What Is Technical Due Diligence: Comprehensive Guide

Technical due diligence stands for analyzing and reviewing every tech aspect of the company’s product or service. Due diligence usually takes place before the acquisition of the business by another company or round of investment. Tech due diligence involves assessing a product's technical state. Expert teams check if the product is in early development, in progress, or ready for launch while also ensuring code compliance with all guidelines and that the software can support hyper-growth.

The TDD is useful for both startups and investors. Such analysis can evaluate the condition of a product and ascertain its fitness for the intended purpose. Then, it goes a step further in helping to estimate future costs regarding upgrades or enhancements. So, now is the time to explicate the reason behind the importance of technology due diligence and its main components.

Technical due diligence is not just a tech examination but a critical way to protect your investment and make sure about the long-term success of your project. Ignoring it can lead to serious legal risks and expenses. To help you navigate this complex process, we'll discuss the key components of technical due diligence that you should consider.

Codebase quality and maintainability

Solid documentation ensures the development will go smoothly and keep your project code flexible for many years. Your IT vendor’s experts check the product against the defined standards, the documentation, and the overall structure for any and every opportunity for the product to continue to grow without taking on serious technical debt.

Software architecture and scalability

Architecture that is ill-built will slow the growth of your startup. Investors want to know if an increase in users and data would necessitate a serious redesign of the system. A scalable system allows uninterrupted growth for your business on most fronts.

Security and compliance risk assessment

Weak security causes a breach and regulatory fines, which leads to additional expenses. Technical due diligence must check the encryption, authentication protocols, and compliance standards. Also, if your software operates in an industry that is subject to strict regulatory requirements, it is important to verify that digital systems are compliant with current compliance guidelines.

Infrastructure and DevOps maturity

Good infrastructure prevents services from going down. Your IT partner specialists will analyze the hosting offers, deployment processes, and automation levels external and internal to the development to keep the operations up and running.

Third-party dependencies and licensing risks

Uncontrolled third-party tools bring in unregulated legal and technical risks associated with their bad implementation. Technical diligence checks compliance with the open-source licenses and establishes that any external component does not transfer long-term liabilities.

Technical due diligence checks a startup’s technology is reliable, scalable, and free of hidden risks. Hence, such diligence helps get the funds for your startup because investors are sure about its tech reliability. Now, we discuss in detail why TDD matters for long-term success:

• Technical risk identification before an investment. An investor finds hidden pitfalls before bad deals. Technical due diligence marks its identification of the weak codes, the security holes, and infrastructure constraints before green-lighting further funding.
• Ensuring scalability and maintainability. Systems are designed to support long-term growth for start-ups. A properly categorized product minimizes expensive rework and optimizes scaling.
• Preventing hidden costs and future failures. Bad planning results in unplanned costs. Technical dd in terms of future hurdle avoidance by forecasting upgrade expenses, security fixes, and infrastructure improvements.

Understanding when to start a technical due diligence process will preserve your startup's future and avert costly mistakes. So, explore the critical points to consider when you need tech due diligence.

Setting up your technology helps to solicit the first investment. Nowadays, equity investors wish to know about probable technicalities and plans of scale-up. Present to them your development schedule, along with some honest discussions on possible technical risks. Such an approach builds confidence and increases the probability that you get funding.

Analyze technological assets in their current condition in the pre-merger or acquisition aspect. In a very detailed analysis of the target company, its systems, code, and infrastructure, it becomes important to look for hidden costs and possible failures in the future. Understanding the technical due diligence may help you identify potential risks that lead to integration problems or security threats so that integration execution can be facilitated smoothly and proper protection is guaranteed for your investment.

Look after compliance with specifications and regulations. Such efforts let you avoid of legal troubles and penalties. This is concerning data privacy, security, or compliance with accessibility. Conduct a technical due diligence review on your technology so that it meets all requirement specifications.

