If you’re thinking of acquiring a software startup

IT due diligence on a software startup may seem unnecessary if the core product offering represents a significant new advancement.  It really can’t be overlooked, however, as there are many technology risks lurking within the product and within the company itself.

As far as the core technology offering(s), it’s important to conduct code reviews, architecture reviews, security audits, application performance assessments (especially in light of the projected growth in the business plan) and an assessment of the company’s software development lifecycle methodology.

There are other hidden risks, some of them far removed from the core product offering, that may impact your future acquisition’s ability to achieve its goals.  Many of them stem from the need to be both chief cook and bottle washer during the very earliest days of the company’s existence. Here are the top three:manyhats1

  1. Inappropriate software development practices: My favorite example here is a startup I was advising during its search for first round investors. They could not resist the urge to keep “improving” the code, so they never segmented or froze their brainchild into discrete releases. The night before I had scheduled a potential investor for a demo, they thought of four new “must-have” features to add, and were actually debugging during a demo that failed to execute.
  2. Tendency to re-invent the wheel: Software entrepreneurs are often skeptical of packaged enterprise software to the extent that they will build their own backoffice, CRM, or other applications. The risk this imposes to potential investors is twofold: you are retaining dedicated staff to support those applications, and any migration off of these applications may be difficult because they are often built “on the side” without sufficient documentation.
  3. Project management immaturity:  It’s unusual for a startup to hire real project managers very early on in their lifecycle. While PM discipline could certainly help them during the concept phase, it’s absolutely necessary as they are attempting their first deployments to clients.  Weaknesses in this area are easy to spot as you conduct due diligence interviews with their customers.

So even if the product has no competition in the market place, and you’re convinced it can sustain competitive advantage, please make sure you have qualified resources do some deep probing to help you understand where the hidden problems may lie.

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