Scale means different things to different people.
When Investors invoke Technology Due Diligence, you need to understand their definition of ‘scaling’ your business.
The investors are unlikely to buy into the lazy explanation of scale – which is generally top-line revenue growth. Given the market opportunity, they will be more interested to understand how realistic the growth plan is.
They will hire due diligence consultants to check many departments. And tech sits in the middle of most, if not all, of them.
Therefore, it is essential to understand their perspective when you are undergoing technology due diligence. So you can consider how your tech environment will need to change post-investment.
The Accountant’s definition of Scale
Accountants Do Well At ‘Scale’
Many intelligent and successful business owners were qualified accountants at one time in their lives. The founder of Nike – Phil Knight – was a Certified Public Accountant, first with Coopers & Lybrand and then Price Waterhouse (PwC).
He later became an accounting professor at Portland State University (PSU). He didn’t do too badly.
More recently, it has been reported that Six out of Ten FTSE 100 CEO Leaders are qualified accountants.
An Accountant’s Definition of ‘Scale’ can help you be more effective during DD.
Turning to a lesser-known accountant turned entrepreneur. Les McKeown is the President & CEO of Predictable Success.
Les was awarded the Samuel Smyth Memorial Prize as a Chartered Accountant in the UK. After a brief period with Price Waterhouse, Les became Ireland’s youngest ever accounting firm partner.
Les has over 25 years of global business experience and started 42 companies in his own right.
Les was the founding partner of an incubation consulting company that launched hundreds of businesses with thousands of employees.
He has unique and practical insights because he helped others set up firms and had a small interest in each. Allowing him to learn the highs and lows and the successes and failures.
So Les has a lot to say about ‘Scaling’ and the misconceptions of the word within the business context. You can learn more in his excellent book DoScale.
In summary, he says when referring to scale, most people mean “getting very big, very fast”.
This thinking is loaded with significant assumptions, making it either daunting or impossible and an unrealistic target.
You can learn more from this interview with Les in this video:
Les’ Definition of Scale
Therefore, it is more complex but more helpful to use McKeown’s definition during Technology Due Diligence projects:
It is too simple to use ‘get big, quick‘ thinking. Instead, it’s ‘get big within the context of your business, team and market realities’.
But ironically, we must stress test both scaling scenarios during Technology Due Diligence. This helps to get a sense of your potential challenges and the opportunities to create more business value.
We need to define ‘Scale’ for Technology Due Diligence
1. The first lens: Get Big, Quick
This will be the first lens to assess the technology’s scaling capabilities. We utilise a hypothetical scenario:
Scale the product or service, working on the basis of 100% business growth in 100 days.
What problems would that cause for you and your team? What known issues suddenly become a significant concern?
For instance, a target we worked with knew some cost efficiencies within their AWS environment. But they hadn’t gotten around to addressing them. This would seriously erode the bottom line if the business suddenly increased its business.
The scenario stress-tests the technology, operations, and team to uncover areas that may need future investment.
2. The second lens: Get Big within context.
After considering the impact of a sudden increase in customers, we need to test three other areas in more detail:
We need to learn the business history, its origins and the key events that got it where it is today. Business history includes how management found each other, developed their vision and establishing product-market fit. Those early-stage events can have tremendous upside in the longer term.
Then we need to understand the current situation:
- Have they re-platformed?
- How have they addressed the ‘older’ systems and technology?
- Did they acquire their competitors as part of an M&A strategy?
- Were they able to decommission old systems, or are they still running in parallel? What are the cost implications in either situation?
- How easy was it to migrate people onto the new platform? This may answer how well the team develops its tech roadmap and designs products.
- How has management dealt with adversity?
- How have they managed unsuitable hires in the tech team?
- Have there been data breaches? If yes, how did they manage it?
For example, , the sudden appearance of well-funded competition or, more likely today, how they handled a significant data breach.
Ultimately, you need to consider the team’s structure, accountability, and communication ability.
We also need to consider technology management’s ability to adapt to new plans, reporting and goals. Often leaders are not adequately prepared before the ‘deal’ completes.
How will your team adapt to being ‘under new management? There will be more governance and a need to communicate a more commercial perspective of the tech environment.
For the first couple of quarters, many tech teams struggle with this after a deal completes.
It is impossible to be prescriptive on what market information is relevant during technology due diligence. But we need a context, which will usually be presented during the management overviews and technology demos.
We assume significant growth is predicted for your firm.
And we also know that you, as the technology leader, will understand your industry well. But these two assumptions need clearly articulating so that we can align predicted growth against your tech roadmap.
Ideally, it would help if you had visibility of this growth plan (the value creation plan).
But from a Technology Due Diligence and linkage to Commercial Due Diligence is helpful. It allows us to join the dots between the market potential and the technology that’s being built.
Cross-referencing commercial information is helpful to understand the customer’s perspective on technology. Being abreast of Legal Due Diligence findings is also essential, especially in fast-moving industries like Martech.
You need to consider ‘Get Big, Quick’ and ‘Get Bug, within Context’ scenarios. Then assess the impact on your technology environment.
We will also need to look at the company in context and work with you to predict the areas that will need attention if you were to ‘turn the dial’ on your tech environment. How would that impact your people, product and processes?
Demystifying Technology Due Diligence
By making the Tech DD process transparent, we can ensure the best value for all parties involved. I aim to provide information to help you prepare for and de-mystify Technology Due Diligence.
It might appear that we are ‘giving away’ our approach, allowing target firms to over-prepare. But it is difficult for them to re-write their entire tech history and plans in readiness for sale.
I recommend reading @Scale – A Guide to Technology Due Diligence or Are you and your team ready for the scaling challenge ahead?