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Delving Deeper into the Patterns of Tech Due Diligence

Patterns in Tech Due Diligence

In my conversations with industry peers like Neil, it became evident that a distinct pattern often emerges after conducting numerous tech due diligence projects. More often than not, our reports are dominated by amber and red flags, with very few areas marked in green.

This recurring pattern can be disillusioning. Professionals in the tech sector strive for innovation and distinction. Nobody wants their role to be reduced to a mundane, commoditised job. However, witnessing these repeated issues across myriad teams and individuals grants one a unique expertise in assessing and diagnosing the prevalent challenges.

Common Findings in Tech Due Diligence

I published an article in 2022 that listed the common issues found during Tech Due Diligence. The accompanying info sheet is below:

Since then, the ‘pattern’ has reduced to the following common findings:

Amber Flags:

  1. Strategy & Roadmap: More often than not, there’s a lack of a cohesive strategy and clear roadmap. Teams seem caught up in an endless cycle of tasks with little insight into the potential return on their tech investments. Such a scenario is somewhat expected since tech growth initially tends to be organic, evolving into a more structured approach as the company matures.
  2. Tech Architecture: Often, companies acknowledge certain limitations of their tech architecture. These ‘known, knowns’ might be acceptable risks during a company’s nascent stage. However, without a proper risk register, the commercial and tech risks grow in tandem, posing significant challenges down the line.
  3. Scale & Resilience: Single points of failure don’t raise many eyebrows until a potential investor identifies them as risks that could jeopardise their investment. Added to this is the lack of flexibility and notable skill gaps, especially in domains like DevOps.

Red Flags:

  1. Cyber Security: Unarguably the most critical area of a tech assessment. Any shortcomings in this domain significantly influence the decisions of the Investment Committee.

Why do these observations keep appearing?

The crux of the matter lies in understanding why these patterns persist across various firms, irrespective of the industry. Our methodology isn’t drastically different from the targets we assess. Our primary focus remains on leveraging technology to bolster business growth.

Most teams, driven by a commercial mindset, build solutions tailored to their immediate customer needs. They prioritise revenue-generating technology and maintain discipline in their approach. While early-stage firms often operate under financial constraints, preventing them from investing in advanced cybersecurity or hiring additional personnel, mature firms face different challenges. Many have grown organically and might not have undergone rigorous tech assessments during their formative years.

Transitioning from Assessment to Transformation

A CIO I spoke with years ago remarked, “Nobody enjoys paying for (tech) assessments.” Yet, these Tech Due Diligence assessments open the door to valuable transformation opportunities. Because we can help uncover where help is needed in the team to grow the venture.

The recurring issues highlighted in our RAG (Red-Amber-Green) assessments are not mere standalone problems; they reflect more profound underlying challenges, often rooted in human dynamics. The true essence is discerning the “WHY” behind these patterns:

  • Issues in management dynamics?
  • Hidden agendas?
  • Broken promises?
  • Is it due to the founder’s limited knowledge?
  • A nonchalant attitude or complacency on the founder’s part?
  • Could it be a stagnation in the founder’s technical expertise?
  • Insufficient funding?
  • Or is the company operating more as a consultancy than a tech-driven enterprise?

A disregard for existing challenges is a telling sign. Equally, understanding a firm’s historical decisions offers insights into its adaptability and approach to change. Management’s current attitude often hints at a company’s future direction, something you’ll only get a real sense of once you’ve spent sufficient time together.

In Conclusion

To the uninitiated, tech due diligence might appear to be a mundane, standardised assessment. But these tech observations are symptomatic outcomes. The result of the team fusion/dynamics.

So, at its core, it is akin to solving a complex mystery reminiscent of something the legendary detective Columbo would relish – a profound exploration into understanding human motivations and decisions. That’s why you hire us.

(For those that need a more scientific approach than my personal observations, refer to the book ‘ Value in Due Diligence: Contemporary Strategies for Merger and Acquisition Success‘)

Hutton Henry
Hutton Henry
Hutton has worked with Private Equity Portfolio firms and Private Equity funds since 2015. Having previously worked in post-merger integration for large firms such as Ford and HP, Hutton understands the value of finding issues prior to M&A deals. He is currently the founder of Beyond M&A and provides technology due diligence for VC, PE and corporate investors, so they understand their technology risks before entering into a deal.

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