We at Intium are always on the lookout for opportunities to give back to the investment and tech community. One of such channels is mentoring startups, which our co-founder Agu Aarna has done for some time now in collaboration with our friends at Tenity.
The reason is that in today's fast-paced tech-driven world, investments in technology companies have become increasingly common, but with these investments come risks and challenges that need to be carefully navigated.
Recognizing this, we decided to team up with Tenity and focus on the one crucial aspect of this navigation process – technical due diligence (Tech DD), a comprehensive assessment of a company's technology infrastructure, practices, and potential risks. In this recent interview between Agu and Uve Poom, Head of Operations Nordics, at Tenity, a venture capital investment firm, insightful discussions unfolded regarding the essence, complexities, and importance of Tech DD in the investment process.
Technical Due Diligence: a Holistic Approach
Agu Aarna's journey from a software developer to a founding partner at Intium Tech provides a rich background for understanding the intricacies of Tech DD. His expertise underscores the importance of taking a holistic approach to Tech DD, which goes beyond mere code reviews and system security assessments. Instead, it involves evaluating the intersection of people and technology, organizational scalability, leadership acumen, and business strategy. This comprehensive view ensures that investors gain a thorough understanding of the company's technological landscape before making investment decisions.
Key Elements of a Tech DD
One of the critical aspects of Tech DD highlighted in the interview is compliance and risk management, particularly in regulated industries like financial services. Agu emphasizes the need for a robust risk culture within organizations and the importance of striking a balance between compliance efforts and value creation. By delving deep into compliance practices and risk management strategies, investors can mitigate potential risks and maximize value creation opportunities.
The interview also delves into the intellectual property (IP) aspect of Tech DD, shedding light on the risks associated with open-source software. Agu emphasizes the importance of understanding licensing agreements to avoid legal complications, especially when scaling up internationally. This discussion underscores the significance of thorough IP assessments during the Tech DD process to safeguard investors' interests and avoid potential litigation down the line.
Red flags during Tech DD are another crucial topic of discussion, with Agu providing insights into identifying and addressing these challenges. While true deal-breakers are rare, Agu emphasizes the need to approach red flags with a strategic mindset, focusing on finding solutions rather than immediately walking away from the deal. This pragmatic approach ensures that investors can navigate potential obstacles and move forward with confidence.
Closing the gaps identified during Tech DD is essential for aligning investment decisions with strategic objectives. Agu discusses various strategies offsetting costs for addressing these gaps, including negotiating the price based on the cost of addressing issues and integrating this information into earn-out plans. By understanding the costs and challenges associated with closing these gaps, investors can make more informed decisions and maximize their returns on investment.
The interview also explores how different types of investors approach Tech DD differently, depending on their investment strategies and objectives. While early-stage VC funds may perform lighter checks, growth equity investors focus on using Tech DD as a driver for value creation. Corporate VC and M&A teams consider additional factors such as system integrations and team compositions, highlighting the nuanced approach required for different types of transactions.
Legacy technologies pose unique challenges during the Tech DD process, with Agu emphasizing the importance of evaluating their functionality and business value. By striking the right balance between preserving legacy systems that work well and replacing outdated technologies, investors can mitigate risks and capitalize on growth opportunities. This discussion underscores the need for a nuanced approach to evaluating technology infrastructure during the Tech DD process.
Concluding on Tech Investments
The interview provides valuable insights into the art and science of technical due diligence in the investment process. Agu Aarna's expertise and experience shed light on the complexities and importance of Tech DD, highlighting its role as a strategic tool for guiding investment decisions and maximizing returns on investment. By adopting a comprehensive approach to Tech DD and addressing red flags proactively, investors can navigate the tech landscape with confidence and achieve their investment objectives.
