Technical Due Diligence

Last updated 8 days ago

I've been aiding investors to conduct their Technical Due Diligence to asses the risk of investing into Startups.

When conduction a Technical Due Diligence (DD or TDD), the question I am trying to answer is:

What are the deal breakers in this investment?

To answer this, I need to identify:

  • What does the investor consider a dealbreaker?

    • What are potential dealbreakers they may not even realize?

    • What is an investors investment thesis?

  • What are the potential dealbreakers in this company?

  • Is there anything specific you'd like me to investigate?

  • How would they like me to deliver findings?

Goals of a Technical Due Diligence

  • Identify risks for Investors

    • Find Deal Breakers, and Red Flags

Sub Goals

  • Can the tech team deliver on the product roadmap?

    • What is the product roadmap?

Caveats

  • A TDD can also turn into a Product Due Diligence

    • How well can the tech team support their product?

    • Be prepared to discuss about product roadmap if there are no technical problems.

Timeline

When I am connected with a potential company, I provide a timeline:

Call:

  • 30 Minutes max

  • Introductions

  • Explain the Technical Due Diligence process

  • Learn a bit more about the company

  • Explain any documentation that is required to fill

  • Figure out a single point of contact

Onsite:

  • 1-2 days

  • Demo of the product

    • Helps to inform architecture and infrastructure questions

  • Demo of the internal tools

  • Product roadmap

  • Individual meetings with heads of different product. Departments

    • 30 minutes max

  • Architecture review

  • Understanding Development process

  • Individual meetings with senior leadership

    • Members: CTO, CPO, senior engineers

    • 30 minutes max

  • Join release/deployment process

  • ERD of databases

    • Understand data structure

  • Let me know if any meetings are with remote employees

    • I can schedule my time better knowing so

Findings

I categorize findings into two areas:

  1. Red Flags, Problems, Issues

  2. Deal Breakers, Show Stoppers

Red Flags, Problems, Issues

If I find any of these, for the most part, I find these as a "pass". I do note them down, but everything has a problem. I only escalate these findings into "Deal Breakers" if upon diving a little deeper into it, you discover deep fundamental problems.

For example:

Everyone has technical debt, but does the technical debt slow them down?

Deal Breakers, Show Stoppers

As the name suggests, these are the reasons why the deal should not be made. These are the risks that an investor has to be really aware of when investing.

Examples:

  • They are doing something illegal

  • They are outsourcing their work

  • They don't have the technical ability to deliver on their roadmap

  • They claim to be doing something they are not actually doing, or don't have the competency to

  • They are investing into new technology, they are not familiar with

"Deal Breakers" may not stop the deal, but do have a discussion with the investor about the investment thesis.

  • Are you investing into it being a profitable business?

    • These business may still be making money.

  • Are you investing into the company into building their technical expertise?