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7 ways investors can gain clarity while conducting technical due diligence

7 ways investors can gain clarity while conducting technical due diligence_62c97a9cdf2d8.jpeg
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It feels like almost any company is a tech company in one way or another these days. But when it comes to assessing investment opportunities, few venture and growth equity investors have the resources to conduct thorough technical diligence.

They often outsource this critical work to a consultant for more of a high-level overview, because technical diligence is often a blind spot for investors. This should not be the case, as the robustness of a product or its lack thereof can make or break a company.

The focus of diligence tends to be on aspects of a product that can be measured. As a result, the emphasis is often around financial performance, drilling down to detailed metrics such as gross margins, sales rep productivity, LTV, CAC, payback periods and more. While sales and marketing spend is often the largest operating expense for a high-growth business — sometimes representing over 40% of revenue — R&D costs can also be material, typically comprising more than 20% of revenue.

However, the assessment of the product and R&D expense base is more of a qualitative assessment based on discussions with management, industry analysts and experts, customers and partners. Investors are not alone in feeling somewhat uncomfortable about this. Even CEOs who don’t have an engineering background are forced to rely on the CTO and product team to understand the scalability of the code, technical debt, the cost and time to develop product roadmaps, and more, without a quantitative way to assess the performance.

Over time, technology should become less of a black box for investors.

Lacking knowledge of the code or the product’s evolution, we are just scratching the surface, which makes us more vulnerable to technology overhauls along the way.

The following seven tips will help you gain more clarity on a company’s technology and how best to prioritize initiatives over time for the product to be clearly differentiated in the market.

Getting the tech architecture to scale is critical

The initial decision on which tech architecture to use is widely underestimated, and not enough young companies realize the long-term ramifications.

This is the foundation the code is built on, and it needs to be aligned with the company’s go-to-market strategy. Lack of planning upfront can lead to costly code rewrites later on, and significant customer issues.

Recognize the power of a great developer

I would rather have one A+ developer than 10 B players. While this is true for many other roles, too, it really hits home in an engineering organization.

What do you think?

Veteran

Written by yulica

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