Technology Due Diligence for Startups: What Investors Look For

Technology due diligence is a systematic evaluation of a company's technology assets, team, processes, and risks. It happens before funding rounds (typically Series A and later), acquisitions, and major partnerships.

The outcome directly impacts valuation. Strong technology due diligence can increase a company's valuation by 10-20%. Poor results can kill a deal entirely or significantly reduce the offer.

Having conducted technology due diligence assessments for investors and having been on the receiving end as a CTO, here's what actually matters.

What Technology Due Diligence Covers

1. Architecture and Code Quality

What investors evaluate:

• Is the architecture appropriate for the current scale and the next 10x?
• Is the codebase maintainable (code quality, documentation, test coverage)?
• Are there architecture decisions that will require expensive rework?
• Is the technology stack current and well-supported?
• How much technical debt exists, and is it managed?

What raises red flags:

• Monolithic architecture with no clear path to scale
• Zero or minimal test coverage (< 20%)
• No CI/CD pipeline (manual deployments)
• Outdated technology stack (unmaintained frameworks, end-of-life languages)
• Single points of failure (one server, one database, one person who understands the system)
• Code that nobody can explain

What impresses:

• Clean, well-documented architecture with ADRs (Architecture Decision Records)
• Comprehensive test suite (70%+ coverage with meaningful tests)
• Automated CI/CD with security scanning
• Architecture that demonstrates understanding of scaling challenges
• Clear technical debt register with a management strategy

2. Security and Compliance

What investors evaluate:

• Are there known security vulnerabilities?
• Is customer data properly protected (encryption, access controls)?
• Are compliance requirements met (SOC 2, GDPR, HIPAA as applicable)?
• Has the system been penetration tested?
• Is there an incident response plan?

What raises red flags:

• No encryption at rest or in transit
• Hardcoded credentials in the codebase
• No access controls or logging
• No security testing history
• Customer data handling violations
• No compliance certifications when they're expected for the market

What impresses:

• SOC 2 Type II report
• Recent penetration test with remediation evidence
• Security certifications (CISSP, CISM) on the team
• Comprehensive access controls with audit logging
• Vulnerability management programme with SLAs

3. Scalability and Performance

What investors evaluate:

• Can the system handle the projected growth (10x, 100x)?
• What are the current performance characteristics?
• Where are the bottlenecks?
• Is there a scaling plan?

What raises red flags:

• No load testing or performance benchmarks
• Database queries that don't scale (N+1 queries, missing indexes, full table scans)
• Single-server architecture with no horizontal scaling path
• No CDN, no caching strategy, no queuing for async workloads
• "It works for now" without a plan for growth

4. Team and Knowledge

What investors evaluate:

• Does the team have the skills to execute the roadmap?
• Is there key-person dependency (bus factor)?
• What's the team structure and hiring plan?
• Are engineering practices mature (code review, testing, documentation)?

What raises red flags:

• Single person who understands critical systems
• No documentation — everything is tribal knowledge
• High turnover in engineering
• No code review process
• Outsourced core technology with no internal capability to maintain it

What impresses:

• Clear team structure with defined responsibilities
• Internal knowledge sharing (documentation, wikis, architecture discussions)
• Hiring pipeline and defined roles for next 12 months
• Mature engineering practices (code review, testing, CI/CD)

5. Intellectual Property

What investors evaluate:

• Does the company own all its code? (IP assignment agreements with all developers)
• Are open-source licenses compatible with the business model?
• Are there any third-party IP risks?
• Are trade secrets protected?

What raises red flags:

• Missing IP assignment agreements (especially for early contractors)
• Copyleft licenses (GPL) in proprietary product code
• Core functionality built on a third-party platform with unfavourable terms
• Former employer IP contamination risk

6. Infrastructure and Operations

What investors evaluate:

• Is the infrastructure properly managed (Infrastructure as Code)?
• What's the operational maturity (monitoring, alerting, incident response)?
• What are the infrastructure costs and trajectory?
• Is there a disaster recovery plan?

What raises red flags:

• Manual server management (clicking in the cloud console)
• No monitoring or alerting
• No backup strategy or untested backups
• Infrastructure costs growing faster than revenue
• No disaster recovery plan

The Due Diligence Process

Phase 1: Document Review (1-2 weeks)

The investor's technical advisor reviews:

• Architecture documentation
• Technology strategy and roadmap
• Security policies and compliance certificates
• Team structure and org chart
• Infrastructure documentation
• Recent incident reports
• Technical debt assessment

Phase 2: Technical Interviews (2-3 days)

Interviews with:

• CTO/VP Engineering — strategy, architecture vision, team development
• Senior engineers — code quality, technical challenges, process satisfaction
• DevOps/SRE — infrastructure, reliability, operational maturity
• Product/Engineering interface — delivery process, prioritisation

Phase 3: Code and Infrastructure Review (1-2 weeks)

• Codebase analysis (automated tools + manual review)
• Infrastructure architecture review
• Security assessment
• Performance and scalability analysis
• Dependency and license audit

Phase 4: Report and Findings

The DD report typically includes:

• Executive summary with overall assessment (green/amber/red)
• Detailed findings by category
• Risk assessment with severity ratings
• Recommendations for remediation
• Impact on valuation (if applicable)

How to Prepare

6 Months Before (Ongoing Good Practice)

• Maintain architecture documentation (even lightweight)
• Keep test coverage above 70%
• Run automated security scanning
• Manage technical debt with a register
• Ensure all IP assignments are signed
• Conduct annual penetration testing

3 Months Before

• Review and update all technical documentation
• Run a comprehensive code quality analysis and address critical findings
• Verify all compliance certifications are current
• Conduct a self-assessment against the DD criteria above
• Prepare a technology strategy presentation
• Ensure disaster recovery is documented and tested

1 Month Before

• Prepare the data room (architecture docs, security policies, compliance certs, team structure)
• Brief the engineering team on the DD process
• Address any remaining critical findings
• Prepare the CTO for technical interviews (practice explaining architecture and trade-offs)

How Due Diligence Affects Valuation

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Technology due diligence is a critical milestone in a startup's journey. Preparation makes the difference between a technology advantage and a technology liability. If you need help preparing for due diligence or conducting a technology assessment, let's talk.