6 key tech due diligence questions to ask for strategic acquisitions in 2024

by | Apr 15, 2024

If you are a tech company acquirer undertaking tech due diligence there is a lot of information to analyze. Here are 6 key questions to ask the target that will help you decide to proceed or abandon the deal.

Key questions in tech due diligence for 2024 are open questions that enable you to drill into supporting evidence in 6 key areas:

  • Where have you established a right to win?
  • How are you leveraging Machine Learning and Artificial Intelligence?
  • How do you secure your software supply chain?
  • If you hired 10 more people into R&D where would you deploy them?
  • What would need to be done to the technology and operations to enable the business to scale 10x and 100x?
  • What is the product roadmap investment with the most potential?

Question 1: Where have you established a right to win?

This is a strategy question.  The right to play – also known as table stakes – are the minimum necessary requirements to compete in a market.  The right to win are the qualities that lift the target ahead of its competitors in that market.

As you listen to the answer consider how the target explains its past success and consider where and how you will play and win together after the acquisition.

Depending on the responses, drill-down to the evidence:

Response

Drill-down to evidence

These are the markets or segments we play in that we outperform in
  1. Review win-loss data
  2. Understand the buyer personas and the Ideal Customer Profile (ICP)
  3. Review battle-cards vs competitors
These are the products or product features we offer that are ahead of the competition
  1. Try out the product
  2. Read what customers are saying on review sites
  3. Interview reference customers
  4. Look at what has been delivered in past product releases
We have a rate of innovation that enables us to stay ahead of the competition
  1. Examine R&D effectiveness and the future product roadmap
  2. Consider likely responses from established competition and emerging disruptors
We have a sticky value proposition
  1. Review customer adoption and active usage data
  2. Review customer retention / churn data
We provide a cost effective solution
  1. Analyze sales and margins
  2. Consider the customer’s Total Cost of Ownership

If you can see new markets and opportunities to increase market share by combining forces and winning, then that is a favorable diligence finding.

If the responses or evidence are weak then consider abandoning the deal or proceed with caution and an understanding of the heavy lifting required post acquisition.

Question 2: How are you leveraging Machine Learning and Artificial Intelligence?

There are a lot of different ways that Machine Learning (ML) and Artificial Intelligence (AI) are being used.

Leveraging ML and AI involves choosing the right technology, implementing it, monitoring and evaluating its performance and scaling it.  In some cases the deal rationale assigns specific value to ML and AI assets and capabilities.

Depending on the responses, drill-down to the evidence:

Response

Drill-down to evidence

Machine Learning from data
  1. Understand the flows of data and the insights and decisions that are powered by ML
  2. Identify potential data quality and data lineage issues
Training of models
  1. Understand the models and how they are trained
  2. Consider the costs and efforts associated with re-training from scratch or fine-tuning
Generative Artificial Intelligence
  1. Try it out and evaluate coherence of outputs
  2. Understand guardrails around potential hallucinations
  3. Check that use cases are suitable based on the training data
  4. Check the applications are allowed based on the terms of service (if third party AI capability is leveraged)
  5. Check for emerging regulations around AI in Europe and the risk classification

A lot of tech companies are making claims about AI-powered experiences that just don’t stack up.

If the target is leveraging AI and ML then consider how this capability can be extended post acquisition.

Question 3: How do you secure your software supply chain?

Most software teams make extensive use of open source software, using it for both non-differentiating ‘commodity’ requirements and also to accelerate core development.

When software dependencies are resolved we often find thousands of direct and indirect dependencies pulled into a software product. The tech due diligence stage provides a snapshot opportunity to look at the licensing, currency and health of the open source components.

Common Vulnerabilities and Exposures (CVEs) are the known and published cybersecurity issues that should be resolved by the upstream projects – in fixed versions – and updated in downstream projects that use those components.

Due to the ongoing efforts involved in keeping up to date it is common to see the downstream products lagging in their update process and continuing to use vulnerable components for months after CVEs are published.

