Pershing can complement audited financials and high-level numbers with real-time data transaction/ journal-level data, forming a granular financial due diligence and comprehensive underwriting process not offered by other reporting platforms. Granular financial data allows Pershing Ventures to drill down into the transactions to, not just understand the business, but get a deeper, more detailed look “under the hood.”
What appears to be potentially fraudulent may be simply poor accounting practices or nuances in the business, but it's crucial for Pershing Ventures to ask the question.
gini allows investors to create various reports from the prospective company's data, including the flagship Investor Due Diligence Report.
The reports that gini provides are wide-ranging, from simple profit and loss statements and balance sheets to automated Cash Flow Forecasts, which use AI to create forecasts and test scenarios.
Factors that influenced Pershing Ventures' decision:
- High-quality financial data about the companies;
- Flexibility and ability to drill down to see transactions;
- Automated cash flow forecasts with the scenario builder;
- Personalized white-label landing page for prospective companies to connect;
- Live data sync decreases the burden of the reporting by the founder so they can focus on their business.
How Pershing Ventures uses gini to decrease risk in its investments
Pershing Ventures has decreased its risk in many different ways by implementing and integrating the gini due diligence platform.
Initial Investment Due Diligence
First and foremost, Pershing Ventures uses gini's data during the initial investment phase to understand the prospective portfolio company and get a high-level view of its revenues and growth. gini has several reports that can give investors an excellent high-level business idea. The main reports include the Cash Flow Forecast Model, the Due Diligence Report, and the Advanced Profit & Loss and Balance Sheet Reports.
The reports generated by gini are also essential sources of data used to verify investment marketing documents and verbal statements made by the prospective portfolio company. These can be corroborated and compared to audited financial statements, board reports, and other shared documents.
AI-generated forecasts and financial models
To best evaluate and understand businesses, Pershing Ventures usually creates custom financial models for each prospective company to understand the nuances of the target business. However time-consuming, the financial model is essential to understanding the business. gini's Cashflow Forecast Model is an automatically generated 12-month financial model produced using the company's financial data. The main features of the Cashflow Forecast Model consist of different forecasting methodologies; gini's AI-powered forecasting method, along with exponential regressions, or linear regressions of different time periods. Built-in is also a Scenario Planner that clarifies the company's cash flow situation across different scenarios impacted by capital and financing, headcount, and other expense increases. The automated financial model effectively saves Pershing Ventures nearly 100 hours per month of spreadsheet work.
The automated financial model effectively saves Pershing Ventures nearly 100 hours per month of spreadsheet work.
Automated Due Diligence and Fraud Detection
The gini Due Diligence Report allows investors to enlist many forensic accounting methods for analyzing transactions without hiring a forensic accountant. gini's analytics go down to the journal level and include several indicators that can alert you to suspicious activity - including Benford's Law. The report also reviews transactions to find payment irregularities. Even if payments or transactions are not indicators of fraud or irresponsible activities, investors can take the opportunity to be aware and ask questions.
gini's data is not solely aggregated by month. Therefore, it's also easy to identify common patterns of misstatement, including an anomalous quantity of transactions booked at the end of a month.
Due Diligence as a Condition to Funding
Despite having information rights, many equity investors are hesitant to ask for detailed disclosure of financials. With that said, modern digital lenders have demonstrated that companies are often very willing to connect finance platforms to access financing.
As revenue-based financing becomes more common than in the past, founders have gotten used to linking bank accounts, accounting systems, and payment systems to streamline underwriting. Since many investors, particularly lead investors, have information rights, it is reasonable to demand the same information that lenders receive.
Furthermore, investors should question any prospective company that refuses to allow due diligence on their accounting. This red flag should be a cause for concern for any investors seeking to lower their risk in an increasingly volatile environment.
Ongoing Monitoring and Risk Mitigation
Since Pershing Ventures is both an equity investor and a financier, the team is focused on continually monitoring portfolio companies and uses gini's live data sync to observe revenues and monitor growth in the business. This continuous monitoring is critical because it highlights high-risk transactions that Pershing Ventures can take immediate action on. It also mitigates the threat of misappropriated funds and allows Pershing to play a more firsthand role in the company's growth.
Results and Outcomes
- Minimizes the time it takes to perform financial due diligence of portfolio companies by importing data from the accounting software data source
- Minimizes the inconsistencies and formatting of reporting documentation across different portfolio companies, making it easier to understand the business of the potential investment.
- Minimizes Pershing Ventures' need to build manual financial models, saving them approximately 100 hours a month.
- Minimizes the risk of investing in a company by automating forensic account methods to detect fraudulent transactions.
- Minimizes continuous tension of requesting reporting between the portfolio company and investors
