By Roger Planes, CEO Silicon Rhino
Investing in tech startups can be daunting, especially if you don’t have a tech background. Investing in new ideas, market opportunities and teams can be exciting, and should remain the most important deciding factors when considering an investment. Here are a few points to focus on from a software due diligence perspective.
Documentation is hardly at the top of the priority list of many early stage companies. While the tech team may know all the ins and outs of the project by memory, it will be much harder to onboard new developers or take over the tech if the need arises. Projects and quirks in the systems should be well documented.
At the very least, any startup should have a set of documentation to allow someone else to pick up the project if the key people became incapacitated.
Early stage startups usually fall into the trap of prioritising features due to customer feedback or potential deals in the pipeline. Ask for a 12 month roadmap to understand how the product will evolve going forward.
Having a roadmap in place will serve as a general direction, but understand tech startups operate in an agile environment so feature prioritization may change to best achieve market fit.
The convention of a tech startup needs to have a tech team is being challenged. So long as there’s access to reliable resources to build the product, a product can easily go to market whether the team is in-house or not. What matters is how well the company is able to explain the relationship and access of the resource and how these resources are prioritised.
Leveraging third party systems
Early stage startups should focus in building and iterating the core of their product first and foremost. When resources are not widely available the team needs to prioritise what should be built by the company itself versus what third party tools can be integrated into the system. Payment processors like Stripe or Braintree are one the best examples for a product that takes payments but isn’t part of the core offering. Make sure the team is focused sharp in the product USP and integrate other tools to help speed up development.
Another advantage of using third party software is delegating the regulatory requirements and storage of sensitive customer data like credit card and payments. While you shouldn’t expect developers to be experts in data security, the software team should be aware of the current laws, their obligations and have plans to improve security in the product roadmap if it’s not as robust as it could be.
There are infinite ways to architect a technical product, and all of them have their pros and cons depending on budget, resources available and product availability.
The most important pitfall to look for is the opportunity for a single point of failure. An example of this would be having your whole test stack plus storage in a single server or virtual machine. In case of failure or unavailability (it happens) this would mean the company and their customers wouldn’t access any data while the incident lasts. Distributing the technical stack between different services or microservices will lessen the risk in case of disaster.
Technology can sometimes be unpredictable, so every tech team should have at least a disaster recovery plan in case there are problems with the hosting of the platform or some external services. Asking about backup location and periodicity, how long would it take to relaunch the tech stack in case of failure will give you an understanding about how much the team is thinking about disaster recovery.
This is by no means meant to be an exhaustive list but should highlight the common areas you should have a high level view over for potential additions to your portfolio (and potentially reviewing these points on your existing investments). All these areas can be relatively easily overcome in the early stages of a company. If these questions throw up something unexpected that gives concern, please speak to a trusted advisor.
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