When it comes to technical due diligence, some investors opt for well-established firms, investing significant resources to ensure thorough tech evaluations for their deals. On the other end of the spectrum, some skip tech diligence altogether or rely on “a guy” in their network to handle this crucial task—often a portfolio company CTO or a connection who can manage it “on the side.” While this approach may have sufficed in the past when technology was simpler, today’s rapidly evolving and complex tech landscape demands much more. Effective technical due diligence now requires specialized expertise, diverse skill sets, and a high level of emotional and business intelligence. It’s unrealistic to expect that “a guy” can meet all these critical needs and mitigate the associated risks.
Breadth of skillsets
The level of technical complexity in modern applications is increasing exponentially. The days when a single resource could effectively assess and identify risks across all technical aspects of a business are gone. Think of 50 years ago when a good MD was all you needed as opposed to the myriad of specialists required today. Different technologies and development frameworks require specialized skills that are unrealistic for one person to possess. Similarly, technical due diligence now almost always includes Security diligence, and increasingly, we are seeing it expanded to include Product diligence. With these additional elements, you are certain to outstretch the capabilities of any single person.
The importance of emotional intelligence
Another fallacy of the “we’ve got a guy” approach is that because someone is technical and understands code, they can perform this diligence. There is far more to conducting great tech diligence than just the technical part of digging into source code and evaluating architecture. Knowing the right questions to ask and, more importantly, knowing HOW to ask the questions makes a major difference in the quality of the diligence. Building trust with the team from the target company is essential. Tech leaders in target companies are commonly resistant to the process. This is understandable as the diligence process has the potential to put them and the application they have built in a negative light. As such, very guarded answers can be provided, making quality diligence impossible. So, excellent emotional intelligence is required to break through that resistance and get the transparency and cooperation needed to identify risk successfully.
Just pulling in a resource from your network to perform tech diligence increases the odds of ending up with someone who does not possess the critical emotional intelligence to elicit the most transparency from a target team.
The importance of business intelligence
Another critical aspect of effective Technical Due Diligence is the ability to discern which technical issues are relevant to the deal. Furthermore, explaining those technical problems in clear, non-technical business terms is essential. Both of these considerations highlight the importance of having a technical due diligence partner with not only great technical skills but strong business skills as well. This is a rare mix in the technology world. Using “a guy” who is not deeply experienced in tech diligence introduces the unnecessary risk that the diligence may raise issues that are not critical to the deal. Or even worse, it doesn’t raise issues because they are not technically critical but happen to be very important to the deal from a business perspective.
An experienced diligence resource would know the difference and could save a lot of time and risk by highlighting the issues that might otherwise be missed.
Helping after the close
In many cases, meaningful issues identified in technical due diligence must be remediated after closing. The new portfolio company often doesn’t have the expertise or bandwidth to address these issues on its own. An important consideration in selecting a technical diligence partner is to choose one with the breadth of expertise and the capacity to help remediate all problem areas identified post-close. It is rarely the case that “a guy” has either.
Summary
In summary, technical due diligence requires specialized skills beyond just the capabilities of the particular field. Investors intuitively appreciate that distinction for areas they are familiar with, such as sales, finance, and marketing. However, technical expertise is typically more of a blind spot for this group, so the assumption is pervasive that anyone technical can do tech diligence. Performing tech diligence with a resource who does not possess the variety of skills outlined here introduces a real risk that issues material to the deal may not be brought to light until after the close. They may be a “friend of the firm” and may have even been a great CTO for a prior or current portfolio company. However, great technical skills do not equate to great technical diligence skills, and assuming they do can lead to oversights and misjudgments that introduce risk. To ensure a thorough and accurate evaluation, ultimately safeguarding the investment and moving the deal forward with confidence, it is important to engage professionals with a proven track record in technical due diligence.
You very well may “have a guy,” that you like, but a team— with skills, expertise, and experience in technical diligence— is the best way to ensure you uncover the risks that could impact the deal.
For more information on TechCXO’s Technical Diligence services, please visit https://www.techcxo.com/buy-side-tech-diligence/
