Blog

July 6, 2016
Technology Red Flags to Address Before Investors Ask About Them

This is the first in a two-part series covering strategic technology red flags companies should address in preparation for investment discussions.

Investors go through an exhaustive due diligence process when deciding whether to invest in the latest tech company or during M&A analysis. Financials, market fit and growth, traction, and the founders and employees’ ability to attain what is promised are all thoroughly vetted.

One area they are likely to study is your technology strategy—potentially examining the intricacies of the technology, your infrastructure, and whether the existing technical staff is strong or in need of critical improvements. Is your technology and technology strategy solid?

The three "Ps" of technology product development—people, process, and platform—is a part of every investment decision, regardless of stage. Increasingly, investors are tapping in-house experience or enlisting experts that are fully versed in technical areas and have seen patterns emerge over time to more accurately evaluate potential risks.

With digital transformation across industries making almost every company reliant on technology, stability and a sound technology strategy for growth adds great value to companies looking to expand their investment opportunities. In the first part of this two-part series, we’ll look at some of the common tech risks related to platforms and infrastructure that investors may flag as problems.

TECHNICAL DEBT: WHAT WILL IT COST TO OVERCOME?

It’s an old term, but unfortunately technical debt still runs rampant today in most technology product companies. More mature, longstanding companies being considered for M&A may have amassed large amounts of technical debt by building products and infrastructure on older technologies, setting aside larger refactoring efforts, while trying to get new customer-facing features out the door as quickly as possible.

It may have seemed like a smart decision at the time, but try to address technical debt where you can and have an honest assessment of the cost to fix it. Some companies build a great looking offering, but have to cut corners to quickly get to market. We all know investors want to incur the least amount of cost to fix problems and realize high growth as quickly as possible, so having a good handle on any technical debt will be essential as you enter into funding or M&A discussions.

MVP: IS MINIMAL SUITABLE FOR THE MASSES?

Minimally Viable Products (MVPs) are designed to be lightweight and are a way to validate customer needs. But what happens when the “product” goes into true production? If the MVP was not built with a clear roadmap on how to scale (and scale rapidly), companies may quickly lose momentum, suffer painful outages, forego sales opportunities (revenue), lose their competitive edge, and incur additional costs as they try to react.

The bottom line is (as the scaleable agile framework cites) “crappy code can’t scale,” and if your eye is on quick scaling, how to do that should be a part of your strategy (and contingency plans). If there are concerns about scaling, or you need help in reconciling growth plans with your roadmap and the smartest way to scale, many companies seek counsel to advise on the smartest and most cost-effective path forward (making you look really smart to investors).

The moral of the story is that if you identify the issues early on and begin a measured remediation plan to address them, the happier both customers and investors will be.

TECH STACK: RISK OR REWARD?

How was the product built? What architecture and frameworks were employed? Is it largely based on open source, stitched together to create a functional product? This may be a problem in the future, including impacting IP rights, security concerns or vulnerabilities, and defining “ownership” when it comes time to potentially sell the company.

Just be careful in understanding all of the underlying potential issues and address those before the conversation happens with your investor partner.

LEGACY PLATFORM: WILL OLDER PLATFORMS PERFORM LONGTERM? 

Technology moves at a lightning pace today. What may have been a state-of-the-art platform when a company first started building a product could be antiquated (or worse—discontinued or unsupported) by the time the product goes to market. This “hot or not” trend is especially prevalent in the software development world. The latest and greatest today is quickly usurped by something better.

Remember when Ember.js was “the latest” - only to fade from favor for Angular.js? And what about Angular 2? Many in-house products are built with no clear-cut plan of whether portions are cloud-based, and no ability to migrate the product to the cloud.

Be prepared to explain how the code was built and why underlying technologies were chosen at the time to make your product state-of-the-art and prepared for the future.

INFRASTRUCTURE: READY TO GO OR NOT UP TO THE TASK? 

A company’s technology requirements for growth go well beyond the product itself. All departments including operations, finance, marketing, sales, service, and development must have the right infrastructure and systems in place to truly be successful.

Early stage companies often struggle to strategically choose the right path for enterprise applications like ERP, CRM, or SCM that balance functionality requirements—now and for the future—with cost effectiveness. What may have seemed like a cost effective decision in the early days could actually be hindering your growth today. Even more mature organizations may be operating on antiquated infrastructure solutions that will require investment in order to pave the way for growth.

Technology is complex and infinitely ever-changing. Having experts who are tapped regularly to provide understanding and guidance around technical red flags before they become problems or risks can go a long way in making a company attractive to investors. With every company today relying on a digital approach to business, taking stock of weak spots and areas in need of improvement can pave the way for successful investor discussions. 

 


Peter Karlson is the Founder of NeuEon. Follow NeuEon on Twitter: @neueon

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