Tech Due Diligence

What Is A Tech Due Diligence?

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Tech due diligence is an exploration of a potential company (i.e. target) to evaluate their product or service against a specific investment thesis.

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The goal of tech due diligence is to assess risks that can get in the way of the investment thesis and surface potential surprises. 

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Ultimately, the assessment would advise the investor on whether the thesis is possible. In the cases where it is possible, it would identify important risks and how to mitigate these.

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Tech due diligence could have three outcomes:

• Not a great investment based on the thesis

• Good investment, but risks must be mitigated in value creation

• Great investment and some optimization opportunities exist

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The best tech due diligence would also go above and beyond to explore opportunities to do things better, more efficiently, faster, and with less cost. These would be quantified against value creation levers. This would have a positive effect not only on the outcome of the investment but also on the EBITDA and exit multiples expansion.

 

Great tech due diligence should also be data-driven with quantifiable benchmarks that feed into the value creation cycle for maximum benefits. It should also identify immediate risks as well as potential future risks with an eye for an exit.

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Whether technology is the primary business or the backbone of a tech-enabled company, it significantly impacts the health of the company, profitability, and ability to compete. For this reason, every investment and every acquiring company allocates time for tech due diligence as input to their strategy. 

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What Is Inside A Tech Due Diligence?

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The best tech due diligence takes a pragmatic and strategic 360 holistic approach. The comprehensive view helps with checks and balances and allows different angles to get a more accurate view. 

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There are typically core areas to any tech due diligence, such as the business, technology strategy, roadmap, software architecture, code health, team capabilities, deployment setup, infrastructure, security, and leadership.

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Non-core areas would depend on the situation, such as product portfolio for companies that may have a suite of products, professional services for those who deliver implementations, or a deeper dive into artificial intelligence or blockchain for businesses with an emergent technology architecture.

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The tech due diligence starts by evaluating the technology and product business strategy. It then flows to the leadership and team to determine the capabilities and any gaps. The next area is software architecture, cloud, and code health.

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Finally, a holistic look at the IT infrastructure, working methods, software development lifecycle, tools, quality approach, and product management. Security is horizontal across all areas.

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About Tech Due Diligence

Software Technical Due Diligence is sometimes referred to as tech due diligence, technical due diligence, or technology due diligence. However, it is different from IT due diligence, which is reserved for companies that are not software companies but are instead more tech-enabled.