The Critical Importance of Tech Stack in Technical Due Diligence
Avoiding Investment Pitfalls
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When reviewing a potential investment, whether a turnaround, scale-up, or add-on, investors always conduct thorough due diligence. After all investment is a risk and due diligence activity not only reduces that risk but ensures a fair valuation and accurate calculation of ROI potential. This is a critical part of pre-deal activity; however, an often-underestimated element of due diligence is the technical evaluation, particularly the assessment of the company's tech stack.
When investing in technology-driven businesses, overlooking the technical architecture can lead to disastrous results for investors. It’s akin to surveying a house for bats without checking if the foundation is stable. While a company’s financials may look solid, if the tech stack is outdated, inefficient, or poorly aligned with future growth, you risk throwing money into a dead-end investment. In a competitive, tech-focused marketplace, a company’s ability to adapt, innovate, and scale hinges on its technical infrastructure
Why Tech Due Diligence Deserves Equal Weight to Legal and Financial Due Diligence
Investors familiar with due diligence already understand the purpose behind legal and financial checks. Financial due diligence typically involves reviewing balance sheets, income statements, cash flow forecasts, and overall financial health. Legal due diligence evaluates potential liabilities, including intellectual property (IP) disputes, contracts, and regulatory compliance. Both elements focus on ensuring that an investor is not walking into a trap—protecting from liabilities and understanding the economic viability of a deal.
But if a company’s tech stack—the suite of technologies and infrastructure underpinning its products and operations—lacks scalability, security, or even modernity, then even the most watertight legal contracts or pristine financials won’t prevent an inevitable collapse.
What Makes the Tech Stack So Vital?
The tech stack—the collection of programming languages, frameworks, databases, front-end and back-end systems, and infrastructure—defines a company’s ability to deliver its products and services. Whether it’s a highly scalable microservices architecture, monolithic legacy systems, or a hybrid combination, the tech stack is more than just code. It’s a reflection of how an organisation operates, scales, innovates, and competes.
In particular, organisations now frequently employ a combination of different tech stacks to support hundreds of microservices. While this allows for flexibility and innovation, it also introduces complexity. If not properly aligned, having a multitude of tech stacks can lead to costly inefficiencies. For investors, these inefficiencies mean a longer road to profitability and potential difficulty in scaling operations.
Moreover, if a company is dependent on proprietary or outdated technology, it can make integrating new services a costly and time-consuming ordeal. The very platform that promises growth and scale can quickly become a burden.
Red Flags in a Tech Stack: What Investors Should Watch For
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- Legacy Systems: Outdated technologies that are difficult to maintain or upgrade can slow down a company’s ability to innovate. More importantly, legacy systems require specialised skills, which can drive up hiring costs or limit the talent pool.
- Lack of Modularity: If the architecture is too monolithic, adding new features, improving the product, or scaling the system could be a herculean task, potentially leading to long downtimes or ballooning development costs.
- Vendor Lock-In: Excessive reliance on specific third-party vendors can make it difficult or expensive to pivot if the company needs to scale or adjust its product offerings.
- Poor Security Protocols: Cybersecurity threats are an ever-present risk, and a weak tech stack can make companies especially vulnerable. Investors should ensure that any potential deal includes a thorough security assessment, ensuring that the company can handle current and future security threats.
- Unscalable Infrastructure: A company that has built its system to handle only its current workload is ill-prepared for growth. Investors must ensure that the tech stack can scale horizontally (adding more servers) or vertically (more powerful servers) as demand increases.
Tech Stack and Scalability: A Make-or-Break Factor
One of the most critical elements of any tech stack is its ability to scale. For companies aiming for growth, especially those entering M&A activity, scalability is non-negotiable.
Investors must ask: Will the current tech stack support the growth envisioned in the business plan?
For instance, companies operating across different regions, languages, or even time zones must have robust and scalable systems in place. Without this scalability, growth will be slow, painful, and expensive. At the same time, if the platforms in use are inefficient, deploying to employees across multiple regions or managing multiple staff technology profiles may quickly become unsustainable.
Avoiding the Sourcing Strategy Trap
As companies grow, their sourcing strategy—which encompasses how they acquire and integrate technology, talent, and partners—becomes increasingly complex. Without a sound tech stack, sourcing strategies can be thrown into disarray.
For instance, a company reliant on a rare, proprietary language or obscure technology may find itself locked into expensive vendor relationships or facing a shrinking pool of qualified talent. In contrast, companies that use widely-adopted, open-source technologies often have more flexibility in their sourcing strategies, allowing them to pivot and scale more fluidly.
Additionally, investing in a tech stack with a high dependency on a specific supplier or partner adds significant risk. A sudden change in partnership terms, a vendor’s bankruptcy, or even geopolitical shifts can disrupt operations and force costly re-engineering of systems.
The Role of Leadership in Tech Stack Evolution
Technical due diligence should not just evaluate the technology but also the leadership behind it. Even if a company has a suboptimal tech stack, the right leadership team can transform it. For example, identifying leadership that has successfully decompiled legacy systems and moved toward a modern, scalable infrastructure is a good indicator of future success.
Great leadership is demonstrated not just in maintaining the existing tech stack but in evolving it. This includes anticipating future challenges, being agile enough to adopt new technologies, and possessing the foresight to ensure that the company can scale as it grows.
Averting Disaster: The Importance of Commercial Pragmatism
Technical due diligence must be commercially pragmatic. The purpose is not to demand a perfect tech stack from day one but to ensure that the current infrastructure can support the company’s growth strategy. It’s about identifying where adjustments need to be made and ensuring that there is a clear path forward.
It’s easy to invest in a company with a great idea but whose execution may be lacking. However, waiting until something breaks—like systems crashing during a surge in demand—will be costly and painful. By investing in the right teams, technology, and processes, investors can avoid unnecessary setbacks and ensure that the company can meet its growth potential.
The Non-Negotiable Necessity of Tech Due Diligence
For many investors, the idea that technical due diligence should carry equal weight to financial or legal due diligence may feel new. However, in today’s technology-driven world, a company’s success or failure is often determined by the quality of its technology. A solid tech stack underpins scalability, efficiency, and security. It enables growth, attracts talent, and protects against unforeseen risks.
We have produced a free downloadable guide to use as a best-practice framework when approaching The 12 Essentials of Technical Due Diligence.