Technical Due Diligence Made Easy: Our Checklist for Investors By Aleksa Vukotic

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Technical due diligence is a critical step in the investment process. It helps investors understand every aspect of a potential investment, ensuring that they make informed decisions.?

But what does it actually entail? Is there a technical due diligence checklist investors ought to follow? How can investors without technical know-how ensure they’re backing the right startups?

We’ll answer these questions and more in this article.

What is technical due diligence?

Technical due diligence (Tech DD) is a vital process that gives investors, VCs,? and private equity companies detailed insight into a startup's technological foundation. We often describe the process as a way to de-risk investments.?

Tech DD thoroughly examines a company's technical infrastructure, architecture, and technology strategies. This audit reviews the entire technical setup, from the architecture of the tech stack to the company's compliance with data privacy standards, and even the team behind the tech. The goal is to provide investors and companies with a complete understanding of the risks and opportunities associated with the startup's technology.

TSF’s unique approach to technical due diligence (for investors)

Having built multiple tech startups ourselves, we know exactly what investors should be looking for during a tech due diligence (Tech DD) round. Our approach to Tech DD is unique and goes beyond just checking boxes or pointing out flaws. We offer practical advice, suggest improvements, and provide valuable recommendations.?

Tech DD isn’t about finding flaws or poking holes in the product/startup. Our goal is to ensure a thorough assessment that benefits investors and founders, clarifying the process and building a stronger foundation for future growth.

We recently conducted technical due diligence on behalf of an investor looking to invest in a leading EV charging software provider. Collaborating closely with the tech and product teams, we thoroughly evaluated the ins and outs of the technology to ensure that it was robust and capable of supporting future expansion.

When we dive into a technical due diligence round, we like to think of it as looking under the bonnet of a high-performance car. We’re not just glancing at the surface; we’re getting into the nitty-gritty details to understand what truly drives the startup and to help support investors’ funding decisions.?

Let’s take a look at the core elements of our process.

Technical DD Themes

1. Core tech (code, architecture, and infrastructure)

When we kick off a Tech DD process, the core tech is the first thing we dive into. This is like the engine of a car, and we need to make sure it’s running smoothly and efficiently. Here’s what we typically look at:

• Is the tech real and fit for purpose? This is our first checkpoint. We need to ensure that the technology actually does what it’s supposed to do. It’s not enough for it to look good on paper; it has to perform well in real-world conditions. We look at how well the tech solves the problem it was designed for and whether it’s reliable in various scenarios.

• USP, IP, and replicability are next on our list. The Unique Selling Proposition (USP) is what sets the technology apart from competitors. We also examine the intellectual property (IP) to make sure it’s protected and not easily copied by others. Replicability is about how easy it would be for someone else to recreate the tech. If it’s too simple to replicate, the startup could face competitive threats.

• Complexity and tech debt are crucial factors. We look at how complex the technology is and whether this complexity is manageable or unnecessary. Tech debt refers to shortcuts taken in the development process that may cause problems later. Too much tech debt can slow down future progress and require significant resources to fix.

• Scalability is all about growth potential. We assess whether the technology can handle increased demand as the company expands. This involves looking at the current infrastructure and whether it can scale up efficiently. If the tech isn’t scalable, the company may struggle to grow without major overhauls.

• Cyber security is a non-negotiable aspect. In today’s world, robust security measures are essential to protect data and maintain trust. We evaluate the startup’s security protocols to ensure they’re up to industry standards and capable of defending against potential threats.

By thoroughly examining these aspects, we get a clear picture of the startup’s core tech health and readiness for future challenges. This helps investors understand the real value and potential risks associated with the technology, setting the stage for informed decision-making.

2. Leadership

When it comes to technical due diligence (Tech DD), evaluating the leadership is just as important as assessing the tech itself. After all, the best technology in the world won’t go far without a solid team leading the charge. Here’s what we focus on when we’re looking at leadership:

• CTO, HoE, HoP: First up, we take a close look at the Chief Technology Officer (CTO), Head of Engineering (HoE), and Head of Product (HoP). These key players set the tone for the entire tech team. We want to know about their experience, their vision for the technology, and how well they work together. A strong leadership team can make or break a startup’s success.

• Engineering team structure: Next, we dive into the structure of the engineering team. How is it organised? Are there clear roles and responsibilities? We look for a well-defined hierarchy and a collaborative environment. A solid structure ensures that projects run smoothly and efficiently.

• Hiring plans and growth: Growth is a big part of any startup’s future, so we examine the hiring plans. Is there a strategy for scaling the team as the company grows? We look at the kind of talent they’re aiming to bring on board and whether they have a plan to attract and retain top-notch engineers.?

