What is technical due diligence?
Technical due diligence is a process by which the investor attempts to answer one or more specific questions related to a company’s technology capabilities, before making an investment. The interview and information gathering aspect of due diligence is very important for a successful process, even if such process is often quite generic. As an investor you want to know, before putting money on the table, that their prospect has the necessary infrastructure, systems, processes and capabilities to accelerate growth and increase business value.
Getting answers in a technical audit
Venture Capital firms often want to gain answers on topics like e.g.:
- Is the team technically capable, knowledgeable and experienced?
- Strengths of the company that should be preserved and/or built-upon moving forward
- Opportunities for growth post-investment close to help meet objectives, e.g. roadmap validation
- Technical risks to the investment coupled with the cost to mitigate, strengths, weaknesses and risks of the company?
- Sometimes start-up founders will also make wild statements about proprietary algorithms, special people or data, so a VC may want to get an independent opinion about such claims.
Investments and acquisitions are inherently risky and the competition for software based investments is intense. To successfully win the deal and achieve the right return on investment, Venture Capital firms & business angels, corporations and other investment firms must quickly asses risk and opportunities, through the bidding process to close.
Two sided perspective
At Audit à la Carte we collaborate closely with your team on short timelines to identify technical risks, opportunities for growth, strengths to build upon, potential areas for cost reduction and additional investment. We help increase your confidence that your investment is sound and will achieve the anticipated return as well as how your potential investment stacks up against other relative companies. And we do this with a business focus using language that is easy to understand, even for non-technical people. Some example focus areas from our recent audits include:
- Identifying legacy and obsolescence issues
- Software scalability to meet growth objectives
- Team efficiency and productivity
- Open source exposure
- Acquisition integration inefficiencies and opportunities
- Getting reviewed in preparation of investment
Why do Technical due diligence?
Technical due diligence is for assessing the value of a software system - whether a system is reliable, resilient, scalable and it is compliant to relevant standards. This is being done increasingly in various industries. Buyers or investors require independent technical assessment of the vendor’s systems. They will be interested to know whether the systems they are buying or investing in are scalable to meet future growth targets and according to relevant standards without major additional investment.
Due diligence, including technical, is a VC's duty and responsibility and not just a box to check - know what you’re getting into!
There’s a high rate of execution failures in start- or scale-ups, yet many investors skip technical due diligence or have non-technical partners talk to the CTO for a quick review. Technology must be evaluated at par with financial discipline before giving a company money, often weird that VCs will put cash into teams after incredibly thorough audits of their books, but without really looking at what’s under the hood.
Technical due diligence establishes a more realistic view of the company’s technology and easily highlights cultural qualities and dysfunctions in technical teams by asking important questions. It avoids a lot of surprises during the first board meeting after the investment. It also usually costs less than the lawyers involved in any deal.