Remarkable Innovation

A belated Happy New Year! There hasn’t been much time for blogging at RI-towers of late. Anyone here who thought the credit crunch might bring a well-earned rest has been disappointed; lots to do.

The surge of work for us seems to be proving the theory that investors are doing more technical due diligence during the downturn.

There was, however, time to read the read the excellent “Nanotechnologies in 2009: Creative Destruction or Credit Crunch” (opens as PDF) by bleeding-edge investor, nanotechnology guru and prolific blogger Tim Harper.

In addition to some characteristically fascinating insight about a widening funding gap, the sacrifice of billion-dollar potential revenues, and the “hokey cokey” approach he expects to see from Clean Tech investors in coming months, he also mentions the danger for investors in raiding “fire sales” for valuable intellectual property: it is frequently worthless without the people who thought it up.
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“This Wall Street meltdown is having effects on early-stage green-tech companies getting the money they need to grow. There was a huge due diligence process, with outside scientists, as we looked for money, which they probably wouldn’t have done before.”

That quote from Jonathan Gorman, Manager of Business Development at Qteros, an alternative energy start-up (originally quoted on CNET.com).

We’ve started to come across this a lot in past few months; investors are giving more priority to technical due diligence in the current climate.

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Following on from our previous post linking to a great article on “How to Survive Technical Due Diligence“, here’s an equally good, and equally detailed, set of posts from Mike Dunn, VP at Hearst Interactive Media covering his methodology for performing technical due diligence in the digital media industry.

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We spend a lot of time reading about current thinking in tech diligence, so this is unlikely to be the last addition to our previously posted list of interesting articles about technology due diligence.

Today’s addition is an impressively detailed set of articles about DD in the IT industry from Michael Sisco, a CIO with vast experience.

The index of all the installments doesn’t seem to appear until the final article, so here’s a full set of links for the entire series:

• The art of technology due diligence
• Preparing for IT due diligence
• IT due diligence: The on-site discovery visit
• Write an effective IT due diligence report
• Three rules for successful staff assimilation in an acquisition
• Strategy is critical for melding technology during acquisitions
• Measuring the results of an acquisition

There’s someone else who should be included in a technical due diligence assessment.

Someone other than the engineers, the technicians, the management team, the  technical advisers, the industry veterans…

This person is often completely overlooked, but he or she will give a more impartial view of the product, often understanding its limitations better than the engineers who created it. And, ultimately, this person has a greater influence over a product’s success or failure.

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Here’s a sobering thought for any private equity investor: losing a data centre is usually catastrophic.

In 2002, 93% of companies that lost their data centers to a disaster for more than 9 days filed for bankruptcy within a year*.

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Open-source sounds great for small technology companies. What can be better than free software if you’re on a tight budget?

But David Boutcher and Bob Stankey of law firm Reed Smith have just published an insightful article in Computing Magazine highlighting some of the pitfalls; what they call “Open Source’s Dark Side“.

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Here’s a great piece from Bob Pasker, CTO-in-Residence at Azure Capital Partners, titled “A High-tech Entrepreneurs Guide to Surviving Technical Due Diligence“.

It’s a comprehensive set of advice for any company that finds itself the subject of a technical due diligence assessment (and good recommended reading for anyone about to undergo a Remarkable Innovation due diligence assessment!).

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Talking to engineers is an important part of a technical due diligence assessment.

Technology is paramount, but when we’re assessing a company for possible acquisition we always spend a lot of time looking at the technical personnel as well. Our assessors usually interview all the engineers and dig into experience, motivation, working styles, staff cover and so on.

Here’s a great example of one of things we’re looking for:

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If ever there was a vindication of the need for technical due diligence, this is it. It seems that an issue arising during the TDD may have caused Google to walk away from a $200 million acquisition of Digg.

It’s a strong example of how crucial the technical assessment can prove to be.

We’ve been saying for a long time that technology due diligence is a critical part, if not the most important part, of the investment preparation process. It seems in this case that Google would agree.