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Technical Due Diligence: What Investors Actually Look For

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Technical Due Diligence: What Investors Actually Look For

Technical due diligence can feel like a black box to founders. You know investors will look under the hood, but what exactly are they looking for? After participating in dozens of these evaluations, here's what actually matters.

The Framework

Technical due diligence typically examines five areas:

  1. Architecture and Scalability
  2. Code Quality and Technical Debt
  3. Security and Compliance
  4. Team and Processes
  5. Intellectual Property

Let's break down each one.

Architecture and Scalability

Investors want to know if your technology can support the growth your business plan promises.

What they examine:

  • System architecture diagrams
  • Database design and query patterns
  • API design and documentation
  • Infrastructure setup (cloud, on-prem, hybrid)
  • Monitoring and observability

Common red flags:

  • Single points of failure
  • No caching strategy
  • Monolithic architecture with no path to scale
  • Manual deployment processes

What good looks like:

┌─────────────────────────────────────────────┐
│              Load Balancer                  │
├─────────────────────────────────────────────┤
│     API Gateway (rate limiting, auth)       │
├──────────────┬──────────────┬───────────────┤
│  Service A   │  Service B   │  Service C    │
├──────────────┴──────────────┴───────────────┤
│         Message Queue (async jobs)          │
├─────────────────────────────────────────────┤
│    Primary DB ←→ Read Replicas │ Cache      │
└─────────────────────────────────────────────┘

Code Quality and Technical Debt

Every codebase has debt. The question is whether it's managed.

What they examine:

  • Test coverage and testing strategy
  • Code review practices
  • Documentation (inline and external)
  • Dependency management
  • Error handling patterns

Metrics they look at:

// Example: Healthy test coverage
{
  "statements": 78.5,    // > 70% is good
  "branches": 65.2,      // > 60% is acceptable
  "functions": 82.1,     // > 75% is good
  "lines": 79.3          // > 70% is good
}

Common questions:

  • How old are your dependencies?
  • What's your strategy for security patches?
  • How long does it take to onboard a new developer?

Security and Compliance

This area has become increasingly important, especially for B2B companies.

What they examine:

  • Authentication and authorization
  • Data encryption (at rest and in transit)
  • Secrets management
  • Vulnerability scanning
  • Compliance certifications (SOC 2, GDPR, HIPAA)

Non-negotiables:

  • No hardcoded credentials
  • HTTPS everywhere
  • Password hashing (bcrypt/argon2)
  • Regular dependency audits

Sample security checklist:

- [ ] All secrets in environment variables or vault
- [ ] SQL injection prevention (parameterized queries)
- [ ] XSS prevention (output encoding)
- [ ] CSRF protection on state-changing endpoints
- [ ] Rate limiting on authentication endpoints
- [ ] Audit logging for sensitive operations

Team and Processes

Investors are investing in people as much as technology.

What they examine:

  • Team structure and experience
  • Development workflow (agile, kanban, etc.)
  • Deployment frequency and process
  • Incident response procedures
  • Documentation culture

Questions they ask:

  • How often do you deploy to production?
  • What happens when something breaks at 2 AM?
  • How do you prioritize technical work vs. features?
  • What's your interview process for engineers?

Intellectual Property

Especially important for deep-tech companies.

What they examine:

  • Code ownership (work-for-hire agreements)
  • Open source license compliance
  • Patents and trade secrets
  • Third-party dependencies and their licenses

Common issues:

  • Using GPL-licensed code in proprietary software
  • No contributor license agreements
  • Unclear ownership of contractor code

Preparing for Due Diligence

Start preparing before you need to:

  1. Document your architecture - Create and maintain system diagrams
  2. Track technical debt - Keep a prioritized list of known issues
  3. Automate what you can - CI/CD, testing, security scans
  4. Organize your codebase - Consistent structure, clear naming
  5. Write runbooks - Document how to deploy, monitor, debug

The Timeline

Expect technical due diligence to take 2-4 weeks. The process typically involves:

  • Week 1: Document review and initial questions
  • Week 2: Deep dive sessions with engineering team
  • Week 3: Follow-up questions and clarifications
  • Week 4: Final report and findings

What Happens Next

Due diligence findings rarely kill deals outright. Instead, they inform:

  • Valuation adjustments
  • Escrow or holdback provisions
  • Post-close remediation requirements
  • Hiring plans and budgets

The goal isn't to have a perfect codebase—it's to have an honest understanding of where you are and a credible plan for where you're going.

Final Thoughts

Technical due diligence is ultimately about trust. Investors want to believe that what you've told them about your technology is accurate and that your team can execute on the vision.

The best preparation is simply building good habits from day one: test your code, document your decisions, manage your debt, and be honest about your challenges.

I do technical due diligence for investors looking at healthcare technology and regulated software acquisitions. If you're working on a deal in this space, reach me at bjarne@christiansen.co.

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