Foreseeing and fixing any technical hitches early in the process of an IPO is vital. It is very likely that the investor scrutinizes the whole technology stack for stability and security. The technology infrastructure should be robust and scalable. Therefore, use the technical due diligence process to identify and tackle weaknesses in advance and before any public opening.

The typical tech due diligence process has six main steps. But there can be even more stages depending on your company’s requirements and business goals.

Early-stage partner searching is crucial. This process begins with establishing open dialogue. Trusting relationships with potential partners or investors are the lifeblood of any startup. Communication and trust can keep the startup from having lags in negotiations or stoppage altogether and are an important part of understanding how to outsource software development. This makes being prepared to produce an impression and to have everything that strengthens their standing ready for presentation and ready to respond with correctness to any question without the option of avoiding it.

After discussing all the details and requirements of the tech due diligence process, parties also set deadlines for preparing the necessary documents like API documents and architectural descriptions. The call to be on the same page at this stage is very important. It can be detailed report writing, coding documentation, source code analysis, security audits, and so on. Both parties should establish an agreement on timeliness and documents. This approach guarantees that every eventuality is eliminated, saving time and delays in the following stages.

The company tends to have some technical documentation like architecture, design due diligence documents, and more. Share these docs before meeting in person because sharing your documentation ahead of time gives the investors or potential partners the opportunity to familiarize themselves with your product, services, or technology stack.

Documentation quality and clarity and also completeness of information wherein confidence of investors is imbibed. Well-organized documentation generates professionalism and preparedness among investors, who find it easy to assess the technical aspects of the company.

We at Cleveroad provide high-quality custom software development services, including due diligence. Recently, we’ve delivered end-to-end tech due diligence to the company from the USA, Prime Path Medtech™, while creating Quality Management System (QMS) for medical device manufacturers. The Prime Path Medtech™ company provides medical device manufacturers with Total Quality Assurance services, including research, support, and guidance.

Their QMS was ineffective and costly to both our customers and their clients, so we conducted an in-depth analysis, developed a system architecture with complicated business logic and role structure, and created a SaaS solution from scratch. The project aims to help our client align their documentation with regulatory requirements in order to gain market authorization in different countries.

Here is what Breanne Butler, Client Liaison Officer at Prime Path Medtech™, has said about cooperation with Cleveroad:

The investors prefer personal sessions to find out the inner processes of the startup. Such diligence meeting may last one or two days and allows analyzing the services or products personally.

Viewing your offerings in a real-time demonstration allows investors to request in-depth analysis, ask technical questions, observe the capabilities of your team, and form their own opinions with regard to their competence. The technical team's ability to communicate complex ideas, grasping of the product being demonstrated, and approaches used in the solving methods of the product's problem are the areas that investors judge.

The three previous stages typically bring a lot of questions. Discuss all the details and give investors full transparency. During this step, you can have several personal meetings with partners, considering their questions about the tech part of your service or product. Be ready to discuss anything that might raise concerns, from code quality to system reliability or even the potential risks your technology might face in the future.

The final stage of performing technical due diligence for startups is the preparation of the final report. Investors usually hire independent specialists to fulfill due diligence. As a result, they get a report describing all possible risks, benefits, and expected revenue. The report is typically very detailed, including assessments of your company’s technology, infrastructure, scalability, security, intellectual property, and overall potential for growth.

To ensure that technical due diligence go faster and shows better results, you should adhere to proven algorithms and practices to provide a smooth tech due diligence process.

You should set your evaluation criteria before conducting technical due diligence. Your experts must look for possible problems in architecture, scalability, and code quality. Each part of the diligence must have clearly defined parameters for an objective assessment.

