Why tech due diligence should be a priority

AI has changed the fundamental rules of software development. As a Venture Capitalist (VC), you will have noticed this too, especially when deciding whether or not to invest in a software company.

If the technology isn’t right, everything that follows will be built on foundations that no-one has checked: the financial model, the market analysis and even the term sheet. They are all based on the technology doing what it promises to do. If you don't check this, you are counting your chickens before they hatch, based on assumptions. Not facts.

No-one wants to invest millions only to spend the next six months fixing what they just bought or to find out that they bought something they don’t actually own.

Tech due diligence reveals hidden risks in software code

Consider risks that only become visible once you reach the product scaling stage. This is happening increasingly. In the past startups needed an entire engineering team to build software that they could show to potential investors. Today, a small team can now vibe-code a working tool in just a few days. This is a risk for VCs that need to determine what has been developed. And a good reason to take a very close look.

The pace of development might seem impressive, and the product might do what it is supposed to and more in the demo. But will the same apply when in the product scaling phase? That's when you really find out what the product looks like under the hood. Code without a clear architecture and documentation that has never been updated. The team didn't do a bad job. They just built so fast, with AI, that no-one knows precisely how everything fits together anymore.

And there are other risks too, like security vulnerabilities that you only find if you actively look for them, or issues with intellectual property (IP). Has the IP (or certain parts of it) never been officially transferred? This will only come to light once a subsequent investor has the chain of ownership traced, or when the creator of the code comes forward.

AI shortens tech due diligence process to one working day

Before, three to six weeks was normal for tech due diligence. But no-one wants to delay a lucrative deal for weeks when the technology is 'probably fine anyway’. With the risk of entering into negotiations and being bound by a term sheet without knowing exactly whether the foundations are sound.

Here too, AI has changed the fundamental rules; this time, in favour of VCs. Tech due diligence doesn’t have to take weeks. It can be done in just one business day.

That’s good news because the world doesn’t stop turning while you wait. In three to six weeks, the founder might already be considering term sheets from other VCs that are able to proceed faster. You don’t need to choose any more: in-depth can now also be done fast.

Tech due diligence first gives VCs a competitive advantage

Insights early in the process give you more leverage. Whether you decide to increase your offer, renegotiate, set additional conditions or simply walk away. The sooner you know whether the foundations are sound, the sooner you can decide. This enables you, as a VC, to close good deals faster because you know what other VCs don’t know yet. And the company in question gets the clarity it needs sooner and possibly even a better deal.