TECHNOLOGY DUE DILIGENCE IN SEARCH - WHAT WE'VE LEARNED OVER THE LAST YEAR
A little over a year ago, we started Spellbound Partners to bring a more operational and financial focus to the technology due diligence process. In particular, we believed that the companies being acquired by searchers needed practical, business-focused analysis related to the People, Product and Process of the target.
We've had the privilege of working alongside a number of searchers this past year, and have looked at companies across a wide array of industries (some of which we never even dreamed existed!). We thought it would be useful to share some of the learnings from this past year across each area of diligence.
Not surprisingly, the biggest area of risk across nearly every company we reviewed was knowledge concentration and continuity. Typically there were one or two key developers who held the keys to the kingdom. Many times, these key employees were not aware of a potential sale, and as a result, were not even thinking about how the company might exist without them. At times, we saw employees holding the company hostage, though they would never likely say it exactly that way.
Other areas of weakness related to People were in hiring and onboarding of new employees. The ability to bring on new people and get them productive is one of the key markers of a well-run development organization. In most companies we reviewed, onboarding consisted of mentoring from existing team members, which slows the entire team down.
We also witnessed remarkable dedication to the company from a number of these key employees. It was common to have engineers with tenures of ten years or more, something that is rarely if ever seen in the startup world.
The quality of products was as widely varying as the industries they serve. We saw products where we found it hard to believe they actually worked every day. We also saw very well-designed and executed products that had the potential to be so much more under a new owner.
It was common for companies to be using dated technologies and approaches, and (surprisingly) a lack of knowledge of more modern practices and tools that would have made their lives so much easier.
Many companies got tripped up on customization. There was a tendency to handle customization of the application in ways that boxed them in and made ongoing support incredibly difficult. Their approach also made the addition of new features or scaling significantly a real challenge.
The ability for customers or partners to extend the application capabilities was mostly not a focus at all. We met with a few who absolutely nailed this, however.
Part of our process is an in-depth review of source code. We saw some things we'd rather never see again if given the choice!
Last, application security was mostly an afterthought. There was no regular scanning of the application, no code security review, and a good amount of "we hope we never have a breach!"
With rare exception, processes were well behind industry standards. Automation of any kind was rarely present and in particular testing and the build/deployment process. Source code was at times not managed centrally at all, and many times was managed on a local server instead of a service like Github or Bitbucket.
Data management, including access to customer data by employees, was very relaxed.
The backup and disaster recovery processes were frequently manual and insufficient to survive an actual disaster without significant business impact.
The development process itself was often very informal with no ability to measure the inputs and outputs.
The good news in all of these process issues is that they are, by and large, inexpensive to fix provided the organization is willing to change how they operate.
Our most pleasant surprise has been the level of candor and humility from the seller. There were some exceptions where we felt like we were being sold to, but for the most part, sellers have simply shared how things are, why decisions were made, and many times how they wished they'd done it differently.
It's been an incredible year. We have been so impressed with all of you searchers who are putting it on the line to take over a company. For those of you we've had the privilege of working with so far, we can't thank you enough for your trust. We'll see the rest of you here on Searchfunder or out on the road in the coming year.