Tech DD Myth Busters # 2

I am funding a start-up, so I might not require a Tech Due Diligence.

Wait, what?

Often when we discuss with investors, especially individual investors / angels or small funds, they ask if they can skip a Tech DD - as they invest only in start-ups.

The underlying assumption that Tech DD is best only for complex systems with a lot of existing technology is unfortunately very wrong, and harmful for your investment thesis while funding a start-up.

Often when we conduct Tech DD for start-ups, we are caught with unexpected surprises, that may help your investment position a lot in the long term.

Tech DD findings will not only help robust the tech platform being planned, but it will also help you negotiate a better valuation with the founders. It can help you assure that the platform is built for scale and support in growth stage, while identifying the loopholes that can change the valuation of the startup - helping you negotiate more RoI for the same amount of investment.

If you are putting your money, your reputation, your brand-value and your network on a tech platform which is still being built; or is yet to come to life; the risk is doubled naturally.

With most start-ups that take a lean approach to quickly move through their development phases to save time and money, there are obvious short-cuts taken that might prove costly over the long term. For example, start-ups tend to use a lot of third party API integrations to quickly perform some functions in their codes. These ready-to-consume APIs save a lot of development time. But often, the API providers have a FREE tier to start the account, which might be very costly when a certain threshold is achieved. When crossed, the paid subscriptions may be heavily charged, and require a long-term commitment, with prepayment.

In such cases, the start-up is stuck, as they have an increased number of users, and a heavy dependency on these third-party APIs, and have no choice but to pay the hefty fees. An early revealation of this can help to save a lot of trouble at a later stage, and the startup may switch to building their own logics, or identify a better alternative.

Tech DD for Startups, is like examining the sapling in the nursery before it becomes a big tree. You can not alter the unwanted outcomes later on. The only way is to ensure that things are set well in the beginning so that when the startup becomes a success the fruits can be sweeter for all stakeholders.

Are you evaluating startups to invest in currently? DM us, and we will see how we can help you to make it safer on the technology front.