Technical due diligence is just about finding fault.
Right?
Examining the technology; looking for shortcomings that might affect your investment.
Well actually, not quite.
Interesting things happen when you bring in fresh eyes to look at a technology business. Eyes belonging to an expert who understands the business, but isn’t blinkered by submersion in it.
An interesting post on Techcrunch today tells of a company that’s about to go public, allegedly relying on an internet scam for most of its revenue.
The final paragraph points out that the scam appears to have been overlooked during the due diligence done so far.
The problem is that traditional legal and financial due diligence aren’t set up to spot problems like this.
Would proper technology due diligence have uncovered the issue?
The answer should be yes. A good technical due diligence will examine how technology is being used to contribute revenue.
Have the due diligence teams involved in this deal been a little too reliant on the soundbite method?
The “soundbite method” works something like this:
An investor finds a company with an interesting technology. He spends months analysing the business, and thousands of dollars on the financial due diligence.
He doesn’t know much about the technology, so he calls a few friends and advisers – technical people who work in related fields. He gets a few opinions – soundbites – often based on incomplete knowledge of the technology.
The investment decision ends up being based on a very thorough assessment of the balance sheet and a very sketchy awareness of the technology.
There’s something back-to-front here: future performance will be much more dependent on technology than on financial history. Shouldn’t technology be the focus of the due diligence? Shouldn’t it at least have the same rigour applied as the financial due diligence?
Technology due diligence is not a soundbite.
Casual opinions are not enough if you’re about to jump into a technology investment. It needs a thorough, professional assessment.
No one would make an investment based on a cursory glance at the balance sheet. It’s not a good idea to make one based on a cursory glance at the technology either.
Following on from the last few weeks of posts introducing the concept of technology due diligence and explaining some of what’s involved in performing an assessment, this week we’re providing some links to further reading on the subject.
All of the articles below are written by experts in technology due diligence and there’s a lot to be learned from each of them.
Posts over the last couple of weeks have examined the technology due diligence process. Now we turn to the necessary attributes of the team that actually performs the assessment
A technology due diligence (TDD) exercise requires a team with a rare mix of skills and knowledge.
Last week’s post looked at what a typical technology due diligence assessment involves. This week’s post describes what happens once the process is complete:
At the end of the technology due diligence (TDD) assessment, results are collated into a final report.
“Conclusions and recommendations must be formulated, and full details of methodology, sources, and references documented”
“Technology due diligence: the need for and benefits of technology assessment in connection with investment in high-tech companies”
Carol R. Goforth, Ronald R. Goforth
Rutgers Computer & Technology Law Journal, Summer 2001
Far beyond simply providing an overall recommendation on whether or not to go ahead with the investment, merger or acquisition, the report will contain a detailed breakdown of technical findings and, most importantly, their implications for the future performance of the proposition. This is one of the key skills of any TDD assessor: an ability to translate technical findings into “dollars and cents” implications for the value of the deal.
Technology due diligence (TDD) typically involves subject area experts assessing the functionality and resilience of some or all of the technology employed and/or marketed by the subject company.
TDD can be broken down into the assessment of two distinct areas: the company’s technology infrastructure (IT systems, manufacturing equipment etc) and any unique technology that it has created.
Whereas financial and legal due diligence are well accepted stages of the investment process, technology due diligence is a relatively new concept.
There’s some of explanation of it on the Remarkable Innovation technology due diligence pages, but over the next few weeks we’ll post a series of articles here that cover the topic in more detail. The final post in the series will include a collection of links to other writing on the subject.
Welcome to the Remarkable Innovation technology due diligence blog.
In 2004, Paris-based venture capitalist Marc Goldberg wrote an inspirational blog post which discussed “the idea of open-sourcing the due-diligence process“. That’s what this blog will try to achieve: an open discussion of technology due diligence best practices.
It is intended as a point-of-reference for investors, technology experts and other interested parties to learn from each other and exchange ideas. Please get in touch if you would like to contribute!
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