What Investors Look for in Technical Due Diligence

# What Investors Look for in Technical Due Diligence

As a technical due diligence partner for several venture capital firms, I've evaluated the technology of startups from Seed to Series C. Here's what we actually look for—and how founders can prepare.

Why Technical Due Diligence Matters

Technical due diligence serves several purposes for investors:

1. Risk assessment: Can this technology support the business plan?
2. Valuation input: Is the technology an asset or a liability?
3. Post-investment planning: What technical investments will be needed?

For founders, a clean technical due diligence can accelerate deals and improve terms.

What We Evaluate

1. Architecture and Scalability

What we look for:
- Can the current architecture handle 10x growth?
- Are there obvious bottlenecks or single points of failure?
- Is the technology stack appropriate for the problem?

Red flags:
- Monolithic architectures with no clear path to decomposition
- Critical dependencies on deprecated or unmaintained technologies
- Scaling plans that require complete rewrites

2. Code Quality and Technical Debt

What we look for:
- Consistent code style and organization
- Appropriate test coverage for the stage
- Reasonable technical debt for a startup

Red flags:
- No version control or chaotic commit history
- Zero test coverage with no plan to improve
- Copy-pasted code everywhere, indicating inexperienced developers

3. Security Posture

What we look for:
- Appropriate security for the data handled
- No obvious vulnerabilities in production
- Security awareness in development practices

Red flags:
- Credentials in code repositories
- No encryption for sensitive data
- Complete absence of security consideration

4. Team and Processes

What we look for:
- Technical founders who understand their system
- Development processes appropriate for the stage
- Ability to onboard new engineers

Red flags:
- Technical founders who can't explain their architecture
- No documentation or tribal knowledge only
- Key person dependencies with no mitigation plan

5. Infrastructure and Operations

What we look for:
- Production stability appropriate for customer commitments
- Monitoring and alerting in place
- Disaster recovery capability for critical data

Red flags:
- Frequent unplanned outages
- No visibility into production health
- No backups or untested backup procedures

What We Don't Care About

Perfect code: Startups are messy. We're looking for appropriate quality, not perfection.

Cutting-edge technology: Boring technology often scales better. We care about fit, not fashion.

Comprehensive documentation: Some documentation is good. Extensive documentation at seed stage is a yellow flag—you should be building product.

How Founders Can Prepare

Before Fundraising

1. Clean up obvious issues: Fix credential leaks, address critical vulnerabilities
2. Document key decisions: Why did you choose this architecture? What are the known limitations?
3. Prepare honest answers: We'll find the problems. Better to address them proactively.

During Due Diligence

1. Be transparent: Hiding issues destroys trust and often kills deals
2. Show self-awareness: Acknowledge limitations and share your plans to address them
3. Demonstrate learning: Show how the team has improved over time

What Makes a Strong Impression

- Clear technical vision with realistic assessment of current state
- Thoughtful tradeoffs that prioritize business outcomes
- Culture of improvement with evidence of learning from mistakes

Conclusion

Technical due diligence isn't about having perfect technology—it's about demonstrating that your technical foundation can support your business ambitions and that your team is capable of getting there.

The best founders are honest about their current state, clear about their vision, and realistic about what it will take. That's what we're looking for.

Preparing for technical due diligence? We can help with pre-diligence assessment.