No stone left unturned: how TechMiners approaches tech / product DD

My name is Daniel Jung am the Director of Transaction Services at TechMiners. Founded in Berlin in 2019 by a team of former CTOs, TechMiners has so far assessed technology stacks of 300+ businesses. I have personally been involved in dozens of due diligence projects for serial acquirers including heavyweights like Pollen Street Capital, Castik and Marlin Equity.

Firms like these are M&A machines that pride themselves on consistent underwriting. One thing they all have in common is rock-solid yet fast-paced and seller friendly approach to Technology and Product DD. 

In this article, I share thoughts on how you can improve your tech diligence process.

Is tech DD even necessary?

A rather contrarian, but not at all isolated view in the industry is that “if software works, no need to pick it apart”. Focus on the P&L and IP instead. Leave the code alone. 

I hold a different view. 

In software M&A, source code is the primary asset acquired, perhaps joint first with customer relationships. Moreover, the quality of the code directly influences post-merger execution, affecting churn rates, new MRR etc. It is not just PLG: enterprise software businesses tend to carry significant technical debt to the point of obsolescence.

Now, for the firms that do carry out tech DD, approaches vary. Ranging from using third party consultants like TechMiners to asking the CTO or a tech lead to “fill out a page”.

While each approach has its merits, engaging an experienced provider saves time and money while significantly reducing deal risk.

Here are 4 reasons why. 

#1: Capacity factor

Imagine you are the CEO or the Head of M&A of a serial acquirer tasked with deploying $50M in equity per year. This translates into 5 to 10 deals - likely spanning different products, geographies, and tech stacks. 

Compromising on quality will eventually pulverise your carried interest. However, you can’t agonise over deals either as they will go away. 

Best of breed serial acquirers take 6 to 8 weeks from signed LOI to signed APA / SPA. This timeline means that substantially all DD needs to be completed in the first 4 weeks, to leave enough space to agree mitigants and to negotiate deal docs.     

Can your in-house team deliver 10 DD sprints per year? 

At TechMiners, we do. In fact, we have expanded capacity to the point where we are able to run concurrent multiple reviews for the same client. With good access to the target we can deliver within 10 business days a comprehensive report like the example below, easy to read and packed with actionable insights.

#2: The “So What?” factor

“We have a coder in Bosnia who will run the penetration test. Our CTO can do the code review. We’ll record the product demo: people can diligence that async”. 

Been there?  

No software business can function without a CTO. Unfortunately, very few CTOs are “Swiss Army Knife” type of people comfortable juggling PHP, C# and Java. And usually they are not specialised in fast, minimally invasive and effective tech assessments. In most businesses they don’t have to as they get to choose the tech stack and run a specialised business.

Not in serial acquirers.  

When evaluating a target with multiple, potentially conflicting tech stacks the temptation is to make it go away. “It’s a spaghetti code”. OK…how good is that spaghetti? 

Another extreme are lengthy reports that lack insights or take weeks to produce and block the Target for days.  

Finally, biases (phobias?) that certain individuals have against certain technologies can equally trip up deals.   

This isn’t to say that in-house tech teams are not competent. Absolutely not. It’s just that they are not used to this type of work. 

TechMiners will work alongside your M&A and CTO teams, providing objective assessment without undermining internal stakeholders.

#3: The strengthen your hand factor

M&A practitioners: how many times have you spent weeks negotiating an SPA, just to receive a critical report from the tech team, necessitating a price decrease?

CTOs: how many deals have you been involved in, where you are shown a draft SPA at the last minute, asking for “input” based on the DD that properly kicked off only 2 days ago? 

Not deal.   

It is not unusual for a buyer to In short: absolutely. 

Request meaningful price reduction based on DD findings. But it can create a stalemate, especially when buyer and seller tech teams don’t see eye to eye (“Who did you call spaghetti?!”). 

A comprehensive report from a reputable third-party vendor can be a game changer, especially when it is supported by benchmarking data. Very effective way to achieve  price reduction or negotiate post-closing performance metrics related to technical debt reduction. 

#4: The I don’t trust you factor

Sellers are protective of their source code - and rightly so! 

Sometimes this anxiety reaches alarming levels:

• On-screen walk through the source code between signing and closing, with no recording allowed

• Asking to put source code into escrow until all deferred payments have been made (in which case we may as well etch into a tablet…)  

Let’s take a step back. This isn’t supposed to be happening.  

Why not bring in an external consultant to serve as a bridge buyer and seller. Review the source code. Confidentially interview employees. Reposition the whole thing as a (almost) free, client agnostic audit with valuable recommendations as a result rather than a buy-side DD.

I hope I have piqued your interest in TechMiners. To learn how we can turbocharge your technology / product DD, contact me today on daniel.jung [at] techminers.com!