Technical Due Diligence Checklist [For Startups] (2023)

Technology due diligence is vital for your business. Being a costly business venture, it is still a must-have, regardless of the net worth of the business.

As tedious as company due diligence may be, it’s critical since most investors expect it. It is important to document VC’s rely on during your business discussions.

Investors should understand the core of your business to put money in it.

And the core of your business is defined by the idea validation, infrastructure, workflow, and the legal status of your intellectual property.

Both investors and entrepreneurs will benefit if they have a technical due diligence report.

What Is Technical Due Diligence For Startups?

If to explain due diligence shortly, it is an analysis and review of the product or service tech specification. It is an obligatory process before investment.

Investors use product due diligence to understand the competency of the product or service.

Here are common technical due diligence questions that help investors to understand the state of your business:

  • What is the product development stage?
  • Is your product or service scalable?
  • How competent and credible is the team?
  • How accurate are the team’s responsibilities?
  • Is the company in a position of making execution on its current roadmap?
  • What are the weaknesses and strengths of the business model? What risks can it potentially cause?
  • Is your company able to meet the requirements?

These and more concerns will help investors moving forward with confidence. It is clear, that tech due diligence is a must-have item for any company. Especially, as soon as you move to MVP development.

But due diligence is not a one-off task. You need to have tools and teams that work to ensure all the objectives of the analysis are met.

It is also important to do due diligence in the early stages of your business. This is because as the product grows, you will be able to identify ways to scale your project in technical terms.

Technical Due Diligence Checklist [For Startups] (1)

Technical Due Diligence Checklist For Startups

Technology due diligence checklist is key to ensuring that your due diligence report is thorough.

It will also serve as a control manual to ensure that you proceed as planned to meet the objectives.

You might even think of hiring specialists to help you with a due diligence process. It’s not an easy venture.

One of the things the due diligence process depends on is a stage of a startup. No matter, where are you on the way from zero to hero (or better say, to unicorn startup).

(Video) Tech Due Diligence for M&A Checklist

Let’s consider four stages of startups.

  • Stage #1 – Pre-Seed Stage

Seeding is a fundamental level of your startup.

It starts right after the product/service actualization takes place. The seeding stage entails try-outs in the market.

Investors, in their turn, can then gauge their performance.

  • Stage #2 – Seed Stage

At this stage, your startup should be running as intended. Moreover, it should provide the solutions to the problems it intended to solve.

  • Stage #3 – Series A

At this stage, the product is already well-established. Now your product or service is customer-focused, and thus, is scaling rapidly.

  • Stage #4 – Series B

The product or service is now visible, and the market base is established.

At this stage, you are no longer a startup. Whatever happens next, now your business controls the niche.

During all these stages, something is happening with the company. And it doesn’t go unnoticed.

What does it mean?

The most important element of due diligence depends greatly on the stage of the investment.

For very early stage businesses, there is limited financial and operational information. As a result, understanding the founding team, the market, and any early customer feedback are the most important data points.

For series A companies, hopefully there is data that can prove the company has hit product-market fit. At this stage, investors will be interested in data points such as the stickiness of the product, churn rates, and unit economics.

Finally, for later stage investments, it’s most important to validate the financial performance of the business, how it differentiates against competitors, and the overall market opportunity.

Bruce Hogan, CEO at SoftwarePundit

Technical Due Diligence Checklist [For Startups] (2)

(Video) The Due Diligence Show - S01E01 - Our Take on Technical Due Diligence

Your company is expanding and the chances to find the right investors are increasing. And more so, they’ll come to you.

It’s an additional reason you need a review of a state of your business. A due diligence checklist can help you to convince investors that your business is worth investments in. Even if you gonna build a new Uber MVP.

Here is the list of several issues for the due diligence checklist.

Do you want to raise funds but have technical issues?

Talk to us and we'll help you with tech due diligence to let you raise investments

Let's talk

Infrastructure and Architecture

  1. Do you know the current state of product infrastructure?
  2. Have the team given proper attention to the place where the application is hosted?
  3. Does it sit on some cloud providers?
  4. Have they paid due regard to security issues?

These are the questions you need to answer before any investor knocks on your door.

They will need to know not only the state of the product’s infrastructure. A due diligence report is incomplete without legal documents.

Thus, you need to file all the legal documents.

Ownership of The Code

There is a maintainable code and scalable code. The maintainability of the code refers to the good quality of code.