Let’s look at the critical evaluation criteria:

• Codebase quality and maintainability. Assess coding standards, documentation, and test coverage to ensure long-term sustainability.
• Software architecture and scalability. Review architectural decisions and technology scalability.
• Security and compliance risk assessment. Verify data encryption, authentication, authorization, and vulnerability protection. Ensure compliance with relevant industry standards (e.g., GDPR, PCI DSS).
• Infrastructure and DevOps maturity. Evaluate hosting selection, deployment processes, automation, monitoring, backup procedures, and disaster recovery plans.
• Third-party dependencies and licensing risks. Identify all third-party libraries and services, check open-source and commercial license compliance, and assess dependency-related risks.
• Performance and optimization. Analyze system response time, resource utilization, database query efficiency, and caching strategies to optimize performance.
• Business requirements alignment. Make sure that the technical solution aligns with your business goals and adapts to market demands.

Automated tools will be an important part of the report of a technical due diligence analysis by showing inefficiencies, possible non-compliance, and vulnerabilities. Your specialists should use static code review, dependency scans, and performance monitoring to pinpoint critical issues early. Using automation allows them to show a clean and well-documented code base, reducing long-turn uncertainties for creating faster, much more precise assessments.

A successful technical dd process is input by many disciplines. The input from a product manager, legal team, and security expert will provide a holistic view of technical maturity. Cross-functional team management helps to wrap all technical due diligence – from intellectual property matters to scalability – with pertinent context, thus strengthening the promise of a startup's future growth in a sustainable manner.

Security is a crucial element of all measures of technical due diligence. Also, it provides assurance to a potential investor about the security posture of the organization in terms of protection against data loss, as well as compliance with legal regulations and risk mitigation.

A team of experts must document and integrate all the critical security policies, encryption standards, and roles-based access controls into the entire development process from the outset to indicate that security has been proactively managed. You should put into place security early in their life cycles, thus minimizing long-term risks and increasing investor trust.

Technical evaluations should also be in high standards with the general business strategy. Such a system, then, would be the one that strengthens an organization for growth, sheds technical liabilities, and positions itself well in the market.

You should include within your tech due diligence a clear roadmap on technology building to align with revenue models, expansion plans, and operational efficiency. Investors look for assurance through such technical decisions toward the long-term business direction, with the additional benefit of a competitive edge.

If you are not an expert in technical due diligence, you’d better hire professionals. According to Hein, complete documentation in place is essential to assess and safeguard investments.

There are reasons to hire a third party to walk you through the technical due diligence process:

• Various metrics. It’s possible to look through the code utilizing different analytical tools. That allows seeing the architectural design, code complexity. Such metrics give a full technical picture.
• Senior professionals. There are automated tools, but you can also hire an experienced software engineer to estimate the code quality.
• Fast delivery. Cooperating with third parties allow getting more rapid results, since they already know the process and work faster.

You can look through our technology due diligence checklist. There is a list of due diligence questions to start understanding the structure and maintenance of the product.

There are questions according to various factors like code quality, scalability, architecture, and more:

1. What is the architecture of the software solution?
2. Organizational chart. What are the roles and responsibilities of the key personnel?
3. What open-source software is used?
4. How did the software development and delivery processes go?
5. What is the technology team's budget?

Cleveroad is a proficient IT consulting company with 13+ years in the IT market that provides robust and flexible technical due diligence services. We are experienced in numerous business domains, including Healthcare, Supply Chain, Finance, Media, Travel, Social, Education, and more. Cleveroad also offers various IT consulting services on digitalization, startup, technology, IT strategy, etc.

By choosing Cleveroad for tech due diligence, you’ll get the following benefits:

• Efficient IT consulting services to guide your implementation of digital solutions and innovations
• Free Solution Workshop stage to align your business needs with technical implementation
• A partnership with an ISO-certified company implementing ISO 9001 quality management systems and ISO 27001 security standards
• High level of expertise and proficiency in delivering cloud consulting services proven by receiving Amazon Web Services (AWS) Select Tier Partner status within the AWS Partner Network (APN). (For articles about cloud, SaaS)
• All guarantees for your business information security and signing NDA per your request