You may have come across this statistical fact before: 90% of startups fail. What’s more, according to Fundera, almost 30% of small businesses surveyed by NSBA lost growth opportunities due to a lack of funding.
But we’re not about to be foreboding and discuss the failures’ causes. We’d rather help you better understand what investors consider when deciding whether to support your project.
Technical diligence is one of the key steps towards startup funding. So, what is it, and how to make it right?
This post will explain technical due diligence meaning and specifics. We will also provide a useful checklist defining its core components.
What is Technical Due Diligence and Why It Matters?
So what is technical due diligence, and why should you care? Let’s try to figure it out.
Technical Due Diligence is the process of verifying a digital product or a tech startup and all related tech details such as the product’s architecture, code quality, security, licensing, and more. Majorly, tech diligence occurs in the active product development phase, when certain documentation already exists, decisions are made, and you’re a step away from the investment stage.
And that’s the core reason to conduct tech due diligence. Investors, potential product buyers, or other stakeholders may initiate this assessment to check the product and the team behind it.
Here are a few key reasons to conduct technical due diligence before M&A or seed funding.
- Evaluate the product’s real value.
- Assess potential risks and pitfalls.
- Conduct in-depth verification of the technical solutions.
- Predict the product’s growth potential.
The importance of tech due diligence for investors is obvious. It enables them to make reasonable decisions based on specific findings, not assumptions.
Businesses and startups can also benefit from technical due diligence. It might help founders understand if the project is on the right track and still follows the original idea.
How to Conduct Technical Diligence
Although the technical due diligence process may vary depending on your project’s specifics, it normally requires several key steps to be taken. Let’s explore these milestones in more detail.
1. Code Review
Usually, it all starts with a code review that your development team should conduct. The preparation stage isn’t about finding and eliminating your system’s bugs. That’s what the engineers and QAs deal with during the development process. Code review is a technical verification to summarize your current achievements and the deliverables you’ve met so far.
Code review is focused on checking tech documentation and the solution regarding the interface, integrations, and code.
The planning stage is more connected to your product’s business and branding aspects. A team led by your company’s CEO develops a simple, consistent, and compelling business strategy and introduces it to investors.
At such a mature development stage, you probably have a fairly clear idea of your product’s value for the customers, its growth potential in the market, competitive capacity, etc. So during the kick-off call, your goal is to bring together and present this vision.
Often, investors pay less attention to the product’s minor technical flaws that are easy to fix. However, a lack of a comprehensive business strategy or poor market prospects may push them away.
3. Documentation Check
Technical diligence is an assessment that relies more on facts than words. That’s why well-prepared and consistent documentation is vital. All details concerning your product’s architecture, infrastructure, integrations, servers, and any other tech solutions should be accurately documented and kept in a precise order. Meticulous documentation will serve for more detailed and accurate experts’ conclusions.
4. Technical Diligence Meeting
Next, a pre-scheduled meeting with your development team may occur. The experts conducting technical diligence want to learn more about your project’s internal specifics, meet the team working on the product, and hear their opinions on its strengths and prospects.
After all these steps, the team conducting tech due diligence may ask additional questions on a follow-up meeting or call. Then, they will leave their feedback about the completed assessment process.
6. Reporting the Findings
Finally, the technical due diligence process is over. The experts who conducted it will prepare a comprehensive report containing all their findings of your product’s documentation, code quality, business strategy, etc.
Technical Due Diligence Checklist
Now, let’s look at the most crucial components of tech due diligence. Each of them may be crucial to your startup’s success.
Here is a tech due diligence checklist that includes the most influential factors in this process.
1. Architecture and Infrastructure
Tech due diligence is primarily focused on your product’s technical side, so you should be ready to present and explain the solutions regarding your product’s architecture, APIs and integrations, scalability, technology stack, and more. So ensure to provide the interested party with all the required documentation regarding these development aspects.
Of course, it doesn’t mean that you will have to finalize unfinished reports and correct potential problems in a hurry, specifically for tech due diligence. It’s more important to explain the current situation, justify your decisions, and describe your vision.
Here are the key technical matters that will likely be raised.
Architecture. Present the chosen architecture type, whether it’s monolithic or microservices. Each approach has its specific features, significantly affecting the product’s future. So you should explain your decision and give some arguments.
Scalability. You should have a long-term vision of your product’s future. So even if it’s not likely to have an enormous audience right away, consider the potential need to scale. Suggest how your tech solutions and architecture support this idea.
APIs and integrations. Introduce the services implemented via integrations and present your APIs documentation. It significantly affects your product’s specifics and complexity.
Technologies. Introduce the chosen tools and frameworks you’ve used for your product development and deployment. Pay special attention to the relevance of the frameworks, databases, servers, etc., to your business goals, and provide corresponding documentation.
Code quality. The potential code issues may result in an inflated project budget and expanded timeline. Your code might need certain polishing, but its current condition can make a difference.
Security. You need to show how you ensure your app’s ready to withstand potential hacker attacks and has a robust system preventing breaches. You may also have to provide the results of security checks.
The people behind the technologies you implement are the key to your project’s success. So another important aspect of technical due diligence is related to the team working on your product. It’s important to introduce your key team members, explain their roles, and present a consistent and up-to-date organizational chart.
So during tech diligence, ensure detailed documentation regarding staffing, contracts, labor costs, etc. Be prepared to provide reports on the team members’ functions and capabilities.
3. Development Workflow
During the technical diligence process, you’ll also have to provide the experts with a comprehensive overview of various internal processes and how they are carried out.
And once again, documentation is crucial. Be ready to show the charts and metrics revealing the workflow’s nature, overall and individual productivity, team members’ performance, and the quality of delivery. This information is inseparably linked with the project manager’s responsibilities.
Also, this matter involves the collaboration model and methods used for the efficient development process. If you benefit from the agile approach, ensure to mention it. Also, prepare the reports about the team meetings’ goals and frequency.
4. Intellectual Property and Licensing
Checking all necessary documents concerning intellectual property, licenses, patents, and compliance with certain regulations is another essential milestone of due diligence. To prepare for this audit aspect, keep all corresponding documents and ensure you have all needed to prove your product’s uniqueness.
Here are the key points the experts will assess.
- Patents. You will have to confirm the freedom to operate and provide the documents that confirm your intellectual property rights.
- Attribution report. This document proves that your product’s elements like third-party integrations and open-source components are implemented legally.
5. Development Strategy
After you’ve passed every audit stage and answered all technical due diligence questions, the investors will be interested in your vision of the product’s future. What is your product development roadmap? Which solutions will you implement next? What are the milestones and potential challenges and milestones of the upcoming stages?
Back up your answers with documented plans and a confident growth strategy.
Tech Due Diligence: A Step Towards Your Startup’s Success
Technical due diligence is one of the main success factors when it comes to getting an investment for your startup. It might seem quite complex to pass such a detailed and multi-level audit. However, good organization of all development aspects and consistent documentation will make you feel more confident.
We hope our tech due diligence checklist will come in handy. However, if you need more detailed advice on introducing your product to the investors and preparing for the assessment, we are ready to help.
Halo Lab is a full-service digital agency with deep web design and full-cycle software development expertise. We deliver successful solutions for many businesses and industries. Our professionals have in-depth knowledge of every development stage, its specifics, and proper documentation.
Get in touch for more information about technical diligence or any other question regarding your project.