In case the code is not maintainable, it will be rather hard to modify it. It means there is a high chain reaction of breakages that can start.

That is why it’s better to hire developers who do not rely on open source code and software. Instead, get experts who develop products from scratch.

Organizational Structure Of Your Team

It is paramount to have a reliable team of professionals that run your startup.

This is because the right team will propel the agenda of the company forward, and ensure that you meet the aim.

An investor, who buys equity in your business will need to understand who you are.

Everything is important ⁠— the person behind the idea, legal records, team relationships.

(Video) Startup Spaces: Technology Due Diligence 101 - Secrets from an Auditor

Technical Due Diligence Checklist [For Startups] (3)

Intellectual Property State

Intellectual property refers to intangible products as a basis for human knowledge. Software is a great example.

Most technological startups are intellectual products. For you to claim a product or service, you need legal documents that certify the ownership.

Experienced entrepreneurs will ask for documentation certifying your ideas’ originality and operational permit. This is what forms the patent and copyrights for the startup.

In your tech due diligence report, you will need to include all the legal and updated documents that confirm your property ownership.

For example, Tinder has patented swiping and double-opt-in matches, so you can do it for your app too. Or try to build an app like Tinder in a better way.

Business Scalability

No one wants to put their money in a business that has no detailed plan showing growth projections.

As an entrepreneur, you need to make sure that the startup is in a position to grow under any circumstances.

Investors understand that some stages of a startup are not always promising. Besides that, a startup needs to have some space in the market.

Investors will use your scalability projections to calculate the ROI for their investment.

Business Tech Model

  1. Is your product able to meet expectations?
  2. Are you in a position to sustain hardship?
  3. What is the primary audience profile?
  4. Is your solution user-friendly?
  5. Is it able to solve the customers problem?

All these questions arise when you think of a business model.

A business strategy can help you summarize the aspects classifying your business model. When you have a defined business model, it becomes easy to execute your agenda.

In the future, it will be easier to integrate other services like subsidiary outlets and the likes.

Serious investors look for a suitable business model to cover the risks.

Technical Due Diligence Checklist [For Startups] (4)

Due Diligence Process Steps

The flow of the due diligence process may vary due to the business goals of the particular product or services.

(Video) Technical Due Diligence Case Study

But the main due diligence steps are:

  • Get Ready For Cooperation

Before any legal process starts, an entrepreneur should be ready to act and negotiate openly.

Investors and business partners need to have trust-based relationships.

  • Starting an Official Process

Once all the tech due diligence details and requirements are settled, the process is officially started. The company is now obliged to provide all the necessary documentation within a stipulated time frame.

Investor would ask a startup founder to prepare APIs documentation and architectural description.

  • Referral Procedure

Once all the necessary documentation is ready, startup representatives refer it to investors and get ready for the next step.

  • Getting Down to Business

Investors would like to assess the situation personally. Thus, it is better to arrange live meetings.

It is time to talk about business in detail. During this stage, investors are likely to ask specific questions to ease the decision-making process.

It is possible that there will be several meetings with investors with a lot of technical and non-technical issues discussed.

  • Final Report

A final report is usually fulfilled by an independent person. Investors hire specialists to estimate all the startup benefits, drawbacks, possible risks and forecasted revenue.

Technical Due Diligence Checklist [For Startups] (5)

Why Is Startup Product Due Diligence Important

No matter how promising your startup is, it’s hard to convince experienced investors to join without a well-thought business plan.

A due diligence report coupled with a solid plan is a key to attracting business collaborations.

Apart from that, technology due diligence is essential both for you and for the business as an entity.

Here are some of the benefits of having due diligence for your startup:

  • It proves the seriousness of your business. Investors are looking for entrepreneurs who have a plan. They need partners they can work with and business that is able to get returns on their investment.
  • It gives credit to your business. The process of due diligence is supposed to debunk all the myths you have about your business. In short, a due diligence report reveals the actual state of the company.
  • It helps planning your business. As an entrepreneur, you always need to look ahead. Moreover, you don’t have to make due diligence when investors are lining up to join you. This means that having the report beforehand gives you more chances in front of investors.
  • Data security concerns. Forbes published an article on how compromised data of big firms led to losses and mistrust. Without proper records and analysis, your startup is vulnerable. Breaches that may lead to losses is another reason you need due diligence in place.

