Technology Due Diligence Provider 101 guide

What is a Technology Due Diligence?

Fundamentally a Tech DD involves subject matter experts reviewing all relevant technological features of a targeted company. More often than not, this review uncovers a variety of technological insights that support stakeholders by permitting an informed, fact-driven decision.

A Technology Due Diligence, in conjunction with the classical due diligence; Legal, commercial and financial should cover all the topics and risks associated with technology companies.

How to choose a Technology Due Diligence provider?

A Tech Due Diligence can come in many shapes and sizes, and looks different from case to case.

Transactions by nature are dynamic and unique, meaning each accompanying Tech DD is largely context dependent. Simply put the larger the transaction scale, the deeper the Tech DD. The more established the company, the wider the scope of the Tech DD.

Beyond this, the intricacies of each transaction ultimately determine the Technology Due Diligence provider. For example a small seed round typically does not require a Deep Tech DD, in cases like these it's often appropriate to utilise the Buddy CTO method, where 1 or 2 sessions talking to the CTO and reviewing his choice of technology stack is sufficient. Whereas if a MVP or paying customers already exist, it’s recommended to take a more thorough approach, choosing a provider with expertise and benchmarking data.

It’s also important to consider the potential value a Tech DD can provide the target, as well the investor. For smaller startups, a Tech DD has the potential to hugely benefit the company, through constructive practices such as CTO sparring, roadmapping and the creation of action Items.

In M&A transactions a Tech DD provider should be involved in the risks and integration phase. Where it’s opportune to perform a preliminary review of points of interest, to reach an initial comprehension of viability. These points of interest include scanning open source licences, key developer retention, Tech Debt, and others.

If required an outside expert is brought in to give specialist insight into certain fields of interest.

Aside from context dependent cues, there are accepted practices seen in most Technology Due Diligences. A comprehensive report consisting of facts, action items, strengths and weaknesses of the target company is highly recommended. Pricing which varies by provider  can be determined by either man-days or fixed price, however it’s always recommended to request an offer which outlines the scope, including outside involvement, deliverables, and timeline. This ensures transparency on both sides of the transaction.

A Tech DD should also act as a Chinese wall, guaranteeing confidentiality and discretion, whilst accessing key data points, such as source code, team, product roadmap, documentation and more. It is equally important that a provider remains unbiased and neutral throughout the entire process.

How to choose a Technology Due Diligence Provider?

A Tech Due Diligence can come in many shapes and sizes, and looks different from case to case.

Transactions by nature are dynamic and unique, meaning each accompanying Tech DD is largely context dependent. Simply put the larger the transaction scale, the deeper the Tech DD. The more established the company, the wider the scope of the Tech DD.

Beyond this, the intricacies of each transaction ultimately determine the Technology Due Diligence Provider. For example a small seed round typically does not require a Deep Tech DD, in cases like these it's often appropriate to utilise the Buddy CTO method, where 1 or 2 sessions talking to the CTO and reviewing his choice of technology stack is sufficient. Whereas if a MVP or paying customers already exist, it’s recommended to take a more thorough approach, choosing a provider with expertise and benchmarking data.

It’s also important to consider the potential value a Tech DD can provide the target, as well the investor. For smaller startups, a Tech DD has the potential to hugely benefit the company, through constructive practices such as CTO sparring, roadmapping and the creation of action Items.

In M&A transactions a Tech DD provider should be involved in the risks and integration phase. Where it’s opportune to perform a preliminary review of points of interest, to reach an initial comprehension of viability. These points of interest include scanning open source licences, key developer retention, Tech Debt, and others.

If required an outside expert is brought in to give specialist insight into certain fields of interest.

Aside from context dependent cues, there are accepted practices seen in most Technology Due Diligences. A comprehensive report consisting of facts, action items, strengths and weaknesses of the target company is highly recommended. Pricing which varies by provider  can be determined by either man-days or fixed price, however it’s always recommended to request an offer which outlines the scope, including outside involvement, deliverables, and timeline. This ensures transparency on both sides of the transaction.

A Tech DD should also act as a Chinese wall, guaranteeing confidentiality and discretion, whilst accessing key data points, such as source code, team, product roadmap, documentation and more. It is equally important that a provider remains unbiased and neutral throughout the entire process.

