Product Tips and Insights

What is Technical Due Diligence?

Enterprises

A friend of mine recently had the house inspector at the house she loved and was ready to purchase – perfect in every way.

Well, that is until the inspector found several serious issues with the foundation. Once she received the inspector’s full report and based on what she told me, there are many risks to consider if she wishes to still purchase the house. This is the practice of Due Diligence - reasonable steps taken by a person in order to satisfy a legal requirement, especially in buying or selling something. 

The same holds true when acquiring a new product or piece of software. It is important to go through technical due diligence on what you are acquiring or purchasing, much like a car or house.  In fact, in a list published by Forbes on 20 Key Due Diligence Activites, technology and intellectual property were ranked second in order of importance. 

When an Organization or Venture Capitalist looks into acquiring another company, they hire a third-party inspector to handle the due diligence process. This third-party inspector, called an assessor,  takes a deep dive into the financial, organizational and technical heartbeats of the targeted company. Like the house inspector, the assessor will be looking to find architectural issues, identify potential risks and determine product scalability.  

The actual interaction between the assessor and the targeted company is about 2-4 weeks - if the targeted company has all the paperwork in order. In the instance, it does not have a strong historical paper trail or written policies and procedures, that 2-4 weeks can stretch even longer and create a tremendous amount of strain and chaos during the process. Once the assessor’s meetings are completed, then the Venture Capitalist firm or Organization will receive a complete report.

Assessors follow a very long, detailed list during the process.  For example, these are some of the high-level questions that they are looking to answer during the Technological Due Diligence:

  • Stability: How often does the system crash (or almost crash) and what were the causes?
  • Scalability: What are your operational capacity limits and activity volume thresholds?
  • Security measures: What are your plans for security failures such as your physical data centers were destroyed or only one person has all the system passwords leaves abruptly?
  • Production Speed: Do your open-source licenses have legal implications?
  • Costs: What are your current internal and third-party expenses? What are your cost forecasts if you scale the business?

So if you are an investor or VC looking to acquire a new software product, find a reputable assessor to take a deep dive into the product you will be inheriting. And if you are a startup or existing company finding yourself in a merger or acquisition,  take a moment to talk with your programming team, and schedule some time for them to review their code to make sure your software is ready for the future.

 

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