Published by Rich Kershaw on July 15th, 2020

Preparing for pre-offer VC due diligence

In the course of your fundraising for your tech startup, you’ll probably be grilled more times than you can keep track of on your product, business and people. I’ve co-founded several companies and fundraised for several more, and I wish someone had given me a preview of what to expect!

In many respects, technology due diligence from potential investors is similar to selling your product to a client. They’ll want to see the same basic things: that you have a good value proposition that’ll help them deliver, competitive pricing, and a team that can give continuity.

But investment organisations are also going to be looking at things that your clients words defence ability of intellectual property the uniqueness of your products in the markets and whether that represents a risk or benefit, whether your roadmap makes sense and can be delivered on which for a fixed feature set product might not be such a consideration for a client. Depending on the length of their investments they might also be looking at things like technical debt your development processes your ability to hire for the technologies that you've chosen to build with.

Where does tech due diligence sit in the big picture?

First of all you need to understand that there are actually more than one due diligence stages in the investment process. Initial due diligence will generally cover-off the big questions, and subsequent stages will delve deeper, with the deepest levels involving analysis of code and intellectual property. I get involved with the first stage, and it’s the one that will, very likely, take you to heads of terms with your capital partners. In the main, that's the kind of DD process that I'm talking about here.

Speaking in generalities, VC funds usually have what’re referred to as gate stages, which are the internal checkpoints they have to clear as part of their standard processes to move an investment through their pipeline. "First gate" will usually be initial conversation, review of a pitch deck and an assessment of whether you fit their profile. Subsequent "gates" will tackle projections, technical due diligence and market analysis, right up to approval by their investment committee and agreement on basic terms (or "heads of terms"). Once you have in-principle agreement, you’ll head on to setup a digital secure "data room", where you’ll share detailed projections, roadmap, client contracts and other supporting materials. At some stage during this part, a more detailed dedicated due diligence process might take place. Generally, that’ll involve a company like NCC Group will actually have their analysts inspect source code and check for IP infringement, amongst other things.

What should I expect?

The aim of this stage of due diligence is to validate essential decisions and

  • You’re actually doing what you say you’re doing - for example, if you’ve advertised that you’ve got the latest in machine learning, you really have, and it’s not just in prototype
  • You’ve covered all your stability bases - can your system withstand a data centre outage, or a marketing launch with 2000% of the usual traffic?
  • Does your product scale? You’ve built a product that works today, but what do you need to do for 3 years’ of continuity as you grow?
  • Are you making sensible choices

I'm currently available for short and long-term projects, including interim and non-executive CTO positions.

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