VC's don't invest in technology. They invest in what technology can become. Which begs the question - why treat a startup like an established enterprise when doing a technical due diligence ? If you are evaluating a mature business, the focus should be on aspects such as:
Code quality
The modernity and longevity of the stack
Information security policies
Process maturity
These check are certainly necessary, but in the context of a startup, they are not sufficient. Positive results will provide some comfort to the investor, but will not tell you if the company can scale.
The real risks for venture-stage startups are far more likely to to manifest in one of the following ways:
Tech that scales, until it doesn't. You shouldn't be asking yourself if it works today - you should ask yourself what will be the first thing to break, because something will break as you scale 10x.
A single point of failure disguised as a tech team. SPOF's (we are allowed the occasional acronym) aren't always technical. Have you considered what happens if that brilliant CTO decides to leave ? Can the team sustain the roadmap without a secondary level of technical leadership ?
Impressive automation (and AI) that doesn't actually work. Startups will sometimes go to great lengths to emphasise their use of AI -powered products, but on closer examination these tools are a often a thin veneer of automation on top of manual processes.
VC's should rethink technical due diligence and treat a startup as the early stage business it is.
Assess adaptibility, not only architecture - not only do startups pivot their business models, they pivot their platforms. Architecture changes as business requirements change - can the technology support the iterations the business goes through ?
Consider the depth of the engineering team. Key woman (and man) risks are real. Can you identify who the key role players are, and what the consequences would be if they left ? Bear in mind that many startups do not have the "luxury" of extensive documentation, and knowledge lives in people's heads.
Validate the moat, not just the MVP. Technology does not always create a moat - sometimes it is just a tool. But it is important to understand what the value of the technology is beyond the MVP stage - a true technology moat is a valuable asset.
To summarise, venture capitalists should not do due diligence to confirm a thesis, they should do it to test a thesis. Ask yourself - what hidden technical risk can turn the potential unicorn you are investing in, into a failure ?
Rosewood has extensive experience evaluating early stage startups, and first hand experience in managing the technical teams and platforms for these businesses. Reach out to us for help with a contextually relevant technical due diligence.
(Header image by https://unsplash.com/@edwardhowellphotography)
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