It feels like almost every business these days is a technology company in one way or another. But when it comes to assessing investment opportunities, few venture capital and growth equity investors have the resources to do thorough technical research.
They often outsource this critical work to a consultant for greater high-level oversight, as technical due diligence is often a blind spot for investors. This shouldn’t be the case, as a product’s robustness or lack thereof can make or break a company.
The focus of due diligence is usually on aspects of a product that can be measured. As a result, the focus is often on financial performance, delving into detailed metrics such as gross margins, seller productivity, LTV, CAC, payback periods, and more. While sales and marketing expenses are often the largest operating expense for a high-growth company — sometimes accounting for more than 40% of revenue — R&D costs can also be significant, typically exceeding 20% of revenue.
However, the assessment of the product and R&D cost base is more of a qualitative assessment based on discussions with management, industry analysts and experts, customers and partners. Investors aren’t the only ones feeling a little uncomfortable with this. Even CEOs who don’t have a technical background are forced to rely on the CTO and product team to understand code scalability, technical debt, the cost and time to develop product roadmaps and more, without a quantitative way to measure performance.
Technology should become less of a black box for investors over time.
Because we have no knowledge of the code or the evolution of the product, we just scratch the surface, which makes us more vulnerable to technological revisions.
The following seven tips will help you gain clarity about a company’s technology and how best to prioritize initiatives over time to clearly differentiate the product in the market.
Getting the technical architecture to scale is critical
The initial decision on which technical architecture to use is widely underestimated and not enough young companies realize the long-term implications.
This is the foundation upon which the code is built and it should be aligned with the company’s go-to-market strategy. Lack of advance planning can lead to costly code rewrites later and significant customer problems.
Recognize the power of a great developer
I’d rather have one A+ developer than 10 B players. While this is true for many other roles, it really comes in handy in a technical organization.