Technology Risks Investors Should Uncover
Part One: Looking Under the Hood
Investors go through an exhaustive due diligence process when deciding whether to invest in the latest tech company or during M&A analysis. Financials, market fit and growth, traction, and the founders and employees’ ability to attain what is promised are all thoroughly vetted. One critical piece of the picture that may be missing is an in-depth and systematic way of understanding and balancing the risks that are often unseen—the intricacies of the technology and infrastructure and whether the existing technical staff is strong or in need of critical improvements.
The three ‘Ps’ of technology—people, process, and platform—should be a part of every investment decision regardless of stage. Although sometimes difficult to ascertain where the risks may lie, enlisting experts that are fully versed in technical areas and have seen patterns emerge over time—across industries, people, and technologies—is a direction many investment firms are beginning to take. Although many investors are well-versed in the technical aspects of their investments, with digital transformation across industries making almost every company reliant on technology, a deep understanding of underlying issues is imperative. In the first part of this two-part series, we’ll look at the most common tech risks related to platforms and infrastructure.
Technical Debt: What will it cost to overcome?
It’s an old term, but unfortunately technical debt still runs rampant today. More mature, long-standing companies being considered for M&A may have amassed large amounts of technical debt by building products and infrastructure on older technologies, sweeping larger refactoring efforts under the rug, and trying to get new customer-facing features out the door as quickly as possible. Start-ups may have also built a showy offering they cobbled together to get to market, based on shifting ground as well. Often this shaky foundation is not readily apparent and carries significant costs to correct. As with any investment, the least amount of cost incurred to fix problems, vs. realizing high growth, time to market and efficiency, the better. Knowing this level of information during the consideration phase equips investors to more accurately ascertain risk vs. reward.
MVP: Minimal may not be suitable for the masses
Minimally Viable Products (MVPs) are designed to be lightweight and a way to validate customer needs, but what happens when the “product” goes into true production? If the MVP was not built with a clear roadmap on how to scale (and scale rapidly), companies may quickly lose momentum, suffer painful outages, forego sales opportunities (revenue), lose their competitive edge, and incur additional costs as they try to react. The bottom line is (as the scaleable agile framework cites) “crappy code can’t scale.” Understanding the architecture and supporting infrastructure and fully vetting the growth plan and process in relation to the roadmap, can help fully ensure the company is poised to ramp up and meet demands in the future. If there are any issues uncovered, advising on the smartest and most cost-effective path forward is an area that investors can provide in a strategic advisory capacity. In the early days of Twitter, the service would often put up a “fail whale” when they became overburdened by their scaling issues. This was chronicled in a Time magazine article. The moral of the story is that if you identify the issues early on and begin a measured remediation plan to address them, the happier both customers and investors will be.
Technical Stack: Risk or reward?
How was the product built? What architecture and frameworks were employed? Is it largely based on open source, cobbled together to create a functional product? Understanding the future issues, including impact on IP, security concerns or vulnerabilities, and “ownership” when it comes time to potentially sell the company, should all be understood up front during the due diligence phase.
Legacy Platform: Will older platforms perform for tomorrow’s requirements?
Technology moves at a lightening pace today. What may have been a state-of-the-art platform when a company first started building a product, could be antiquated (or worse—discontinued or unsupported) by the time the product goes to market. This “hot or not” trend is especially prevalent in the software development world. The latest and greatest today is quickly usurped by something better. Maybe the development teams were attempting to cut corners and cost by utilizing platforms that aren’t robust enough, making future enhancements difficult at best, or simply unmanageable. Many in-house products are built with no clear-cut plan of whether portions are cloud-based, and no ability to migrate the product to the cloud. Knowing how the code is built and the platforms that are utilized is worth uncovering early in order to strategize for the future.
Lack of Infrastructure: Poised for the future or ready to crumble?
A company’s technology requirements for growth go well beyond the product itself. All departments including operations, finance, marketing, sales, service and development must have the right infrastructure and systems in place to be truly successful. Early stage companies often don’t have the foresight or expertise to strategically choose the right path for enterprise applications like ERP, CRM, or SCM that balance functionality requirements—now and for the future—with cost effectiveness. Even more mature organizations may be operating on antiquated infrastructure solutions that will require investment in order to pave the way for growth.
Technology is complex and infinitely ever-changing. Having experts that are tapped regularly to provide understanding and guidance around technical red flags is one way to accurately ascertain potential investments. With every company today relying on a digital approach to business, incorporating this functional aspect as a regular part of the due diligence process is mandatory. Approaching it systematically makes even more sense. By applying a structured and disciplined methodology based on best practices (in the same way other aspects of due diligence is performed), investors will be better positioned to make more informed decisions, fully understand the portfolio risk and reward, and ultimately eliminate unnecessary risk.
Stay tuned for Part 2, which will cover additional strategic technology related red flags all investors should consider in any due diligence process.