The Art Of Technical Due Diligence

Previously published in Forbes on April 11, 2019

Technical due diligence (TDD) takes place once an investor (such as a venture capitalist, private equity manager or another company) has decided to invest in, or acquire, a technology company. Once they make this decision, they have limited time to dig into the company in order to ensure that its technology, its engineering team and its development velocity are as advertised.

As someone who has experienced this process from both sides — and whose company provides it — I understand the stress TDD sometimes causes. That’s because a poorly executed technical due diligence initiative can derail a deal and hurt the bottom line for investors — as well as the management team of the company receiving the investment — so it is worth understanding how to do it right as a CTO.

TDD Isn’t A Beauty Contest

After participating in dozens of TDD projects, I’ve learned that there are many ways to solve a technical challenge — including using frameworks or programming languages that I personally wouldn’t touch. It is thus critical to put aside one’s own ideas of technical purity and “the right way of doing things” during TDD and to have an open mind about how technology can be used. (You could even learn something along the way.)

Furthermore, it’s important to be clear about the purpose of TDD. If they’ve already made the decision to invest in a company, investors should assume that its technology is good enough today. What you want to know instead is whether the company can execute your business plan. A technical review should thus stay away from judging the beauty of today’s product architecture and take a more dynamic view to validate whether the technical team can deliver the future that the company has drawn for itself.

This dynamic perspective is all the more important because, for companies lucky enough to grow at a fast pace, life is messy. Code architecture is constantly evolving, and documentation is often incomplete and out of date. Concurrently, penetrating new markets and creating new major features often requires introducing novel technology or considerable re-architecting. You can reign in this apparent chaos during TDD through major core projects that temporarily do not produce user-facing features yet allow the engineering team to maintain velocity in the long run. A wise TDD will use these projects to discern between the “normal growth-driven chaos” and signs of any additional structure the company may need to reach a new stage of growth. An investor should expect one, two or even more of these fundamental projects in a two-year timeframe.

It’s All About The Product Road Map

The product road map is the engineering team’s commitment to the company to deliver specific features, products and capabilities on a given schedule. The management team, in turn, makes revenue projections based on the availability of these new features. Consequently, delays in the product roadmap can have a direct impact on the company’s revenue stream — and thus its valuation.

Beyond giving the product road map a simple thumbs up or down, your technical due diligence should provide actionable information about the upcoming 24 months, including critical dependencies, risk factors and major technical milestones that will usher in product milestones. As a TDD assessor, you should gather this information to track the success of your investment over the short- to mid-term.

In order to evaluate what the technical team must accomplish in order to execute the product road map, you should:

• Capture the business context of the road map

• Understand the business objectives for the next two years or more

• Evaluate today’s technical foundation to appreciate whether it can support future plans

• Internalize the future plans

• Evaluate the team’s ability to deliver these plans — and to mitigate risks

Understanding The Business Context Is Critical

Technology serves the business. It follows that you should assess technology in the business context of the company: Consider market (consumer, enterprise, or government), space (finance, health, social, tools and so on) and company maturity (five versus 10,000 enterprise seats and 1,000 versus 1 million daily users) as a few obvious dimensions. “Scalability” or “security” have very different meanings depending on the company’s business context — and so do the solutions. Similarly, you should evaluate talent, processes, tools and operational playbooks differently based on the business context.

Skills And Experience Matter

Nowadays, many companies use multiple technology stacks. As a consequence, if you’re a CTO performing TDD, you should be “multilingual” so you can evaluate all components of the technology.

To assess development velocity, your investigation should also show how well the code is written and organized and include an evaluation of the tools for test automation, continuous integration/continuous deployment, data center deployment, monitoring, alerting, business intelligence, data science and so on. In addition, assessing a company’s specific expertise in artificial intelligence has become a must in many industries.

As if all that was not enough, TDD assessors should understand engineers as well. It is critical to assess individual and collective talent on the team, as well as organizational dynamics and methodology.

Finally, because so many of the risks and critical milestones can depend on the maturity of the company, one of the most important skills that you can bring as a CTO performing TDD is the ability to identify the inflection points in the company’s growth, assess the impact on technology and translate insights to the technology team: For example, what new technology requirements will you have when the company has reached product-market-fit and enters the growth stage? For this work, there’s no substitute for “I’ve been there.”

The Good News Is Also Important

In parallel to identifying what could go wrong, it is critical to highlight the company’s unique strengths. This starts with its intellectual property (whether it’s patentable or not), it and includes unique sources of talent, internally developed tools and methodologies that increase development velocity and difficult-to-recreate data sets … all of which may have been overlooked by non-technologically-inclined investors. Ultimately, the balance of a company’s unique strengths and weaknesses that will determine its success, and a good due diligence report will highlight that.

For a company seeking investment, TDD may seem like an unnecessary hurdle; however, when it’s properly conducted, TDD adds value and insight for both the investor and the startup.

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