• Onboarding and dev tooling: Onboarding is crucial for getting new hires up to speed quickly. We check out the onboarding process to see how effectively new team members are integrated. Additionally, we evaluate the development tools in use. The right tools can significantly boost productivity and streamline workflows.

• Culture, learning, and development: Finally, we delve into the team’s culture. A positive, inclusive culture fosters innovation and keeps morale high. We also look at opportunities for learning and development. Are there programs in place for continuous learning? Do team members have access to training and resources to advance their skills? A commitment to learning and development is a strong indicator of a company’s long-term potential.

By assessing these aspects of leadership, we get a clear picture of how well-equipped the team is to drive the company forward. Strong leadership, a well-organised team, strategic growth plans, effective onboarding, and a positive culture all contribute to a startup’s ability to succeed and innovate. This helps investors gauge not just the current state of the company, but its potential for future growth and adaptation.

3. Product

We also examine the product itself because understanding the product from all angles helps us gauge its potential and future direction. Here’s how we break it down:

• Product roadmap: First off, we look at the product roadmap - the strategic plan for where the product is headed. We want to see a clear, well-thought-out plan that outlines upcoming features, improvements, and innovations. A solid roadmap tells us that the company has a vision for the future and knows how to get there.

• Decision making: Next, we assess the decision-making process around the product. Who makes the calls on what features get developed and when? Is it a collaborative process involving feedback from various stakeholders, or is it more top-down? Effective decision-making processes ensure that the product evolves in a way that meets market demands and user needs.

• Value attribution: We also look at how the team attributes value to different features and aspects of the product. This means understanding what the team sees as the most valuable elements of the product and why. Are they prioritising features that will deliver the most value to users and the business? This insight helps us understand the product's potential impact and alignment with the company's goals.

• Timeline: Finally, we examine the timeline for product development. How realistic are the deadlines for new features and updates? Is the team meeting their targets, or are there frequent delays? A realistic and well-managed timeline indicates good project management and a disciplined approach to development.

By evaluating these aspects of the product, we get a comprehensive view of its current state, long-term viability, and success potential.

4. Delivery

When it comes to technical due diligence (Tech DD), delivery is a key area we scrutinise. After all, even the best product ideas need a robust process to bring them to life and keep them running smoothly. Here’s what we typically look at in the delivery aspect:

• Delivery process: We start by examining the delivery process. How does the team take a feature from concept to deployment? We’re looking for a streamlined, efficient process that minimises delays and ensures high-quality outcomes. A well-defined delivery process is essential for consistently meeting goals and keeping the product on track.

• Estimates, iteration, and release cycle: Next, we dig into how the team handles estimates, iterations, and their release cycle. Accurate estimates are crucial for planning and managing expectations. We also look at their iteration process—how they break down work into manageable chunks and refine it over time. The release cycle is another critical factor; we want to see a regular, predictable schedule for updates and new features. A well-managed cycle shows that the team can deliver consistently and adapt to feedback.

• Transparency: Transparency is a big deal. We check how open and clear the team is about their processes, progress, and challenges. This means regular updates, clear communication, and an openness to feedback. Transparency builds trust within the team and with stakeholders, making it easier to address issues before they become major problems.

• Maintenance/support ratio: We also look at the maintenance and support ratio. How much of the team’s time and resources are dedicated to maintaining existing features versus developing new ones? A healthy balance is crucial; too much focus on maintenance can stall innovation, while too little can lead to a backlog of issues that affect user satisfaction.

• Automation maturity: Finally, we assess the level of automation maturity. How well does the team leverage automation for testing, deployment, and other repetitive tasks? High automation maturity can significantly speed up the delivery process, reduce errors, and free up the team to focus on more strategic work.

By evaluating these aspects of delivery, we get a clear picture of how well the team can bring their product to market and keep it evolving.?

It’s worth noting that our process is adaptable to the type of investment and technology, whether it's a Deep Tech/AI startup, a large-scale marketplace, or an EdTech or AdTech solution. While we adhere to some core principles, we always consider the unique aspects of the technology based on the problem it addresses and its customer and commercial proposition.

Conclusion

At our tech venture studio, we partner with entrepreneurs to build groundbreaking tech products by leveraging our technical expertise and leadership mindset. Our primary focus is on technology and product development, but we also provide broader guidance to scale the business effectively. By collaborating with venture and angel capital, we maximise the chances of success for new products and ideas.?

For investors, this means a reliable partner who can thoroughly vet potential investments and help turn innovative ideas into successful ventures.?

If you’re looking to minimise risk and maximise potential in your tech investments, we invite you to learn more about our comprehensive technical due diligence process. Contact us today to discover how we can support your investment decisions and help bring the next big tech success story to life.