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Burning question

As an investor, you perform technical due diligence to evaluate the technology of your target investment. Skimping on this step of the investment process can lead to significant costs later and ultimately a suboptimal exit. Reflecting on many successful technical due diligence efforts leads us to these seven focus areas which help enable the best results.

  1. Talk to us about your investment. Our #1 priority is to help you fulfill your investment objectives. Understanding your general thoughts on the company, your longer-term investment thesis, and any specific objectives help us help you. Do you plan to expand the business internationally? Is the technical founder of the family business planning to exit? Is there potentially complex technical debt that will be costly to address? We will get you answers and an analysis – your initial questions help more efficiently guide the process.

  2. Involve us early in the process. The sooner you involve your diligence provider in the process, the better. Even some quick conversations early-on in your discussions with the target can help set context and help create a strategy for evaluating the technology of your potential investment.

  3. Treat technical due diligence as importantly as other diligence streams. We get it – investors are most interested in the financials and the general growth potential of the business. Not to overly generalize, but financial analysis, business, sales, and marketing are typical investor backgrounds and areas of expertise. Topics that are more foreign and less interesting may get less attention. In the end, technology can make or break the company and proper evaluation is needed to minimize risk. Be sure to allocate enough of your investment budget along with sufficient time for a thorough technical due diligence.

  4. Provide sufficient time for us to get answers. A 1h overview meeting with the target is a great start but not enough! Technology/software and people are complex and require sufficient time to extract any risks. For smaller deals, 1-day may be sufficient for the analysis, but generally, 1.5-2 days with the target’s technology leaders should be requested.

  5. Educate us on the deal dynamic. Let us know if there are factors at play for us to be aware of that may influence the deal. For example, is there a difficult or sensitive personality? How many people are “under the tent” regarding the investment transaction? Providing this information up-front helps us proactively work around any issues and adjust our strategy for getting the needed answers.

  6. Provide data room access early. Reviewing complex technical documentation takes time. Encourage the target to fulfill the data request well before the interviews take place to give us time for analysis and to put together interview questions that align with your investment thesis.

  7. Provide continuous feedback. Our primary goal of a technical due diligence engagement is to generate an output that helps you. Please tell us what you like and dislike about the process, deliverables, formats, interactions, or anything else on your mind before, during, and after the technical due diligence. As your partner, we want to make your life easier, so if you need something in a specific format, for example, just ask!

Will doing all of these things guarantee a successful investment from the technology perspective? No – that would be a tall order. However, these tips will help create a smoother process and help your diligence provider surface significant investment risks and also help you with your valuation.