Investors turn to automated, AI-powered diligence platforms to select the right deal

VCCiRCLE | 26th September, 2021

With hundreds of potential targets clamouring for their attention, investors are turning to smart, artificial Intelligence (Al)-powered platforms that can provide them with enough data to check the financials, tax filings, litigations, regulatory compliance, and credibility of a potential investment target in minutes.

Karza Technologies, for instance, can get complete access to the profile of a target firm in a minute, which can offer a perspective on the credibility of a business, according to its co-founder and chief executive Omkar Shirhatti. Karza uses technologies including optical character recognition (OCR) text detection and text-recognition algorithms that are trained on hundreds of various font families and background sounds. The startup also uses face recognition models and sources government data to perform verification in real time.

By analysing data that is accessible and publicly available, agencies like Karza can sniff out litigations (if any), loan defaults, encumbrances, money laundering, or benami transactions the target firm is involved in, corroborated SNG and Partners managing partner, Rajesh Narain Gupta.

Besides helping investors detect what a target company might be concealing, some of these platforms are also extending services to banks at a time when they have gone cautious in the wake of a slump and bad-loan crisis. AdvaRisk, for instance, offers early detection of risk across loans worth Rs 50-1,000 crore to foreign and Indian banks including ICICI and SBI as well as funds and non-bank lenders.

The startup, which monitors five lakh accounts and facilitates recoveries of over Rs 500 crore per month, will soon be entering the retail credit and property segments to collapse the diligence timeline taken for loan issuance, said co-founder Vishal Sharma. The plan to foray into new segments followed ICICI picking up a minority stake in the fraud detection and prevention-based fintech startup last year. A year earlier, AdvaRisk got a seed investment from early-stage venture capital firm Sprout Venture Partners.

Rising investor interest in the segment underscores the importance of third-party data analysis in today’s fast-paced world of dealmaking.

“Rather than waiting for ready data set results from the seller, which could be window dressed and may take time, diligence teams are requesting access to core systems (not only financial but operating systems as well) and are analysing raw data using business intelligence tools…” said Samir Sheth, partner and head of deal advisory services at BDO India. “And the ability to interpret and question the data set appropriately is the key to successful diligence,” he concluded.

On their part, firms such as Karza Technologies, AdvaRisk, IDfy, Cubic Tree, Prop A, and Save Risk, have already attracted funding from investors wanting to cash in on the rapidly mushrooming sector. 

Karza, for example, raised around $713,101 (around Rs 5 crore) in a pre-Series A funding in 2019 from Singapore Angel Network and others. Hyderabad-based SignalX Pvt Ltd, an Al-based risk management and compliance startup, also raised seed funding last year led by United States-based 3Lines Venture Capital.

Inc42 reported this month that online fraud detection and background verifier IDfy will be raising funds from early-stage venture capital firm Blume Ventures and TransUnion International which is a global information and insights company.