Data & Intelligence

Investing in Online Platforms: Key Diligence Considerations

By Hayley Brady, Senior Associate and Clare Hubert, Associate at Herbert Smith Freehills

Introduction

Booking your latest holiday? Ordering a pizza? Selecting your new sofa? The chances are you will be using an online platform. The growth of online platforms, as part of the on-demand economy, is on a constant upwards trajectory and activities centered around online platforms, where independent sellers can offer goods or services directly to customers, are attracting significant consumer attention and spending. This has led to increased investor appetite and we anticipate that this appetite is only going to increase. Online platforms are unrestrained by geographical boundaries, have low cost barriers to entry and offer the potential for considerably lucrative returns by “bring[ing] together consumers and producers, allowing trades that would otherwise not happen.”1 This is reflected in consumer spending on e-commerce platforms, which has experienced significant year-on-year growth since 2011 with continued steady growth forecast for 2018 and 2019.

Today, online platforms operate across all number of industries, from consumer goods to financial services and travel to crowdfunding. Online platforms differ in size, industry, sector, purpose and business model and, for that reason, attempting to encapsulate the diverse range of players in this space in a one-size-fits-all definition is a difficult exercise. Given the breadth of the online platform space, in this article we will focus primarily on due diligence considerations relevant to investments in relatively mature online platform companies in the direct-to-consumer sector that are rapidly growing and looking for capital to expand and improve current operations or enter new markets to accelerate growth. These include, for example, platforms such as Farfetch (fashion), Made.com (furniture and homewares) and OpenTable (Restaurant Reservation Services).

The Appetite for Investing in Online Platforms

The European Parliament recently recognized that online platforms play “a prominent role in the creation of ‘digital value’ that underpins future economic growth in the EU.”2 The explosion in recent years in the number of disruptive online platforms has resulted in increased opportunity for investment activity both in the EU and further afield.

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Renuka Ramnath | Founder, Managing Director & Chief Executive Officer, Multiples Alternate Asset Management Private Limited

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Brian Lim | Partner and Head of Asia and Emerging Markets, Pantheon Ventures

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David Rubenstein | Co-Founder and Managing Director, The Carlyle Group

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Dr. Andrew Kuper | Founder and CEO, LeapFrog Investments

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Torbjorn Caesar | Senior Partner, Actis

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Drew Guff | Managing Director & Founding Partner, Siguler Guff & Company