Leveraging on Technical Due Diligence

We have already discussed the benefits of conducting tech company due diligence. But that’s not all.

(Video) How to Build a Highly Efficient Due Diligence Process

You need to identify opportunities that may come in handy for the successful investment of your startup. Technology due diligence is one of those tools.

With the right data, resources, and understanding of your startup’s framework, you will leverage the benefits outlined above.

It shows that tech due diligence is the most efficient tool to secure your startup product.

FAQs

What is a technical due diligence? ›

Technical due diligence (TDD) requires dedicated, specialist teams of chartered building surveyors and engineers to properly appraise a building.

What is due diligence checklist? ›

A due diligence checklist is an organized way to analyze a company that you are acquiring through sale, merger, or another method. By following this checklist, you can learn about a company's assets, liabilities, contracts, benefits, and potential problems.

What is a standard technical due diligence survey? ›

The primary purpose of a vendor's technical due diligence survey before a proposed sale is to identify significant physical defects or any statutory non-compliances that may affect the value of the property on the open market.

How do you carry out due diligence technical operation strategy? ›

2. Document review
  1. Check internal procedures.
  2. Check company compliance.
  3. Check relevant licences and subscriptions.
  4. Conduct review of technology underpinning operations.
  5. Conduct review of intellectual property (if applicable)
  6. Benchmark KPIs of the operation against industry competitors.
13 Feb 2022

What is technical due diligence in M&A? ›

Technical due diligence is the process of assessing the technology and related aspects of a company, including its products, software, product roadmap, product differentiators, systems, and practices.

What is due diligence in IT projects? ›

Due diligence is considered as a process of investigation and research on a particular process or transaction. The main aim of due diligence is to find out any form of inconsistency in the process or operation. Due diligence exercises are carried out to find out any kind of potential problems within a business.

What are the types of due diligence? ›

Types of Due Diligence
  • Financial due diligence.
  • IP due diligence.
  • Commercial due diligence.
  • IT due diligence.
  • HR due diligence.
  • Regulatory due diligence.
  • Environmental due diligence.

What does operational due diligence do? ›

Operational due diligence (ODD) is the process by which a potential purchaser reviews the operational aspects of a target company during mergers and acquisitions. Most often ODDs are conducted in the industrial sector.

What is a TDD inspection? ›

Typically, TDD is a process of discovery to inform the client of the condition and design of the property, suitability for intended use and value of the asset, existing and future CAPEX/ OPEX, allocation of risk/liability, and benchmarking for investment yield. Legal due diligence is provided by a legal professional.

What is commercial due diligence? ›

Commercial due diligence is the process through which a buyer analyzes a target company from a commercial perspective. The aim of commercial due diligence is to provide the buyer with an overall context of the company, based on its positioning in its market(s), and how that is likely to evolve in the years ahead.

What is technical due diligence in real estate? ›

Technical Due Diligence is an investigation and analysis of the technical aspects covering compliance to approvals, codes and complete audit of asset. This complex and multi-point review necessitates a stringent process and check to identify unknown risks during all stages.

How do you do due diligence in a startup? ›

The first step of due diligence is to filter out almost every idea you see until you find one that meets the critieria for success.
  1. Specific product details. ...
  2. Must-have or nice-to-have? ...
  3. Rate of growth. ...
  4. Market size. ...
  5. Market share. ...
  6. Location of startup. ...
  7. SWOT analysis. ...
  8. A solid business plan.

What are the 3 principles L's of due diligence? ›

As part of this process we focus on three main areas: Commercial due diligence. Financial due diligence. Legal due diligence.

What are the due diligence requirements? ›

The Four Due Diligence Requirements
  • Complete and Submit Form 8867. (Treas. Reg. section 1.6695-2(b)(1)) ...
  • Compute the Credits. (Treas. Reg. section 1.6695-2(b)(2)) ...
  • Knowledge. (Treas. Reg. section 1.6695-2(b)(3)) ...
  • Keep Records for Three Years.

Which framework is used for due diligence? ›

A risk-based approach is used to determine the scope of due diligence is conducted. Generally, we need to focus on new partners or where the risk of using an existing partner has significantly changed.

What is difference between CDD and odd? ›

ODD is forward looking

Commercial Due Diligence (CDD) assesses the attractiveness of the market the target operates in as well as the relative strengths of the target today compared to its competitors.

