You need to keep an eye on technology when scaling a business
Scaling a business is one of the biggest challenges that companies face – and it can be difficult to overcome these barriers to business growth without the right tools and resources.
And when there’s an investment round, an additional barrier, due diligence, becomes apparent because now the entrepreneur and their team need to articulate their plans to win investment.
Not all plans are created equal, and unfortunately, it’s not until you’re under investor scrutiny that you find yourself in the challenging no-mans-land of being stuck between your entrepreneurial vision and the investor’s need to understand the risks in detail.
This post highlights 8 of the barriers to business growth we spot during technology due diligence for you to consider and address in your own time – hopefully, long before a due diligence exercise.
The observations we make may not be barriers to business growth, but…
Many companies will thrive without the ‘proper’ processes, technology, or roles. For instance, for a small business being assessed, we might state you need an ‘appropriate Finance system’ when we’ve witnessed corporates operate successfully purely from spreadsheets.
We see technology through the eyes of an investor, who is typically keen to invest but has to look for the kinks and concerns.
So, we highlight areas that may be a risk for them but may work perfectly for you today.
In essence, there’s no right way to do things. That’s what makes tech exciting.
Here are the 8 barriers to business growth and suggested ways to minimise them:
1. A lack of resources causes the most challenging barrier to business growth
The first barrier to business growth is a lack of funding. Hiring the right employees, purchasing necessary equipment, and expanding into new markets can be difficult without adequate funding. Hence, this is why your firm is speaking to an investor to support the next growth stage.
But a lack of funds can also be apparent if you’re not forecasting enough spending. For example, you may present a ‘steady state’ growth plan that investors like as you reduce their risk. But if you’re also predicting zero / next to nothing spend, we will flag this and look at your tech hiring plans to see if this matches the strategy and roadmap.
2. Scaling a business whilst there are expensive tech challenges
A primary benefit of IT due diligence is that we help identify potential issues and help you run through the various hypotheses that impact the budget and viability of the business.
So, we might uncover a tech problem that has a substantial price tag to address it. Whether this is a known issue varies from firm to firm, but you can guarantee the investor isn’t aware of it. In some extreme cases, the proposed fix(es) has doubled the cost of technology, suddenly making the business untenable.
The action point here is to be realistic about the proposed tech budget and to review your primary risks and the potential costs to address them.
3. Technology causing barriers to business growth
Identifying tech issues and helping provide potential solutions and remediation costs is a vital element of our role. These can range from how the software is architected and data is collected to more obscure things such as how the team uses cloud services. For example:
- The architecture of the product needs a major rehaul
- The speed of the core product needs improving
- Legacy technology that’s expensive to replace
- End-of-life components that are tricky to upgrade
- Using expensive cloud products (e.g. GPUs)
The list could go on. But one overriding concern creates barriers to business growth – the lack of a plan to address all the known problems the team is dealing with.
Whilst we often work with the management team to propose a solution, the investor wants to understand the risks and the impact on the Enterprise Value of the business. For a scale-up company, it’s essential to address these technical challenges as soon as possible.
4. Per-client customisation creates barriers to business growth
If there’s a high level of per-customer customisation to your product, this can be a red flag. This is because customisation prevents scale and typically needs a team to maintain.
We don’t often see this issue, and there’s usually already a plan to address before we assess.
5. Professional Services
We worked with a marketing business with a healthy list of household names as clients and its tech was a differentiator and enabler of business. However, looking at their growth plan and how the software operated, it became apparent that the firm would need to hire hundreds of junior staff to meet the growth objectives.
Professional Services can bring in a healthy income. Still, in some cases, similar to customer-led customisation, it is seen as difficult to scale as the challenge is to scale, manage and retain a team whilst protecting vital Intellectual Property.
In some cases, investors will see a Professional Services team as a ‘value add’, in others, these are simply barriers to business growth.
A way to address this is to highlight the problem early and have a plan and technology-driven approach to remove the extra resource over time.
6. Confused Product Strategy
I was bamboozled by the product strategy in a small firm of around seventy staff. They’d hit gold with their first product and then decided to re-platform it, and then whilst that was ongoing, re-platforming again. Resulting in three live versions of the same product that were providing a variation of the same thing.
Worse still, none of these platforms provided the data the Senior Leadership team urgently wanted. In this scenario, the tech team was over-stretched, confused and not delivering on time.
A team’s historical approach to product development and decision-making can indicate how well a team will utilise an investor’s cash.
Technology Due Diligence will often highlight the problem, but to address this, you may have to implement a more formal approach to product management or hire/bring in new skills.
7. DevOps and Technology Infrastructure
Regardless of size and maturity, the technology infrastructure can be a barrier to business growth. For example, an eCommerce business we assessed was very successful, generating hundreds of millions in revenue each year.
But we were surprised to see many infrastructure risks, including concerns about cloud cost optimisation (which had been outsourced) and resilience.
There were single points of failure throughout the infrastructure. The reasons why this happened are complex, but it’s usually due to shortcuts being made early in the life of a business which is challenging to address post-deal.
If you cannot hire, consider fractional support to fix this.
8. Leadership not ready/suitable for the next stage of growth
‘What got you here won’t get you there‘ can often be true. There may need to be changes in the leadership team or some additional support. In extreme cases, CTOs have wanted to leave the business post-deal.
It’s not unusual for us to support CTOs through the first quarter post deal when it’s their first time with an institutional investor because the pace increases whilst the need for more governance and reporting becomes more robust.
The stress during this transition can be full-on as the tech leader does their best to satisfy new stakeholders, support further growth initiatives and keep the lights on.
Conclusion
This is not an exhaustive list; my objective of this post was to demonstrate the varying and differing factors that are uncovered during IT Due Diligence that present barriers to business growth.
I haven’t mentioned the obvious concerns such as attracting, hiring and retaining talent nor the wage inflation in the technology industry, which looks like it’s here to stay. Or issues with intellectual property, levels of maintenance etc.
But I think you get the point – a tech problem isn’t often a tech problem.
If you want to learn more, you can read this guide on Tech DD or give me a shout on LinkedIn.
