What is a technology due diligence?
Technology Due Diligence (Tech DD) is a thorough analysis of a company’s technology platform, designed to assess its ability to support management’s and investors’ growth plans over the typical investment cycle of 5-7 years.
The Tech DD also plays a crucial role in ensuring that the investment remains attractive to the next owner, whether that's another private equity firm or an industrial buyer.
The Tech DD results in a detailed report that serves as a foundational tool for making informed investment decisions. It’s particularly crucial for companies offering software products or tech-enabled services.
Tech vs. IT Due Diligence
Don’t confuse it with its cousin: the Information Technology Due Diligence (IT DD). While the Tech DD focuses on the core product technology, an IT DD centers on the business application landscape and can be of relevance to companies in all industries.
What are the core elements of a Tech Due diligence?
The Tech Due Diligence can be boiled down to the three core elements of a modern tech company: Product, Organization, and Process, as outlined in the illustration below.
Product
Evaluation of the product
Analyzing architecture and technology, product strategy and roadmap, security and compliance.
Process
Assessment of tech processes
Evaluating software development, product management, customer support and onboarding.
Organization
Analysis of the tech team
Examining size, structure, skills, talent sourcing strategies, and assessing potential key person risk.
What Questions Does a Tech Due Diligence Answer?
The Tech Due Diligence should help investors answer four fundamental questions about the tech platform: Can it Scale, is it Competitive, Secure and Efficient?
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1 | Scalable
Can the tech platform scale in line with growth plans?
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2 | Competitive
Can the platform maintain a competitive edge in the market?
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3 | Secure
Are security risks known and proactively addressed?
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4 | Efficent
Is the development organization effective and efficient?
In order to answer these overarching questions, advisors analyze the target company in up to 20 areas covering the full tech platform, such as software architecture, infrastructure technology, data management, software development lifecycle, and the tech organization’s skills and tenure.
FoT’s proprietary tech due diligence methodology, TechCheck, provides a comprehensive assessment, ensuring a full view of the technology platform across these four dimensions.
Key Outputs of a Tech Due Diligence Report
Risks
The primary objective of a tech due diligence report is to identify any major risks that could impact the competitiveness of the company or its ability to execute the growth plan.
Action plan
The report typically includes a list of recommended actions to mitigate any risks and improve the technology platform, along with estimated costs and effort required for implementation.
Benchmark
Additionally, the report includes a benchmark of maturity against industry standards — categorizing the company as a laggard, on par, or ahead of the curve.
Opportunities
Beyond risk identification, tech due diligence offers investors valuable insights into the technology, the company, and the industry. This understanding can be instrumental in identifying opportunities to enhance the value of the acquisition.
Investor considerations
Investors often have specific questions or concerns, and these are addressed during the due diligence process to ensure a thorough evaluation.
What to Look for in a Tech Due Diligence Team
Solid tech experts
A top-tier tech due diligence team should be led by experienced CTOs who have not only built complex software products but also successfully scaled tech companies multiple times. These experts bring real-world experience to the table, speaking the language of developers and engaging effectively with CTOs and CEOs on all tech topics. They offer pragmatic insights and understand the trade-offs necessary to make a tech company successful.
Strategy consultants
To ensure thorough and efficient assessments, the team should be complemented by smart analysts who are IT generalists and expert project leaders. These professionals should have broad experience across the tech stack, excel at problem-solving, and be quick to analyze data, summarizing findings in a clear and accessible format.
Experience from 100+ transactions
A seasoned tech due diligence team brings the collective experience of over 100 transactions, enabling them to execute assignments confidently, even on short notice—sometimes within just a few days.
Natural collaborators
What truly sets expert teams apart is their ability to work hands-on with the target’s management team, establishing transparency with minimal reliance on data rooms. They collaborate productively with the target’s experts, leaving them with the sense that they have been understood and respected. These teams can quickly adapt and probe during Q&A sessions, and produce final reports that withstand scrutiny from the target’s management after closing.
Industry experts
Additionally, it may be advantageous to employ a team capable of assessing the functional aspects of the target’s product and benchmarking it against the competition. To enable this, advisors need a network of industry experts, familiar with several tools and intimately aware of the relevant business processes to run through benchmarking exercises.
FoT is unique in that our engagements are led by a seasoned CTO.
Learn more about FoT’s team here.
How to Prepare for Tech Due Diligence
If your company will be subject to a tech due diligence, preparation is crucial. Investors will request large amounts of detailed data and require meetings with your team, usually a full day.
If a comprehensive sell-side report already has been prepared, a one-hour Q&A session may be sufficient.
Key Preparations
Assemble a team of 2-3 knowledgeable individuals who can organize documentation and present effectively.
Team
A weak product demonstration can be detrimental. Ensure that you have a skilled demonstrator and a suitable environment. During the demo, stick to main uses cases but highlight popular and unique features.
Demo
Take control of the agenda. Structure your presentation logically, share details, include data and proof points, and remember to highlight your achievements.
Agenda
Do I need to share code?
Typically, there is no need to share source code unless specifically requested by the investor for a very good reason. In our article “Source Code Analysis: When Should Investors Press For It?” we outline the four situations investors usually push for access to the source code before committing to a deal. However, a visual code review is commonly conducted, looking at select parts of the code.
Adequate security preparations
Having security audits prepared is strongly recommended, and it’s best to conduct these well in advance to give time for any mitigation required. Also spend some time to consider compliance. In the case of data privacy: do you handle sensitive personal information or conduct systematic monitoring of individuals? If so, you are typically required to handle data security seriously, including having strong security measures in place, as well as data privacy policies and assessments on hand.
Key challenges to address
One potential complication of Tech/IT Due Diligence is that it’s usually brief, limited to two weeks, and sometimes left as a final step before finalizing the transaction. By this stage, the buyer and seller generally have a strong mutual understanding of the price and terms. Hence, negative findings could prompt investors to renegotiate the price or even withdraw from the deal, potentially squandering significant time and resources invested in the deal.
Another challenge is that tech due diligence may require the involvement of additional personnel from the target company to provide detailed information. This can lead to several issues, such as increasing the risk of information leakage or subpar quality due to stress and lack of time for preparations if resources are scrambled at the very last minute.
Access our guide
For more detailed guidance, we offer the comprehensive guide “How to pass a Tech Due Diligence with flying colors”.