It’s no secret that everyone who creates a startup wants to see it as a successful and fast-growing product. However, on the road to success, there is always one test called technical due diligence.
Technical due diligence is a necessary process when auditing a tech startup by investors. It allows you to know the quality of the code and give a clear assessment of the development processes.
In this detailed guide, you will learn everything about technical due diligence and its impact on tech startups.
What is technical due diligence?
First, it is worth making it clear what “technical due diligence” is. This term describes the process for a complete examination of each technical process in a product. This check is often done before buying a business from another company.
Technical due diligence often answers the following questions:
- What is the state of the software product? Is it in the early stages of development, in development, or has it already been released?
- What is the quality of the code? Is it written with all the rules for correct coding?
- Does the software lend itself to scalability? Is the software product ready for unexpected growth?
Technical due diligence gives certain benefits to both a startup and an investor.
- Technical due diligence allows you to understand the state of a software product clearly.
- Due diligence Anblurit future costs of improving the software product.
- High chance of identifying possible risks for the company and the investor.
Six stages of technical due diligence
Technical due diligence is often a six-step process, but the number may vary depending on the company and its business goals.
Step #1: Preparation
The preliminary preparation for technical due diligence is associated with establishing a trusting relationship between all participants in the process. As surprising as it may sound, the relationship of trust between the startup company and investors is one of the keys to success for all participants.
Step #2: Official start of technical due diligence
The second stage of technical due diligence begins after all parties have discussed the requirements they set for the technical due diligence process. In addition, at this stage, the deadlines are set that are needed to prepare all the necessary documents. These documents can be architecture descriptions, documented APIs, and so on.
Step #3: Looking through the documentation
Investors conduct a detailed study of all documents provided by the startup company. Depending on the company and the number of documents, this stage may vary in time.
Step #4: Scheduling live meetings
At this stage, the parties agree on the schedule of live meetings. Investors often prefer live meetings as they allow them to understand the internal processes more deeply. Such meetings can last several days during which investors can thoroughly analyze the services or products that the startup provides.
Step #5: Discussing all the issues
At the last two stages, the investor may have a sufficient number of questions that require clarification. At this stage, meetings are held between the parties to clarify all questions regarding the startup, the startup’s technical part, etc.
Step #6: Preparing the final report
The last stage of the entire technical due diligence process is the preparation of the final report. For these purposes, investors conceived hire independent experts to conduct due diligence. The result of this review is a report that documents all potential benefits, risks, and expected revenues.
Key elements of the technical due diligence process
Let’s talk in more detail about the aspects that technical due diligence checks. In total, six elements are checked.
Architecture and infrustructure
One of the main aspects of validation is the technology on which the startup is based. It is crucial to describe your technology in detail and provide all technical documentation, all architectural schemes, scalability, and so on.
In turn, the infrastructure is responsible for your product’s technical components, such as programming languages, databases, or any other technology.
Code and data quality
The second most important is the quality of the code since the number of errors that can occur in a software product depends on this. Investors are testing this aspect, as rewriting low-quality code requires additional resources.
Scalability is another thing that investors are looking at. Scalability can be critical, especially if the product is embedded in an investor solution. It becomes clear how the system works and what problems may arise during the growth process during the check.
As strange as it may sound, investors will also be eyeing the startup’s development team. Since the development team has a significant influence on the business’s formation, investors will be interested in the development team during technical due diligence.
If the startup is working with offshore development teams, it is also worth discussing with investors and introducing people who help implement the startup’s technical aspects.
Properly established internal workflows allow you to support and develop a technical product effectively. Investors want to see processes like quality assurance, security testing, product support, and deployment processes. In addition, they expect high levels of efficiency and profitability from these processes.
Intellectual Property (IP)
Intellectual property is something that many investors care about. Therefore, it is imperative to ensure full intellectual property protection for your future partners. It is worth paying attention to third-party software product components, such as free software or open-source programs.
We’ve covered everything you need to know about technical due diligence. Now you’re armed with knowledge and ready to pass your own technical diligence.