What should I ask for in due diligence? ›

Questions to ask during due diligence begin with financial information.
...
When it comes to financial information, ask for:
  • Credit reports.
  • Tax returns.
  • Audit and revenue reports.
  • List of all physical assets.
  • List of expenses (fixed and variable)
  • Gross profit margins.
  • Owner's benefit.
  • Any debt.

What are due diligence documents? ›

Due diligence documents are the research and analysis of a company or organization done in preparation for a business transaction (such as a corporate merger or purchase of securities). Due diligence documents typically include the following categories; legal, financial, sales and marketing, and human resources.

What is the importance of conducting due diligence 200 words 5? ›

Due diligence helps investors and companies understand the nature of a deal, the risks involved, and whether the deal fits with their portfolio. Essentially, undergoing due diligence is like doing “homework” on a potential deal and is essential to informed investment decisions.

How do you conduct due diligence in a business? ›

Checklist for Due Diligence of Company
  1. Business Due Diligence. ...
  2. Documents Required During Company Due Diligence. ...
  3. Review of MCA Documents. ...
  4. Review of Articles of Association. ...
  5. Review of Statutory Registers of Company. ...
  6. Review of Book of Accounts and Financial Statements. ...
  7. Review of Taxation Aspects. ...
  8. Review of Legal Aspects.

What is due diligence in IT risk management? ›

Due diligence is the conduct by the organisation of enquiries on specific countries, transactions, projects, or business associates in order to learn more about them and the possible risks they may pose to the organisation. The results of the due diligence would be fed back into the relevant risk assessment.

What is an example of due diligence? ›

Due Diligence Examples

Conducting thorough inspections on a property before buying it in order to make sure that it is a good investment. An underwriter auditing an issuer's business and operations prior to selling it.

How do you write a due diligence report? ›

When writing a due diligence report (what others may call an IT assessment report), keep four things in mind:
  1. Write for the target audience.
  2. Focus on the report objectives.
  3. Limit the report to information that has material impact to your company.
  4. Structure the information to be used as valuable reference material later.
2 Dec 2002

What are the 3 kinds of diligence? ›

It may be divided into three degrees, namely: ordinary diligence, extraordinary diligence, and slight diligence. It is the reverse of negligence. (q.v.) Under that article is shown what degree of negligence, or want of diligence, will make a party to a contract responsible to the other.

What are the key roles in due diligence? ›

The Role of Due Diligence

The process validates the accuracy of the information presented, ensures that the transaction complies with the criteria laid out in the purchase agreement, verifies that the parties consider all benefits and risks, and allows the buyer to know what they are buying.

What is standard due diligence? ›

A due diligence check involves careful investigation of the economic, legal, fiscal and financial circumstances of a business or individual. This covers aspects such as sales figures, shareholder structure and possible links with forms of economic crime such as corruption and tax evasion.

Why due diligence is key to effective strategic planning? ›

It assists in the verification of financial projections thereby aiding the acquirer to understand drivers of historic and projected profits and cash flows and key issues facing a target business. This helps in the analysis of potential synergies and trends.

What is the integrity due diligence for? ›

An integrity due diligence focuses on identifying risks not normally revealed through other due diligence processes. It enables you to reduce risk, make informed decisions, pursue opportunities and manage difficult situations with greater confidence.

What is an odd analyst? ›

Job description. Operational Due Diligence Analyst. As a Barclays Operational Due Diligence (ODD) Analyst, you will identify and assess the business, fund investment, regulatory and governance risks.

What is due diligence in IT projects? ›

Due diligence is considered as a process of investigation and research on a particular process or transaction. The main aim of due diligence is to find out any form of inconsistency in the process or operation. Due diligence exercises are carried out to find out any kind of potential problems within a business.

What are the types of due diligence? ›

Types of Due Diligence
  • Financial due diligence.
  • IP due diligence.
  • Commercial due diligence.
  • IT due diligence.
  • HR due diligence.
  • Regulatory due diligence.
  • Environmental due diligence.

What does operational due diligence do? ›

Operational due diligence (ODD) is the process by which a potential purchaser reviews the operational aspects of a target company during mergers and acquisitions. Most often ODDs are conducted in the industrial sector.

What is environmental due diligence? ›

Environmental due diligence is a process that evaluates the environmental conditions and risk associated with a property. The process can be at the request of a private owner, lender, attorney, developer, etc. and for different reasons.

