Any company with software at its heart should always be conducting its own due diligence and be prepared for investors to carry out their process. Technical due diligence is one of the essential streams of analysis that we undertake at Frog during an investment process.
Not every technical diligence is the same and the approach very much depends on the investment round that a company is in. At Frog it is the opportunity for us to understand how technology has enabled a company’s success to date and to evaluate how well equipped a tech organisation is to scale up.
“Not only is the exercise useful for an investor, but it is also tremendously valuable for the company. It is common for growth stage companies to have seen their growth suddenly outpace their development capacity and so a diligence can often result in identifying areas, whether known or unknown, that require shoring or strengthening and provide a reminder of any neglected housekeeping tasks.”
In the toolkit, we outline how to go about conducting a Tech DD including the following sequence:
- Deal Origination – Early on, before term sheets have been agreed we will have had several meetings with all the members of the leadership team including the CEO, CTO or CIO. By understanding the product or platform through the eyes of the customer together with hearing the company’s growth strategy it enables us to fine tune the diligence investigation. It is also a good time for both sides to get comfortable with each other’s styles and to start forming what we hope turns into a long-term relationship.
- Demonstration, Documentation and Data Room – If a demonstration environment or test account for the product is available, it is always useful for the diligence team to have access to that as early as possible. Before formal interviews begin, we review all documentation that the company provides. Building a comprehensive data room in advance of the diligence to include architecture, processes, organisational structure, disaster recovery, monitoring services, roadmap all helps our team build up a clear picture of how the organisation performs.
- CTO Kick off call –The purpose of the CTO kick-off call is to set our preferred agenda, together with a list of people or subject experts that we wish to interview and to agree the final schedule for the interviews.
- Interviews – The formal diligence interviews can take between 1 and 2 days and involve people across the entire Product and Technical teams. It is usual to have several interviewers on our side so that we can be time efficient and introduce a wider diversity of thought and a greater challenge to our own evaluation.
You can read more about Technical Due Diligence in the attached toolkit.
About the author
Andrew began advising Frog in 2019 as Technology Specialist, before joining as an Operating Partner in 2021. He has worked in companies throughout their lifecycle from startup through investment, private equity and onto exit.