The Due Diligence Process

The Due Diligence Process

Stephen J. Andriole
DOI: 10.4018/978-1-60566-018-9.ch001
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As suggested in the preface, due diligence is a process designed to reduce uncertainty and increase the likelihood of productive investments. The focus here is on technology due diligence, or the process by which technology investment decisions are vetted to maximize impact and reduce risk. Research around technology due diligence is sparse. There are only a few analyses and case studies that look at the nuances of due diligence generally and technology due diligence specifically. A literature review reveals very few formal analyses of the overall process, though there are some useful sources, such as Gordon (1996), Harvey and Lusch (1995), Lajoux (2000), Perry and Herd (2004); a few on portfolio management, such as Weill and Aral (2006), and macro trends in business technology (Andriole, 2005). Some analyses have been applied to venture capital due diligence (McGrath, Gunther, Keil, & Tukiainen, 2006), and some in the much larger context of business technology alignment (Prahalad & Krishnan, 2002). As noted in the Preface, very few have focused on technology due diligence. None have focused on technology due diligence from the three intersecting perspectives discussed here. The most relevant discussions for this book focus on merger and acquisition (M&A) due diligence, such as Cullinan, LeRoux, and Weddigen (2004), Breitzman and Thomas (2002), Bing (1996), Lajoux and Elson (2000), Howson (2003), and Perry and Herd (2004). Others focus on venture investing and the due diligence process that some venture capitalists apply (Camp, 2002; Zacharakis & Meyer, 1998). Still others focus on very specific aspects of due diligence—like patents (Panitch, 2000) and, as noted above, very few focus on technology due diligence (Marlin, 1998). This chapter discusses technology due diligence. It first describes the criteria that can be used by Chief Information Officers (CIOs), Chief Technology Officers (CTOs), hardware and software vendors, and venture capitalists (VCs) to vet alternative technology decisions. It then turns to the processes by which due diligence projects can be organized.
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Due Diligence Criteria

In a perfect world, every technology investment decision is made with complete information gathered by a perfect team of experienced due diligence professionals. In the real world, the due diligence process is often rushed, plagued by the unavailability of information, and conducted by people who have limited experience or—worse—have already decided that they love the technology and therefore “the deal.” One of the core arguments here is that due diligence is part art, part science, and part luck. Recognizing this, however, by no means suggests that the process should not be structured by at least a checklist of things to consider before making technology investments. Ideally, the checklist is comprised of a set of criteria that are more or less quantifiable that lend themselves to situational weighting so that different investment perspectives can be accommodated.

Here are 15 criteria that apply to all technology investments—regardless of where you sit or the nature of the deal. The criteria frame the investment decision identifying the questions you need to ask about the investment opportunity before spending money. They include:

  • 1.

    Products and services that are on the right technology/market trends trajectory

  • 2.

    Products and services that have the right infrastructure story

  • 3.

    Products and services that sell clearly into budget cycles and budget lines

  • 4.

    Products and services whose impact is quantitative

  • 5.

    Products and services that do not require fundamental changes in how people behave or major changes in organizational or corporate culture

  • 6.

    Products and services that, whenever possible, represent total end-to-end “solutions”

  • 7.

    Products and services that have multiple exits

  • 8.

    Products, services, and companies that have clear horizontal and vertical strategies

  • 9.

    Products and services that have high industry awareness recognition

  • 10.

    Products, services and companies that have the right technology development, marketing, and channel alliances & partnerships

  • 11.

    Products and services that are “politically correct”

  • 12.

    Companies that have solid people recruitment and retention strategies in place

  • 13.

    Products, services, and companies that have compelling “differentiation” stories

  • 14.

    Company executives that have wide and deep experience

  • 15.

    Products and services companies that have persuasive products/services “packaging” and communications

Depending on the investment perspective, some are more important than others. Some yield information more readily than others. Some are potentially dangerous, like when the due diligence team falls in love with the management team for the wrong reasons, and some are hard to quantify.

CIOs, CTOs, hardware and software vendors, VCs, and everyone that buys technology use some due diligence criteria as a means to vet ideas. Some are quite formal about the investment process while others prefer to fly by the seat of their pants. There is generally more discipline surrounding the creation and application of technology than we find in venture investing, especially seed and early stage investing (later stage venture investing tends to be somewhat more disciplined than seed and early stage investing). This is because CIOs (and others who spend significant amounts of money on technology) are expected to make the right decisions most of the time. They are consequently more careful about how they spend their firms’ money, because if they are wrong too often they will get fired. Vendors are also careful since whole new product lines are expensive to develop, package, market, and sell: the last thing they want to do is invest in a new software application or communications technology that no one wants to use or one that the competition has released six months before the company’s expected release date.

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