Lessons learned speaking to 120 investors about Tech DD
I learned a lot from speaking with 120 investors during the pandemic. One thing that stood out to me was how Tech DD could be improved if we saw things through their eyes. Some of these lessons are described in the video below:
How Tech DD fits into the broader diligence landscape
At the time of writing, deals for pure-play technology companies now comprise 31% of all buyouts Tech DD is only currently performed on 9% of deals (Bain Private Equity Report 2022).
So if you, as part of the Technology Leadership Team, are involved in Tech DD, be aware the practice is currently in the minority and a good opportunity for you to be part of a growing area in the tech industry.
It is also essential to understand what other areas of due diligence will be undertaken when and why they happen.
This session from Berkley University provides a good primer on the various DD workstreams that may be conducted at your firm:
What are Investors looking for during Tech DD?
During Tech DD, it is helpful to consider what is important to the investor, not the consultants who interview you.
It is worth determining what type of investor you’ll be working with, as highlighted in this article The type of buyer impacts your Tech DD. Because different types of investors will assess different areas and have different risk appetites. To understand their perspective, it’s vital to consider Critical Questions to Ask during Private Equity Technology Due Diligence.
Of course, investors expect imperfections with the team, products and services. But they want to know their overall risk profile, and it would make sense for you to help them understand their future technology risks and spending.
When we speak to Investors for the first time, before working with them, common questions they raise are similar to this list (not exhaustive):
- Is the system/technology fit for purpose?
- External assessment of the overall technology strategy and roadmap?
- Will technology meet the business growth plan?
- What are the technology leadership and team capabilities / what hires are needed?
- How unique is the platform? Can it be easily copied?
- Are systems resilient, scalable, and recoverable?
- What is the material impact of scaling the platform or systems?
- What are the business continuity plans?
- IT budget forecast, licensing and other costs? (see this article What goes in an IT budget for Tech DD? for further detail)
These would seem sensible areas that investors need to understand to develop a broad scope. But Bain challenges this, asking Investors to consider this at a more strategic level:
- How much does the asset’s underlying technology platform play into value creation now and in the future?
- Are we investing in technology due diligence proportionate to the perceived value?
- Do we have the experience—or know where to get it—to truly understand the technical nuances in this particular space and to develop unique insights?
- Is our tech diligence integrated with the broader commercial and financial due diligence effort, so the insights and recommended actions are consistent with where the value lies?
- Are these insights flowing directly into the value-creation plan to jump-start delivery on the investment thesis post-acquisition?
But what do investors really want?
There’s nothing like getting it straight from the horses’ mouth. So we surveyed Private Equity investors and asked them what they wanted from Tech DD:
“Clear report which can be understood by non-tech people and including very clear recommendations.” “Can the incumbent technology can support the business moving forward.” “Whether our business has the ability to adopt new technologies.” “Whether technology could disrupt our business model and make the business redundant” “We like clear conclusions/recommendations that we can implement into 100 day plans/company strategies.” “Having a clear understanding of future costs relating to maintaining/upgrading/replacing. How well the company is using technology and reliance on certain. IP ownership. Ability/cost/time for competitors to replicate.” “We want to know the technology is as good as it claims to be, not easily replicable and the tech roadmap is suitably costed.” “Overview of tech stack and R&D roadmap along with budgets for the work and historical costs of development.” “IT DD to point out deficiency in the system and accurate estimate to updates.” “We focus on underlying software architecture, the code and the roadmap. This is the primary value driver in the companies that we invest in so is of paramount importance in DD.”
From the variety of the answers, there’s an element of ‘it depends’ working here. It depends on the size of the deal and tech, of course. But it also depends on their prior experience, whether they have undertaken Tech DD previously and the types of companies they have invested in, in the first place.
Better questions to be asking during Tech DD
And to demonstrate the complexity of this topic, we also developed this paper, juxtaposing the ‘standard questions’ with more practical questions that investors should be asking your team:
And from that paper, you can see that we (as advisors) need to consider the tech environment, the context and how you built your team and offerings. For example, a technology offering constructed and led by a firm with minimal interest and investment in tech will differ from a leading-edge business that has invested as if money is no object.
Put yourself in their shoes.
Considering how technology is viewed from an investor’s perspective is critical.
Many investors state they are ‘non-tech’ but be warned, they have sat on enough boards to know when something is going well.
It’s also not worth trying to deceive with technical detail.
Instead, think about the context of your firm, its tech and what risks can be addressed by further investment.