Data-driven Tech DD provider

Data-Driven Tech DD is mainly characterised by, as the name would suggest, an entirely data-driven outlook and evaluation. A data driven Tech DD provider attempts to gain a detailed understanding of the role played by technology in a business’ goals.

Having established contact with key individuals and reviewing important documentation and information, the provider will use these data points to extract data-driven insights, these insights in conjunction with targeted interviews, paint a full picture of the role technology plays in the company.

Some data-driven insights that are often seen are as follows

• Source code insights, outdated dependencies, resulting in increased vulnerability to cyber attacks and increased maintenance costs.
• Ticketing system insights, bug/ticket ratio, a bug ticket majority can be indicative of a decrease in the overall quality of the system. Leading to higher maintenance costs and ultimately reducing user satisfaction.
• Documentation system insights, team workload, heavy workloads pose a risk to productivity, quality of work and employee satisfaction.

A data-driven provider will then decipher the myriad of data points, consolidating the findings to uncover root causes and confirm hypotheses. These findings form the basis for actionable insights for non technical decision makers, whilst being digestible and concise.

All steps of the Tech DD process are centred around data, ensuring an objective evaluation, and facilitating the factual reporting and feedback.

Consultant provider

Consultant providers typically conduct a Tech DD as a small part of a larger, all encompassing due diligence. Including the likes of Legal, Financial and Business DD. The scope of a consultant provider is much wider, meaning it addresses a wide variety of problems across multiple domains.

Consultant providers often have a smaller in house technology department which conducts their own Tech DD. The findings constitute a part of the full DD report, naturally going into less depth than a specialist Tech DD provider.

In certain circumstances, a consultant provider may have to delegate Tech Due Diligence to a 3rd party specialist. This often occurs when the consultant finds themselves out of their depth, typically when there is an underestimation of complexity or volume of technology.

The all encompassing nature of a consultant provider often prioritizes the breadth and convenience at the expense of the depth in technological findings and insights.

Buddy CTO

To preface the “Buddy CTO” provider is only really appropriate for smaller investments. It involves an experienced CTO within your professional network holistically reviewing the technology.

The “Buddy CTO” provider can be a good choice, if the target is in its infancy; just a CTO and idea with no written code. A single interview can provide insight and inform a rudimentary evaluation.

However the “Buddy CTO” provider, as a CTO themselves, often lacks any capacity to perform a deeper due diligence. Meaning the reviewing of code or other time consuming activities act as a major obstacle. Similarly they lack any approved tools, or practices for data-driven deep dives. Leaving only a surface level evaluation.

It’s recommended that the “Buddy CTO” be used as a first impression, but it’s important to consider that it doesn’t constitute proper due diligence.

Alternative: Self Technology Due Diligence

Alternatively, you can try to evaluate the technology company by yourself. Whilst this is not an easy undertaking, if you have a deep understanding of technology and several years of tech experience, it can be done.

However it is likely to be a time consuming activity, which for a busy CTO can be largely inconvenient. Meaning the process could be significantly drawn out or worse be completed quickly at the expense of quality.

Another consideration is that a self-evaluation may be subject to subconscious bias, especially if you share a vested interest in the outcome of the deal.

Furthermore gaining access to full source code and other important IP, can prove to be difficult when performing the Tech DD. As an individual the confidentiality of sensitive information can’t be assured. Whereas a Tech DD provider can act as a Chinese Wall, ensuring discretion.

Checklist to select a Technology Due Diligence provider

When choosing which provider to go with for your technology due diligence, it’s important to have a predetermined set of requirements that the due diligence needs to cover. This is to ensure that both the provider and customer are aligned on expectations and the scope of the diligence, and prevent any disagreements throughout the process .

We have drafted a comprehensive checklist to ensure you can be confident in your choice of Technology Due Diligence Provider. The list is composed of questions and check items that should be looked out for in the letter of intent.

The list can help you:

• Ask the right questions to your provider
• Ensure all relevant and desired information is cover during the Tech DD
• Establish a timeline and processes of the Tech DD
• Evaluate the pricing of a Tech DD across multiple funding rounds