Technical Due Diligence For Start-Ups
Technical due diligence is a vital and imperative part of your start-up. When you have a start-up that is new and growing, due diligence is a must. Technical due diligence is a process that studies and analyses the technical aspect of a service or a product that your start-up offers. This normally happens before angel investors, fundraising or acquisitions etc. come into play.
Due diligence is done by angel investors and other buyers to make sure the product or service offered is in tip-top shape. This process can take up to a whole day to complete. A large investigation is done on the overall product or service as well as smaller investigations over a few days on specific topics.
6 Steps To Follow During Technical Due Diligence
There are 6 main basic steps to due diligence. However, depending on how thorough or detailed your company or start-up mentor wants the due diligence process to be, more steps can be added.
The process of technical due diligence starts even before you might expect. Participants have to be prepared to be open and honest with the team and each other. The angel investors and other buyers and partners have to form that trust level with you before you can go ahead with the process. As a business owner, you must be open to change and negotiation and be able to act accordingly.
Commencing the official process
This process commences once all the details and documentation is passed over. The start-up is now required to pass on any information that may be required by the team that is conducting the due diligence process. Angel investors as well as other parties can ask business owners to prepare APIs documentation and architectural description of the start-up. All the processes of the investigation will be shared at this point.
Screening of the documents
Architectural documents, design documents, etc. must be shared at this stage. Before meeting in person the analysts from the team will analyse these documents to make sure they are in order. To make this process easier for everyone involved, as a business owner make sure to have all your documentation updated.
Once the documents have been verified and everything is in place, angel investors and other buyers make it a point to have a meeting on-site to personally verify if the product or service offered stands in working condition. This step for most angel investors is a mandatory one. This step takes about a day or two, where every technical aspect of the product or service is analysed in real-time by the investors. At this stage investors also get a sit down meeting with the business owner to ask specific questions related to the business to make the processes easier.
Follow up stage
At this stage, the investors and buyers have identified what all can be improved and what all needs to be changed. All the details of the questions should be answered at this stage with complete transparency.
Independent specialists are employed to create a final report for the angel investors and buyers. Since these are specialists and are not partial to any party, they help provide an impartial report to the investors about the pros and cons of investing in the business, start-up benefits, possible risks and the estimated revenues.
To Sum Up
So there you have it, the six main steps in technical due diligence for start-ups. If there are any doubts about due diligence and the types of due diligence that exist be sure to check out my blog on Due Diligence in Start-Ups.
About Devansh Lakhani
Director of Lakhani Financial Services, and a Chartered Accountant, he helps in start-ups funding India from his network of investors. He guides and advises start-ups to scale up by providing efficient sales, marketing, team building, and business management strategies. Being a business plan consultant he has executed fundraising by block deals on the stock exchange and conducted IPOs and right issues on the SME platform to the tune of over Rs. 50 Crore. He is currently working with start-ups from various sectors to help them channelize their business models and investments.
Check out a blog about Lakhani Financial Services written by Karo Startup here.