From The Due Diligence Show (Episode 7), look out Product Managers, this one is all about you! The Thought Source team discuss what they look for in a technology product and its suitability for acquisition. They discuss everything from product features, market fit, what makes a good roadmap and indications that you have set the product up for a successful future in order to adapt and grow.

Adam Jaques: Now last time we were talking about under the covers, the ones and zeros, the code, the architecture, how technology is put together. I want to take us maybe up a level and talk about the product that’s being purchased. Typically, a technology-based product, and what sort of work we typically do when it comes to product due diligence. Now, this is multifaceted as well. We will look at a bunch of different things about the market. For example, that the products are really being marketed and brought into an existing market, but also potentially a market that our client will be working to expand upon.

Luke Silcock: What’s the suitability of fit in that target market?

Adam Jaques: Exactly. Also, how well would this product fit with the other products that the company may sell? For example, can the customer experiences be integrated together? Can they be cross sold with each other? There are a bunch of different avenues that we can go down. And it’s interesting because this particular topic, some of it is discovered after a Letter of Intent (LOI) would be signed, but a lot of it can also be discovered beforehand. And we talked we talked about that in previous episodes.

Luke Silcock: Now you’re working with the team. And we were exploring when we looked at the source code asset, what’s been created, over what timeframe and what sort of revision history has been built. Now if consider some of the other due diligence artifacts that we have sought access to, reviewed and sampled off, we’ll have found, what features were released when, how would they then publish to the market. Maybe feature toggles or otherwise made available to select customer group first, but then more broadly made available? How has the product evolved to the point that it’s got to and then, using that data as we extrapolate forward, what are you trying to do with this product? What market opportunity are you trying to exploit? And what’s the sort of the velocity what’s the company doing now? There’s going to be some drags attached to actually being acquired. We have to factor that in as well. But if you’ve got a company that’s consistently shipping good quality outcomes to customers, and the evidence base is there and we can read that back as part of the diligence. The confidence grows, this is a good one, we can acquire this and we can get the value out of it.

Adam Jaques: Another aspect is that depending on the size of the company that we’re looking to acquire, there may be a specific person or team responsible for Product Management. Sometimes it’s merged in with the marketing group or the sales group as well depending on the organizational layout, but typically, this person will have a role to be an expert in the market in their customer base what the customers are asking for. And this person or team is typically charged with planning out the next year or two of releases of the product and of the features that are being brought to the product to keep it up with the competition, to get it continuing to expand into other markets and that sort of thing. And that’s one of the areas of capability with documentation and evidence that we’ll go and look at. Some of this can be PowerPoint and slide where which is not unusual. But typically, we’ll see those types of people in those roles, create documentation about interviews that they’ve had with customers.

Andrew Borzycki: My biggest personal challenge when doing diligence is just sorting out the present from the future. Because you’re dealing with the folks who are very focused on the future. They’re at the coalface dealing with the customers buying, what’s going to happen and telling them that. But in such a fast-moving field like technology, it is a challenge. Working out what’s there, what’s really there? What’s going to be there? Does any of this actually match with what you as a as an acquirer want?

Luke Silcock: This is often one of the most difficult pieces to ascertain. We found in several situations that sometimes there’s a flagship customer that has pushed the product in a certain direction and is validated in a certain use case. It may even be a bit of a weird use case, but it’s great that it’s been out there, great that it’s been validated, but it might effectively need to be productized back from that very customer oriented solution. So that’s really interesting as well to try and peel that back and relate it to the architecture. Is it something that’s going to end up a Frankenstein once it’s been through all these chops and changes? Or is it something that’s got some architectural, good bones on it, if you will.

Adam Jaques: Competitive intelligence is another area that that we play in quite a lot too. And that’s, looking at the other companies that are selling into a particular market to see how the product competes, or the technology competes that you’re looking to acquire. So that’s an important part to see how these companies have brought them to market. What about scaling?

Luke Silcock: The normal puzzle we’re given is what’s going to happen with this product, how does it relate to the deal rationale and the maturity of the company? Sometimes the companies we’re working with, they’re looking at a pretty much maintaining the existing customer base and running off a pretty valid, viable company. But a lot of the time, we’re talking about companies on a growth curve, so that will say we want to check that 10x growth, x being the number of customers in the amount of volume being done today. Is 10x viable, or even 100x. And then at what point would certain technologies, such as database sharding tech need to be considered or other scaling points that worry the engineers, but realistically, they won’t have solved yet? What we’re looking for is that it’s a team that’s capable of solving those sorts of challenges.

Andrew Borzycki: Yeah, look, I find this probably the most exciting creative part on the diligence because it’s where you have got to knuckle down and look at those really tough, challenges. Will it break if we try and throw 100 times the amount of people at it, but also you get very future focused and looking at where you can take it, which is the exciting part.

Luke Silcock: The blue sky? Yeah. But here’s another one, which is sometimes a puzzle for the teams as they’ve been working in English only. Then the acquirer wants an international product. And people say, Oh, well, I’ll just put a different language in the user interface. It’s something like internationalization, and localization. It’s a particular topic and it goes right back to the source code and, and it’s got its own aspects. There’s accessibility for those companies that want to take a product and make sure the various accessibility guidelines are met when people who may have disabilities that need to use the technology. A whole bunch of these aspects need to get factored into the product roadmap, and assessing it is what that section is all about.

Adam Jaques: Readiness, in the view of bringing it to market through a different channel is another important one. We see a lot of the time larger companies buying technologies from perhaps a smaller organization that may not have sold through a worldwide channel with distributors, channel partners, all that sort of thing. And along with that, you need to build that assets and training materials and so on. Even basics, like the ease of install. How often is the immature product mopping up quite a quite a lot of effort and time when it’s going to be installed per client? Yeah, but at scale that’s just going to kill the team.

Andrew Borzycki: As a small company, that’s great. It’s a chance for professional services revenue. But if you want to scale that, then it’s an entirely different ballgame.

Adam Jaques: Exactly right. And I sort of generically put that under the banner of making sure that the engineers are not being distracted. Keep them heading towards that goal of the next release, and bringing in those other departments to be able to assist in in really making the product a success.

INTRODUCING

THE TECHNICAL DUE DILIGENCE SHOW

The Thought Source team have produced a video series covering the "behind the scenes" of performing technical due diligence for M&A projects.

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