There’s a version of Tech Due Diligence that is inherently collaborative because it involves working openly with the target company and the investment bank. This is known as ‘Vendor Due Diligence’ or ‘Sell-Side Due Diligence’ – effectively assessing the firm before it goes to market.
At Beyond M&A, we prefer to call it Pre-Emptive Due Diligence. Why? Because in this case, the management team is proactively investing in an assessment, on their own dime, and is willing to explore every nook and cranny to uncover potential issues before investors do.
The Process: Conscious and Unconscious Issues
The process of Vendor Due Diligence is largely the same as standard Tech DD: assess the business, identify risks, and highlight areas for improvement. However, the key difference is the mindset of the management team—they want to know what they might be missing.
We typically uncover two types of issues:
- Conscious issues – These are the areas management expects us to evaluate: the tech stack, reliability, scalability, security, and compliance.
- Unconscious issues – These are the insights hidden beneath the surface. For example, spending a day with the CTO, reviewing their stories, challenges, and investment history, might reveal underlying team dynamics or a technical debt problem that’s quietly driving attrition.
Why Team Issues Matter
If there’s a team issue, it becomes even more important post-investment. Once a company secures funding or undergoes a buyout, team expansion is inevitable. If there are existing tensions or inefficiencies, throwing more money and people at the problem won’t fix it—it will amplify it.
But I digress.
The Reality of the First Round
Once we complete our assessment—across team, tech, financials, and operations—we present a report. More often than not, it’s filled with amber and red flags.
I’ve been in countless meetings where the CTO or management team finds this confronting, especially in front of their peers. That’s why I always present the findings to the CTO first, ensuring alignment and buy-in before sharing with the wider leadership team.
Many leaders instinctively want to push back against a sea of amber and red. But doing so defeats the purpose. The objective of this process is not to produce a “clean” report, but to surface and address potential concerns before investors do.
Investors Expect Amber Flags
A key takeaway: investors expect amber flags. They don’t see them as dealbreakers; rather, they view them as areas where their governance and funding can drive improvement. No business is perfect, and a DD report that glosses over real concerns isn’t just unhelpful—it’s misleading.
Key Recommendations
- Set expectations upfront – The report won’t be pretty, and that’s a good thing.
- Give the CTO or key sponsor an initial preview – They should see the report first and have time to respond.
- Context matters – A well-established fintech will face different scrutiny than an early-stage VR startup.
Common Issues We Uncover
Some of the most frequent concerns we identify include:
- Team issues – High turnover, a complex codebase that hinders development, or remote workers operating without structure.
- Cybersecurity gaps – These always come up.
- Resilience and scalability risks – Especially common in fast-growing startups where technical debt is accumulating.
- Product concerns – Sometimes, the core issue isn’t in the team or the tech, but in the product itself and its long-term value proposition.
A Final Thought
If your company has reached the Tech DD stage after receiving a Letter of Intent (LOI), you are already in the top 2% of businesses. That alone is validation that you’re doing something right—and investors know it. The key is to embrace the process, tackle the amber flags head-on, and ensure your business is as strong as possible before going to market.