Depending on the responses, drill-down to the evidence:

Response

Drill-down to evidence

Commonly used packages
  1. Inspect the target’s Software Bill of Materials (SBOM) or ideally inspect software and generate an independent SBOM
  2. Understand popularity of packages
  3. Assess software provenance via package management repositories or distributions
Permissive licenses
  1. Understand use of permissive licenses such as Apache and MIT
  2. Identify components with non-permissive licenses such as GPL, SSPL and understand implications for Intellectual Property or commercial licensing alternatives
Regular updates
  1. Check versions in use vs latest available
  2. Understand the rationale for not updating to the latest
Scanning for vulnerabilities
  1. Understand tools in use – leaders such as Snyk are highly regarded
  2. Check for evidence of regular and ongoing scans and understand how the target has reacted to high priority / critical issues

Question 4: If you hired 10 more people into R&D where would you deploy them?

All R&D activities are constrained.  This is a theoretical constraint-busting question that helps identify current known gaps, key person risks as well as potential benefits in accelerating R&D activity.

Depending on the responses, drill-down to the evidence:

Response

Drill-down to evidence

Gaps in current staffing
  1. Analyze the historical rate of product development and software engineering contributions
Key person risks
  1. Review the org chart and understand the association of software contributions to teams
  2. Look for roles that are actively contributing to areas of the product where no one else is active
Constrained output
  1. Examine rate of open vs closed tickets – e.g. in JIRA system
  2. Look at areas of development that are slower and consider whether extra people can increase the rate of progress
Product roadmap achievement
  1. Look at product backlog and understand how feature velocity is geared to number of teams and team size
Additional resources into existing teams
  1. Consider how additional resources in underweight teams can improve performance
Opportunity for new teams
  1. Consider the organization scaling out approach and the architectural aspects around developing in new areas

If the deal thesis can support an increased headcount in R&D this is a particularly useful exercise.   Of course the +10 headcount is arbitrary and a different number can be chosen that suits the parameters of the deal.

Question 5: What would need to be done to the technology and operations to enable the business to scale 10x and 100x?

Most strategic acquirers are looking to scale up the target.  We find the 10x and 100x scale-up conversation is fruitful to identify short-term / immediate and longer-term opportunities.

Depending on the responses, drill-down to the evidence:

Response

Drill-down to evidence

Elasticity of current platform
  1. Look at the variability in existing workloads and the associated resource consumption and ramp-up / ramp-down mechanism
  2. Understand the thresholds that drive the autoscaling mechanism
Scale out
  1. Understand the architecture and workload distribution options for scaling out – i.e. adding more units – in different tiers
  2. Understand current scale units including minimum number in production and technical single points of failure
  3. Examine metrics such as CPU and memory consumption and factor these into scale out economic model
Scale up
  1. Understand the architecture and workload dynamics of scaling up – i.e. deploying and using bigger capacity units – in different tiers
Deployment options
  1. Understand options to increase the number of instances that are serving workloads
Redesign and rebuild
  1. Understand where the solution redesign may be fundamentally constrained and need to be redesigned to cater for growth
Optimize
  1. Consider where orders of magnitude improvement may be made via software engineering efforts

This discussion should provide an insight into the target’s architectural capability and communication skills.

Queston 6: What is the product roadmap investment with the most potential?

This question will provide a view into existing prioritization mechanism and how constraints in R&D are factored into planning and delivery commitments.

It is also an opportunity to feel the excitement and passion of the leadership, typically this is interpreted as the most significant ‘needle moving’ product opportunity for the target in a stand-alone context.  However, it is also revealing if the response assumes the M&A transaction executes and the joint opportunities are the ones with the most potential.

Depending on the responses, drill-down to the evidence:

Response

Drill-down to evidence

Customer acquisition opportunity
  1. Identify deals in the sales pipeline that require the capability
Existing customer requirements
  1. Check whether there are sponsoring customers who are already signed up to use the new product or feature – bonus points if they are also contributing to the development!
Closing gaps vs competitors
  1. Assess the competitive situation and sales team artefacts such as battlecards that may indicate gaps to close
Disrupting the market
  1. Understand the rationale for new product ideas that may be disruptive
Leading the market
  1. For companies that have a leadership position in a market, examine the competitors gaining ground and what needs to be done to stay out in front
Customer delight
  1. Understand how Net Promoter Score may be influenced by customer experience improvements

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