Technical Due Diligence: Did We Get It Right

Technical Due Diligence: Did We get it Right?

AKF Partners have performed 100s of technical due diligence engagements on behalf of strategic investors, private equity, venture capitalists and others.  As such, we have amassed a significant repository of data, of patterns and anti-patterns, and the personal characteristics of successful and unsuccessful executive teams. Moreover, our teams have been on the “other side” of the table countless times as executives for companies being acquired or looking to acquire. 

It’s not rare, however, when a potential client asks: how accurate is your technical due diligence?  How can I trust that 8 hours with a company is enough to evaluate their technology stack?  We love this question!

Due diligence, whether financial or technical is about assessing the risk the investor or acquirer is taking on by investing money into a company.  It’s less about trying to identify and measure every gap and more about understanding where significant gaps exist relative to the investment thesis, calculating the risk to which those gaps expose the investor, and estimating the cost of closing the most critical gaps.

Due diligence is remarkably similar to playing poker: not any one player at the table has complete information about the cards remaining in the deck and the cards held by each player.  Great poker players combine an ability to calculate probability nearly instantly with respect to the possible combination of cards as well as an ability to read the other players; looking for “tells” that inform the player as to whether their opponent is bluffing or playing with a pair of Aces heading into the “flop.”  Great poker players seamlessly combine science and art.

At AKF, we’ve developed a formal checklist of questions around which we build our due diligence practice.  In the big picture, this includes evaluating People, Technology, and Process. Our experience suggests that companies cannot build the right technology without the right people in charge, with the right individual contributors displaying the right behaviors to maximize success.  Further, building reliable performance and predictable scalability (process, in other words) is of little value if they’re built on top of a weak technology stack.

People >> Technology >> Process

Read more about technical due diligence and AKF Partners here.

So how do we know we’re right?

First and foremost we need to understand the backgrounds, responsibilities and behaviors of the team present in the room with us.  A dominate CEO that answers even the most technical questions, shutting out the rest of the team, is a red flag. We might ask specific questions to others and ask the CEO to let us listen to what others at the table have to say.  If we’re still road-blocked, then our assessment will be very specific about the behavior of the CEO and we might ask for additional time without the CEO present. Another red flag: a CTO answering a technical question while the VP of Engineering’s face turns purple; an engineering manager choking a piece of paper to death while listening to the CTO review architectural principles or a senior leader refusing eye contact. . . the list of cues is nearly endless.  We’ve seen all of them.

Seeing red flags early in an engagement is wonderful, and it allows us time to adjust the agenda on the fly.  If we’re hearing something that sounds implausible, we will focus on the area in question and fire off repeated questions.  Nothing helps like asking the same question three times in three different ways at three different times during an engagement.  We can then judge the quality of the answers by the variety of answers.

Everything is Perfect

The biggest red flag of all: when things are too good.  No down time; the architecture scales across all three axes of the AKF Scalability cube without human interaction;  obscure or bleeding-edge technologies implemented without significant issues, and, most of all, always on time/under budget.  Each of these red flags highlights an area that begs for further digging. This is a good time to start asking for real data. Let’s see the logs in real-time; demonstrate that 2-factor works as described and let’s watch a build.  This is a good time to get familiar with Benford’s Law which states “in many naturally occurring collections of numbers, the leading significant digit is likely to be small.”  Math is useful here just as it was for Bernie Madoff and just as it is for the poker player seeing a 5th Ace being dealt.

Assessments with significantly dysfunctional teams are a little easier and our assessments reflect this by candidly reporting that we could not validate certain facts or statements due to these dysfunctions.  Either we come back and dig more deeply or we meet with a different group of people with the investor.

The Truth about Broken Things