Investment activity has decreased But now It can be launched in 2023. And as investments increase, so does M&A. Does your organization and code pass technical due diligence when it’s your turn?
Let’s start with the positives: If an investor is going through technical due diligence (TDD), they may pass. They have successfully passed the tests for product-market fit, financials and competitive differentiation and now want to look under the hood.
Here’s the not-so-good news: Companies can pass the business test, but fail TDD. Especially for non-technical executives, the process of code-testing… auditing… performed in another language… is steadily disappearing big time. It’s not fun.
Our firm has analyzed code for hundreds of billions of dollars worth of deals, from three-person software companies to companies with thousands of developers. We’ve seen the contributions of over 200,000 developers who have collectively written 4 billion lines of code.
Poor codebase health is not “caused” by other teams than engineering.
From that dataset, we’ve extracted eight questions you can ask yourself right now. Even if TDD isn’t on the horizon, getting good answers to these questions will ensure your codebase is healthy.
A quick primer on TDD
Before we go any further, here’s a little more context for software technical due diligence:
- TDD applies to both traditional software companies and non-software companies enabled by custom-created software.
- It involves examining code written by employees or contractors.
- TDD is conducted in-house by experts or specialized consultants.
- Investors and investors, especially large and elite ones, may request quantitative code scanning to increase qualitative interviews. Such a code scan is an effective obligation if the investor is looking for a representative and warranty insurance (RWI) for the deal.
The goals of TDD are as follows
- Jeopardize the deal Determining whether the code base is reliable enough for investment.
- Identify opportunities for improvement If the transaction goes through.
We say “codebase” because it’s more than the source code under the magnifying glass. Your documents, processes, and most importantly, software developers will be under scrutiny. The functional scope of TDD includes code quality, code security, intellectual property, DevOps, IT, and sometimes product management.
Because it is more than the quality of the code, we will talk about it codebase health To include all these areas.
Question 1: What have you been working on?
Ensuring that the organization is working on the most important software products is an important part of risking the deal.
This may seem obvious, but sometimes, a company says that it is working on a new product, but in fact they spend most of their time on custom development for major customers, or they hardly work on anything.
Let’s take an example of this company’s software development over two years. Not only is there a cycle in the work (higher in the summer), but it has decreased significantly over time, especially in 2022.
Image Credits: Seema
Important point: Any answer to the questions here and in TDD can be enough to clear the exam.
This leads us to TDD Theme #1: The most important part of TDD is ensuring that the state of the codebase is aligned with the organization’s business objectives. For example, US education software companies typically see cyclical software development – high in the summer and low in the fall – to reduce customer disruption when school starts.
Question 2: How many unit tests does your codebase have?
We like to distinguish between underneath Code quality and the functional Code Quality – How the product works for users.
“Technical debt” is another way of describing any imperfection in the code base.
