Launching a startup can be an exhilarating journey. However, to secure the necessary funding and support, startups must prove their worth and reliability. This is where technical due diligence comes into play.
Technical due diligence is the process by which investors, be they venture capitalists, angel investors, or corporate partners, thoroughly assess a startup’s technology, infrastructure, and overall technical capabilities. It is a critical step that can make or break a deal, as it helps potential investors gauge the risks and opportunities associated with the startup.
Whether you’re a founder seeking investment or an investor looking to make informed decisions, this article will equip you with the knowledge and insights you need to navigate the world of technical due diligence with confidence. Let’s dive in!
What is technical due diligence?
Technical due diligence (tech DD) is an unbiased audit of a product’s technical state, code quality, and decision-making logic. During this process, potential risks are assessed, and investors receive an in-depth analysis of the advantages and disadvantages of investing in a particular product. The project team receives an unbiased report outlining what problems may need addressing before making any investments.
The main aim of tech DD is to achieve transparency between investors and developers, verify tech debt levels, assess the product’s scalability, review the technology stack architecture, identify possible weak spots in security, study data privacy standards compliance, and identify other potential issues related to business operations.
This information helps decision-makers assess the current prospects of investing in a given product. Tech DD also offers practical insights into existing customer relationships, organizational structure, or performance metrics critical for investment decisions.
The technical due diligence process
A typical technical due diligence process consists of six basic steps. However, additional steps may be required depending on your company’s requirements and business objectives.
Proper preparation is critical to a successful technical audit. This includes taking the necessary steps to ensure the validity and reliability of the findings.
This includes signing essential documents such as a letter of intent and a non-disclosure agreement (NDA). An intent letter indicates the parties’ intention to enter into formal negotiations or discussions regarding due diligence. The NDA protects confidential information from disclosure to third parties during due diligence.
This phase begins once the requirements of the technical review process have been properly prepared and met. In addition, the parties set deadlines for preparing required documents, such as API documents and architectural descriptions.
Examination of documentation
The quality of the technical documentation significantly impacts the likelihood of a successful technical audit. This documentation should be organized and accurate, allowing potential partners and investors to quickly understand all aspects of internal and operational processes and architectural decisions.
It is also essential to ensure that other required documents, such as conceptual testing results, competitor research design materials, and critical product metrics, are available in a convenient and organized format.
Scheduling a meeting
A technical due diligence meeting is an integral part of the process when a potential investor is considering investing in your project. In this meeting, technical due diligence experts seek a deeper understanding of your product, examine how it works, and discuss areas that may require special attention.
Discussion of all issues
During technical due diligence, experts look at all aspects of your product, including analyzing its architecture, roadmap, performance, UX/UI design, scalability, security, data privacy, customer interaction, and organizational structure.
They also ask questions to identify potential issues that could affect the success or long-term sustainability of the product. This helps make an informed choice about investing in the development.
The next step in the technical due diligence process is to create a report. This involves summarizing all the validation, testing, and stakeholder discussion findings. This document includes an assessment of each aspect of the technical environment and comments on the results, forecasts, possible risks, and recommendations for improvement. The report also includes a timeline for implementing the recommendations and an assessment of their complexity.
This finished report is then reviewed by management and presented to decision-makers who can approve or reject its contents. This report is an important tool that helps shape a successful IT strategy by providing clarity and focus on priority areas that need to be addressed now and in the future. It also includes information on current capabilities, which helps to leverage resources and allocate investments wisely.
Critical elements of technical due diligence
Technical due diligence involves assessing a company’s technical strategies to ensure its viability for evolution. Techn DD enables startups to make informed decisions regarding product development and operational efficiency.
Let’s explore some critical aspects of technical due diligence:
Startups must consider their infrastructure’s hardware, software, and networking components. This includes examining their system architecture, scalability, availability, and security.
Startups need to understand how their data is stored and accessed. This includes assessing database technology, data security protocols, and compliance with laws regarding data privacy.
3. Software Development
Startups should start with building software development team and assessing their processes and tools. This could include an evaluation of the effectiveness of their agile methodology, coding standards, and automated testing.
4. Quality Assurance
Startups should evaluate their testing process to ensure quality assurance. This could involve assessing test automation practices, system performance metrics, bug-tracking systems, and user experience design.
Startups need to consider the internal team structure and capabilities. This could include evaluating the organizational structure, hiring process, and availability of key technical talent.
Technical due diligence checklist
Due diligence is a fundamental component of the investment process, and technical due diligence is essential. With a well-executed due diligence checklist, the investor can notice important details that could significantly impact the success or failure of their venture. That’s why it’s recommended to hire professionals when it comes to performing technical due diligence rather than trying to go solo.
These experienced technicians will help you evaluate and protect your investment. They will create all necessary documents required for a complete understanding of your project and its possibilities for success. Furthermore, they will develop various metrics so that you can look at the timeline needed for completion and estimate any possible risks related to this project.
Additionally, many dedicated systems have various analytical tools that allow auditors to review the code line by line, pointing out potential weak points and indicating the architectural design, code complexity, or other issues requiring quick solutions before further development steps are taken. All of that assures the creation of reliable forecasting models for potential profits and losses with greater accuracy.
The conclusion of a technical due diligence review of a startup is the ultimate determination of whether an organization should invest in or acquire the company. While many considerations must be considered when making this decision, it is essential to remember that technical due diligence provides valuable insights into the strengths and weaknesses of the startup’s technology platform, allowing companies to make more informed decisions.
Yuliya Melnik is a technical writer at Cleveroad, a custom web app development company in Ukraine. She is passionate about innovative technologies that make the world a better place and loves creating content that evokes vivid emotions.