December 24, 2021

If you’re like most people, your eyes will start rolling on hearing the words ‘due diligence.’ The reasons are quite obvious as there’d be outside people commanding all your company information and things can become tedious at times. But whether you like it or not, due diligence is inevitable. And if you’re a technical or software development company, you’re going to be served with ‘technical due diligence.’

Technical due diligence is the process of getting your company’s technology assets, risks, and liabilities verified. The process becomes an absolute must when companies are doing it through mergers, acquisitions or rounds of funding. After all, the investors would naturally expect to understand the ins and outs of the company.

What is Technical Due Diligence? Why is it So Important?

 

To put it in simple terms, due diligence is a review and analysis of the products/services of a tech company. While diligence is also performed for legal and finance, technical diligence focuses on your money-making product or service. That’s why it becomes a critical process for any investor thinking of investing in your startup.

Technical due diligence helps investors understand the product/service and your competence behind it. Technical diligence helps them understand the following things:

  • Product specifications
  • Product development stage
  • Product/service scalability
  • Competence & responsibilities of your team
  • Company work processes
  • Current productivity levels of the company
  • Strengths & weaknesses of the business model
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Now you see the paramount importance of technical due diligence that holds in any investor’s eye.

How to Prepare for a Technical Due Diligence

 

The thing about life is that opportunity can knock on the door any time, especially if you’re in the tech domain. Investors are always looking for opportunities, and as a startup, you must be prepared to pounce on them.

Even before they ask for other diligence and reports, technical due diligence is one of the first things they’re going to ask as it helps them understand your business like no other. That’s why it’s always better to have it ready rather than preparing at the last minute.

Here are 6 steps that you need to perform technical due diligence.

1.      Team

 

The first thing any smart investor would want to see is the team behind your product or service. For that, you’ll need to create an organizational chart that contains all employees and contractors and outsourced resources. This chart needs to describe their roles and departments and highlight the key players.

Make sure that you describe things quite well regarding the highlighted ones. This chart will also include their salaries, skills, resume…in short, everything there is to know about them. Also, highlight additional details such as the people you see succeeding the seniors in the long run. Feel free to add anything that helps them understand people better.

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2.      Architecture and Infrastructure

 

Next comes the product or service part. Here you need to present and describe your technology and provide documentation to back it up. This could include architectural charts, diagrams, and performance indicators. As far as infrastructure is concerned, you should include the backend stuff powering your product. This could include programming languages, databases, app servers, product code and other technologies that compose your product.

Here’s a little checklist when it comes to product architecture & infrastructure:

  • Product design documents
  • Architectural descriptions
  • API Documentation
  • Development & deployment environments
  • Third-party tools & open source components
  • Empirical test data (for product scalability)
  • Copy of all source code
  • Vulnerability scan & penetration test data

3.      Workflow & processes

 

After people and products, it’s time for the investors to know the connecting dots between them. This means processes, tools, and delivery mechanisms you have currently implemented. Investors want to know how effective and cost-efficient your processes are and whether you can continue developing successful products based on that.

Here’s what you’ll need to prepare:

  • Software Development Life Cycle
  • Development Tools
  • KPI Metrics
  • Market Requirement Documents
  • Product Requirement Documents
  • People & Other Resources
  • Automation tools

4.      Intellectual Property & Software Licensing

Although many company owners don’t take it seriously enough, intellectual property is one of the most important things for many investors. That’s because you can face severe challenges if you’ve not protected your products, no matter how good they are. You should develop an intellectual property portfolio for due diligence, which includes all relevant details like copyrights, trademarks, databases, domain names, and patents.

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Additionally, you must also include the following details:

  • Third-party and open source dependencies
  • Notifications/claims/settlements/litigation of IP infringements
  • Licensing agreements of third-party intellectual property use
  • Documents/transactions of intellectual property acquisition
  • Independent contractor or consulting agreement forms
  • Non-disclosure or non-compete agreements
  • Names & contact information of law firms
  • Name and contact information for the law firm(s) that have helped the target company with matters related to intellectual property.

 

5.      Product Offerings & Roadmap

If you think you did this in the first step, then no. We previously focused purely on the technical side while this step will throw light on the business side attributed to each product or service.

Thus, you’ll need to document all your product offerings. This will include all the ones in the market and the ones under development. The investors will surely want to look at how much revenue can be attributed to each, so make sure you also include that.

There are many types when it comes to product roadmaps, and you can go with any of them. But by and large, they should give a deep idea into the future developments, priorities, and the timeline for any planned releases. You can also include the PRD/MRD documents for the products yet to be launched, along with the ongoing improvements in the launched ones.

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In addition, you can include the below-mentioned information:

  • Future developments, priorities, and the timelines
  • New monetization opportunities (backed by research)
  • Efforts and costs for products under development

 

6.      Incident list

The technical incident list is a part of the diligence process. It gives investors an understanding of the things that have impacted your business – from technical and customer perspectives. It should include customer-impacting incidents, infrastructure failures, bugs, security incidents or breaches, etc. Along with the incidents, also include the actions taken for each incident to show how serious you are when it comes to taking your product.

 

 

Our Two Cents

 

Going through due diligence can be stressful, but you need to see it like two people dating. Can you get to commit to a person without getting to know them first? Thus, the first thing you should do is see it as an opportunity. And secondly, try to be as less pragmatic as you can. There’s no need to flaunt big numbers or fancy words; the investors should be able to appreciate your scrappiness and uniqueness as it is what makes your company. Just flow through it and enjoy while it lasts?

 

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