Which framework is used for due diligence? ›

A risk-based approach is used to determine the scope of due diligence is conducted. Generally, we need to focus on new partners or where the risk of using an existing partner has significantly changed.

What is due diligence in IT risk management? ›

Due diligence is the conduct by the organisation of enquiries on specific countries, transactions, projects, or business associates in order to learn more about them and the possible risks they may pose to the organisation. The results of the due diligence would be fed back into the relevant risk assessment.

What is an example of due diligence? ›

Due Diligence Examples

Conducting thorough inspections on a property before buying it in order to make sure that it is a good investment. An underwriter auditing an issuer's business and operations prior to selling it.

What are the 3 kinds of diligence? ›

It may be divided into three degrees, namely: ordinary diligence, extraordinary diligence, and slight diligence. It is the reverse of negligence. (q.v.) Under that article is shown what degree of negligence, or want of diligence, will make a party to a contract responsible to the other.

How do you do due diligence in a startup? ›

The first step of due diligence is to filter out almost every idea you see until you find one that meets the critieria for success.
  1. Specific product details. ...
  2. Must-have or nice-to-have? ...
  3. Rate of growth. ...
  4. Market size. ...
  5. Market share. ...
  6. Location of startup. ...
  7. SWOT analysis. ...
  8. A solid business plan.

What are the 3 principles L's of due diligence? ›

As part of this process we focus on three main areas: Commercial due diligence. Financial due diligence. Legal due diligence.

What is difference between CDD and odd? ›

ODD is forward looking

Commercial Due Diligence (CDD) assesses the attractiveness of the market the target operates in as well as the relative strengths of the target today compared to its competitors.

Why due diligence is key to effective strategic planning? ›

It assists in the verification of financial projections thereby aiding the acquirer to understand drivers of historic and projected profits and cash flows and key issues facing a target business. This helps in the analysis of potential synergies and trends.

What is the integrity due diligence for? ›

An integrity due diligence focuses on identifying risks not normally revealed through other due diligence processes. It enables you to reduce risk, make informed decisions, pursue opportunities and manage difficult situations with greater confidence.

What is legal due diligence? ›

Legal due diligence is the process of collecting, understanding and assessing all the legal risks associated during a M&A process. During due diligence, the acquirer reviews all the documents pertaining to a target company and interviews people associated with it.

What is commercial due diligence? ›

Commercial due diligence is the process through which a buyer analyzes a target company from a commercial perspective. The aim of commercial due diligence is to provide the buyer with an overall context of the company, based on its positioning in its market(s), and how that is likely to evolve in the years ahead.

What is due diligence phase1? ›

A Phase 1 Environmental Site Assessment is a standardized due diligence investigation that determines whether hazardous materials exist on a property. Predominantly, a Phase 1 analyzes any potential liabilities for property purchasers, owners, operators, and lenders.

Videos

1. Due Diligence 101 for Startup Investors (Part 2) - 5T Screening Checklist | Crowdwise Academy (313)
(CrowdWise)
2. Due Diligence 101: Key Checklist Before Buying a Business
(Jason Paul Rogers)
3. How to be Exceptional in a Technical Due Diligence • Chris Philipps • GOTO 2019
(GOTO Conferences)
4. What is DUE DILIGENCE | Meaning DUE DILIGENCE | DUE DILIGENCE checklist | DUE DILIGENCE explained
(Shaf Rasul)
5. Key steps in creating a Technical Due Diligence Report
(AssetWize)
6. Due Diligence Tips for Startups and Angel Investors
(Rockies VC)
Top Articles
Latest Posts
Article information

Author: Lakeisha Bayer VM

Last Updated: 02/08/2023

Views: 5551

Rating: 4.9 / 5 (49 voted)

Reviews: 80% of readers found this page helpful

Author information

Name: Lakeisha Bayer VM

Birthday: 1997-10-17

Address: Suite 835 34136 Adrian Mountains, Floydton, UT 81036

Phone: +3571527672278

Job: Manufacturing Agent

Hobby: Skimboarding, Photography, Roller skating, Knife making, Paintball, Embroidery, Gunsmithing

Introduction: My name is Lakeisha Bayer VM, I am a brainy, kind, enchanting, healthy, lovely, clean, witty person who loves writing and wants to share my knowledge and understanding with you.