7 Common Mistakes During Technology Due Diligence: How to Avoid Them
Technology due diligence is a critical process for any investor that wants to make sure they are getting the most value out of their technology investments.
Unfortunately, many common mistakes can end up costing them time and money. In this blog post, we will discuss the three most common mistakes during technology due diligence and how to avoid them:
1) Poor Diligence Scope
The first mistake is not tailoring the assessment accordingly. Technology is a vast 'creative canvas' so it is easy to spend time on the wrong areas of assessment.
When scoping the project, it's important to tailor the assessment accordingly to ensure that you're focusing on the right areas.
Tech assessment tends to break down to Infrastructure, Software and increasingly Cyber and you need to decide where the focus will be required. For example, a Martech business may, on the surface, require software assessment but due to the customer data it stores and processes cyber is more important.
So when scoping the project, you need to consider two different perspectives as both sides need to be clear about objectives, roles, and expectations from the outset.
Investor's perspective
It is important to understand their investment thesis and the underlying assumptions made about the value technology represents today and how tech will support the growth plan.
When conducting a technology due diligence review, it is important for the investor to understand the company's investment thesis and the underlying assumptions made about the value of technology. Furthermore, they need to be aware of how tech will support the growth plan of the company. By understanding these aspects, investors can make better decisions about where to allocate their resources and focus their attention.
Target's perspective
From the target company's perspective, it is important to understand what the investor's focus is and what they are looking for in order to provide them with the information they need. By understanding the investor's focus, companies can provide relevant information and avoid costly mistakes.
There are many 'outside in' aspects to consider when assessing a target for tech due diligence. The state of their website and the way they use social media and other digital marketing tools will give you a good indication of their maturity.
Additionally, if they are a public company, their public filings will give you some insight into how they think about themselves from a technology perspective and then you need to do your homework on the target company and their technology. This includes understanding the business model, how they generate revenue and what their key value drivers are.
But the real question is to ask the target - what do you hope to get from this exercise? Most, if not all, welcome an external perspective of where they are today and often cite areas that need improvement.
In summary, the assessment will be better if you can ask both sides what they are expecting from the Tech DD so you can build a clear and appropriate scope.
2) Lack of In-Depth Technology Team Assessment
The second mistake is not assessing the team thoroughly. The team should be a critical part of any tech assessment as they are the ones who will be responsible for implementing and managing the technology. Make sure to assess their technical skills, experience, and ability to work together.
The investors will want to know if there are any key person dependencies (there always are) and what's currently in place to motivate and retain the team? In the current recruitment crisis in tech money alone doesn't cut it (but certainly helps if the team feels underpaid).
Most targets assume skills matrices are used by us to highlight negative aspects to the investors but they are an easy device to show areas of improvement that additional funding will help solve and improve the business. Skills matrices are hardly ever in use but are highly recommended.
Ultimately I also suggest going deeper and running psychometrics on the team (this can happen pre or post-investment). The teams willing to do this gain tremendous value and often re-organise their technology team (and sometimes their senior management team) following this type of assessment.
3) Failing to Explore the Relationship Between Tech and Revenue Generation
The third mistake is failing to understand how the target company makes money. This may seem obvious, but you would be surprised at how many times this is overlooked and tech is assessed in isolation. Technology plays a critical role in most businesses today, so it is important to understand how it supports the business model and generates revenue.
Some of the standard questions are expected; What's the customer lifetime value? What is the cost of acquisition for a new customer? How easy is it to upsell or cross-sell existing customers? What is their churn rate?
If they are a product company, what is their go-to-market strategy? How are they selling their product? What is the sales cycle? What is the average deal size?
And if they are a service company, what is the pricing model? How do they deliver their service? What are the associated costs?
But also - are there any hidden services that are bolstering the business model (e.g. professional services or paid-for onboarding) and what are the plans to eradicate human-driven activities? When revenues increase do you also need to hire more people to support the growth?
Ultimately, you need to understand how technology supports the business model and how it generates revenue.
4) Not Assessing the Competition
The fourth mistake is not assessing the competition. It's important to understand who the target company's main competitors are and how they compare from a technology perspective. This includes understanding what their competitive advantages are and whether they are sustainable.
In addition, you should also assess any potential disruptors who could enter the market and threaten the target company's business model. This is especially important in fast-moving industries where technology is changing rapidly.
5) Not Understanding the Technology Landscape
The fifth mistake is not understanding the technology landscape. This includes understanding the main technology platforms and vendors in the market and how they compare. It's also important to understand any emerging technologies that could disrupt the target company's business model.
In addition, you should assess the target company's use of open source software and how they compare to their competitors. This is becoming increasingly important as more companies are using open source software to build their products and services.
6) 'Gold Plated' recommendations
Technology consultants are often brought in to evaluate a company's technology needs and make recommendations for expensive software. While their expertise can be valuable, their recommendations can also have a significant impact on investors.
Investors want solid recommendations on what gaps there are today, how to address them and when those actions will take place. This is often presented in a 100-day plan. But the investors are not keen on 'gold plated' recommendations - they do not want due diligence consultants to recommend inappropriate solutions as this can cost more money and deliver the wrong solution to a problem.
For example, recommending an expensive Enterprise-level CRM when a cheaper and more agile version is more suitable for the target business and the team's culture. Or recommending a generic reporting platform when there's a niche platform specific to the target business' industry. Or worse, suggesting a total re-write of an in-house developed software platform when an off-the-shelf equivalent already exists.
For one thing, technology consultants often recommend software that is more expensive than what the company needs or can afford. This can result in the company overspending on software, which can lead to financial problems down the road.
Another common mistake that technology consultants make is recommending unnecessary software. This can add to the company's expenses and cause it to miss out on important features that would be beneficial
Finally, technology consultants sometimes fail to take into account a company's specific needs again resulting in expensive mistakes.
To address this you need diversity of skills within the consulting team - ideally a team with combined start-up, scale-up, mid-cap and corporate technology industry experience as a minimum. The team also needs to have significant technology team leadership and development experience. Lastly, the consulting team must have C-Suite roles in the past and a commercial understanding of the impact caused by technology related decision making.
7) Not Understanding the Security Landscape
The seventh mistake is not understanding the security landscape. This includes understanding the main security threats and how they compare. It's also important to understand the target company's use of security tools and services and how it compares to its competitors.
Security is becoming increasingly important as more companies are using the internet to build their products and services. Not understanding the security landscape could mean missing out on a big opportunity.
These are just a few of the common mistakes made during technology due diligence. Avoiding these mistakes will help you make better investment decisions and avoid potential problems down the road.
To Conclude
In conclusion, these are three of the most common mistakes made during technology due diligence. By taking the time to understand the target company's business model, assess the team, and understand how technology supports the business, you can avoid these mistakes and create a more holistic picture of the target company.
Technology due diligence is an important process for any investor to go through, but it's also important to understand the common mistakes that are made during this process. By taking the time to understand the target company's business model, assess the team, and understand how technology supports the business, you can avoid these mistakes and create a more holistic picture of