The desire for creating the next big thing is what drives most startups. Getting one big investment that will help them get over the finish line, landing that partnership with one of the big giants of the industry or getting acquired by a known name is what many startups plan to achieve.
But as most businesses move ahead on the road to success and surprise their customers with new roll-outs and better offerings, they have to pass an array of hurdles, one of which may be: technical due diligence.
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What is technical due diligence, anyway?
Technical due diligence is a process of analyzing and evaluating the product, technology, software architecture, and software development related processes in an organization before fundraising rounds and mergers and acquisitions.
Preparing for the technical due diligence process is important. The evaluator will rely on the technical documentation and visibility into software development processes to produce an assessment of your platform, team, and technology. By preparing a data room you can cover many of these concerns beforehand -and it is a handy resource for the company’s non-technical executive team, too.
Key elements of technical due diligence
When preparing for tech due diligence, it is important to consider all the sides of your service or product. Here are the key elements:
- Architecture and Infrastructure
To conduct a technical due diligence process, it is important to consider the technical architecture. Prepare yourself to explain the technical choices you made along with technical documentation, architectural diagrams and so on. Typical documentation that you must maintain include APIs documents, product design documents, and architectural descriptions.
- Code and data quality
Undoubtedly, the quality of your code is a significant factor for tech due diligence. A badly coded system will likely have a lot of bugs and errors.
This is the reason that investors pay close attention to the quality of the code since the poorly-written code will prove to be an overhead expense and lead to additional development time and cost.
The scalability of your product is another focus area. It will let the investors know how the system performs and what kind of problems can pop up during its growth.
As important as your technical product, the team behind the product plays a critical role too. This is because the team creates and maintains your product and will play an important role in determining its success.
Thus, provide investors with relevant information about the team members, the team leads, and their responsibilities and skills.
Workflow (or software development life cycle) is an important internal process and determines the quality of a product. The workflow will consider issues like security testing, quality assurance, product support, and deployment processes.
- Intellectual property
Investors need assurance that the intellectual property of the product in question is completely protected. Thus, you must inform them if there are any third-party components like open-source or free software used in the platform.
Make no mistake, technical due diligence is not only about scalability
The primary reason for conducting technical due diligence is to identify the risk associated with the acquisition target’s technology. The relative importance of the types of risk could vary depending on whether the investor is an investment bank, a VC firm, or an acquiring company.
However – it all comes down to the cost of the investment. For example – can your platform perform as promised, or will it require a great deal of development work to get it to an acceptable level? Is your development team skilled enough to build the next-level platform as you grow your business?
In order to answer these questions, your potential investors, partners, and buyers will have a close look at your product and examine the technology in detail. Scalability could be one of their areas of focus here.
Yes, the scalability of a product is important but this is not the only criterion when it comes to due diligence. While doing technical due diligence, scalability helps investors determine how accommodating a platform is. This gives them an idea of the costs and helps them understand if the product needs to be re-engineered to accommodate a large number of users and if this whole process will involve significant expenses.
However, as many products and platforms have moved to the cloud, they are inherently scalable. Any technical due diligence will verify that the platform in question is well architected and that it leverages the inherent scalability of the cloud platform.
The ownership costs of a platform are driven by several factors, a few of which are listed here:
- What is the operational cost of a platform? How does this cost change when the traffic is increased? Does the cost change linearly, exponentially or does it stay constant?
- What about downwards scalability? Can the operating costs be lowered if users drop during a certain period, let’s say, during holidays? Is the platform/product elastic enough to handle these changes?
- How flexible and customizable is the platform? Is it easy to add new features and tweak it as per the requirements without incurring large development costs?
Add to that, investors could also focus on other less obvious factors like – how well does the technical roadmap supports the business plan? Is there any misalignment between the technical roadmap and the business which will delay the achievement of milestones or lead to missed business opportunities?
Technical due diligence should be a broad exercise that takes into account a wide range of issues. Do not make the mistake of concentrating on only the obvious metrics – technology is a complex dimension of the business and deserves to be understood as such.
Here are a few questions you should have the answers to:
- How do you attract and retain software developers?
- What changes will you apply to your current architecture if you had to scale up from now?
- Why did you build technology XY rather than buy it?
- Is your platform secure? How do you know?
- How do you see the role and responsibility of the CTO?
The wrap up
All in all, a professionally conducted technical due diligence highlights the risks in the business, whether it be in terms of the technical platform, processes or the associated team. It provides a clear risk assessment to the investor and helps them in making an educated investment decision.
Preparing for a technical due diligence could look like dealing with a lot of documentation, but if you keep an eye on your goal, it is just about giving the assessor a clear view of your team’s capabilities and your platforms features.
What are your views on this? How important do you think technical due diligence is?
Jacques is an executive with more than 25 years experience in the software development industrry. He specialises in technical due diligence across e-commerce, fintech, insurtech, blockchain and machine learning platforms.
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