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Scale from a Technology Due Diligence Perspective

Technology Due Diligence - Scale

Scale means different things to different people.

When Investors invoke Technology Due Diligence as part of a broader assessment of your business, you need to understand their definition of ‘scaling’ your tech environment. The investors are typically qualified accountants, so they are unlikely to buy into the lazy explanation of scale – which is generally top-line revenue growth.

Investors are more interested in stress-testing the scaling of your tech environment within the confines of your business’ market, opportunity, customer and, of course, the tech market itself. They will hire many advisors to look at this challenge from varying perspectives, yet tech sits in the middle of most, if not all, of them.

Therefore, it is essential to understand their perspective when your business and technology are being assessed and ensure the final report presents your tech accurately and fairly, given its place in your industry.

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. For instance, the founder of Nike – Phil Knight – was a Certified Public Accountant (CPA), first with Coopers & Lybrand and then with Price Waterhouse (now PwC). He later became an accounting professor at Portland State University (PSU). He didn’t do too badly. More recently, it has been reported in the UK 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. A native of Ireland, Les was awarded the Samuel Smyth Memorial Prize as a Chartered Accountant (CPA) in the UK and was, at that time, the youngest qualified 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 is an international best selling author, including starting 42 companies in his own right.

Relevant to this article, Les was the founding partner of an incubation consulting company that launched hundreds of businesses with thousands of employees. I believe he has grown unique and practical insights into what makes things work because he helped others set up their 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, but in summary, he says when referring to scale, most people mean “getting very big, very fast”.

This is a problem as this simple sentence is loaded with some 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:

Scalability is the ability over time to sustainably grow your organisation to whatever size your industry or sector will allow, in whichever market segment(s) you chose to engage in.

Les Mckeown

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 need to stress test both ways of assessing scale during Technology Due Diligence to get a sense of where your potential challenges may be and where the investment opportunities are 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.

While this growth may not be feasible today, the short time frame and increased volumes should stress-test the technology, operations, and team to uncover areas that may need future investment.

2. The second lens: Get Big within context.

After the first pass, where we consider the impact of a sudden increase in customers, we need to test technology from within the context of the firm.

Scale the product or service, within the context of your business, team and market realities

Business Context

We need to learn the business history, its origins and the key events that got it where it is today. Business history can include the positives of how management found each other, developed their vision, and the lucky events that led to establishing product-market fit. Those early-stage events can have tremendous upside in the longer term.

Often teams need to create new products to keep up with market trends – how well did they build or re-platform, and how did they address 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 – and 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.

In addition, we also need to know how the team deals with adversity.

For example, how they managed unsuitable hires in the tech team, the sudden appearance of well-funded competition or, more likely today, how they handled a significant data breach.

Team

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 – and this is an area I have witnessed as a common problem as the leaders are not adequately prepared before the ‘deal’ completes.

How will your team adapt to being ‘under new management’ where 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.

Market Realities

Due to the uniqueness of each deal, it is impossible to be prescriptive on what market information is relevant during technology due diligence. But we do need a context, which will usually be presented to us during the management overviews and technology demos.

We assume significant growth is predicted for your firm and available in the market to be of interest to an institutional investor.

And we also know that you, as the technology leader, will have a good understanding of your industry. 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 (usually referred to as the value creation plan). Maybe you helped build that plan, but you must have access to the latest version that has been presented as part of the investment thesis.

This is where Commercial Due Diligence (CDD) can help. CDD is not my area of expertise, so I cannot write about it in depth. But from a Technology Due Diligence to Commercial Due Diligence perspective, it can be helpful to join the dots between the market potential and the technology that’s being built.

Cross-referencing commercial information is helpful to get a fresh assessment of customer reviews and needs and see if the technology product and vision meet them. Being abreast of Legal Due Diligence findings is also essential, especially in fast-moving industries like Martech.

Conclusion

In a nutshell, you need to present both an artificial view of scaling your business which we can 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 and how that would impact your people, product and processes.

Later articles will provide examples to help you understand this further, from a technology perspecticve.

@Scale – our objective for you

By making the Tech DD process transparent, we can ensure the best value for all parties involved. My objective is to provide information to help you prepare for and de-mystify Technology Due Diligence.

Whilst this might appear that we are ‘giving away’ our approach, which may allow target firms to over-prepare, it is difficult for target firms to re-write their entire tech history and plans in readiness for sale.

If you want to read more on this subject, I would recommend starting here:

@Scale – A Guide to Technology Due Diligence

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Hutton Henry
Hutton Henry
Hutton's technology industry experience spans Enterprise (Ford, HP etc.) to start-up ventures. 25-years post-merger technology integration experience, and small consultancy founder since 2010. He is currently the founder of Beyond M&A, where he has the privilege of working with VC and PE investors, translating how tech operates in their future investments and identifying additional value creation improvements.

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