What are investors looking for under Technical Due Diligence?

In recent years, we have observed a growing trend of investors scrutinising companies more closely before making investments. They are increasingly focusing on key performance indicators (KPIs), paths to profitability, and product technical quality. This trend underscores the importance of technical due diligence (Tech DD) in today's business landscape. Over the past few years, we have been developing and fine-tuning our framework for technical due diligence, which has proven highly effective.

What is Technical Due Diligence?

Technical Due Diligence is an evaluation process that assesses the technical aspects of a company's product, technology stack, and development processes. It involves reviewing various technical facets to ensure they align with the company's business objectives, investment potential, and goals.

Why your business needs to be prepared?

If you plan to seek new investments, expect investors to look beyond your pitch and scrutinize your platform. Technical due diligence is not about finding flaws in your platform and processes, but evaluating your company overall, and providing constructive feedback. It should be viewed as a learning experience. Preparation for due diligence is a healthy process that helps your company grow and improve. It requires you to examine your organisation from different angles, prepare documentation, and identify weak points. Reviewers will appreciate and value it more if you acknowledge what is missing and explain why it wasn't prioritized rather than trying to conceal it.

Why Perform Technical Due Diligence?

Numerous cases have led to significant issues due to overlooking technical due diligence. For instance, JPMorgan's acquisition of a startup with fake users (Forbes) highlights the need to verify technical claims and user base authenticity. This example underscores the importance of technical due diligence in validating not just financial projections but also the team, code quality, scalability, and other potential risks. Conducting technical due diligence provides a comprehensive analysis of different aspects of the company—architecture, infrastructure, code quality, development methodologies, product, security, team qualifications, etc. This analysis highlights risks, red flags, and provides a mitigation plan. Both parties benefit: the VC gains a thorough risk analysis for informed decision-making, and the company gains an external view of its current technical state and areas for improvement.

Critical components of technical due diligence

1. Software Architecture and Code Quality

Evaluating software architecture involves assessing its design, scalability, and alignment with business objectives. A code review ensures adherence to coding standards, maintainability, and the absence of significant technical debt.

2. IT Infrastructure and Systems

It is crucial to assess the current state, capabilities, and potential risks associated with the IT infrastructure. Including evaluating infrastructure deployment models (on-premises, cloud-based, or hybrid), scalability, resilience, and disaster recovery plans.

3. Cybersecurity

A comprehensive security assessment identifies vulnerabilities and ensures robust protection mechanisms. It includes evaluating network security measures, identity and access management, and compliance with data protection regulations.

4. Intellectual Property and Compliance

Reviewing intellectual property rights and licenses and complying with industry standards and regulations ensures legal protection and adherence to necessary guidelines.

5. Team and Workflow

Assessing the technology team's structure, expertise, and development processes provides insights into the company's operational effectiveness. It is vital to understand the team's ability to execute the roadmap efficiently and their communication channels.

Best Practices for Technical Due Diligence

Preparing all relevant documentation, including code repositories, architectural diagrams, and internal audit reports, before the due diligence process begins is crucial. This preparation ensures a smooth and efficient evaluation process. It is essential to maintain transparency and open communication throughout the due diligence process. Providing accurate and detailed information, addressing concerns, and maintaining clear lines of communication with all stakeholders can facilitate a successful evaluation. After due diligence, focus on addressing identified weaknesses and implementing recommendations for improvement. This proactive approach ensures that the company remains competitive and well-positioned for future growth.

Conclusion

Technical due diligence is a routine check and a comprehensive evaluation of a company's technological health. By identifying potential risks and highlighting technological strengths, companies can position themselves for successful investments, mergers, or strategic partnerships. Preparing thoroughly, engaging experts, and maintaining transparency are vital to a successful technical due diligence process.

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