Technical Due Diligence

19 January 2012

Tap the words ‘due diligence’ into Google and you will be met with a plethora of definitions, with a range of prefixes, including financial, commercial, human, market and technical. (2012) defines due diligence as “An investigation or audit of a potential investment. Due diligence serves to confirm all material facts in regards to a sale”.  Difficult to argue with the objectives of this definition however, it begs the question ‘how do you audit a start-up business that has only been trading for 3 months?’

Genet, a respected early stage investment specialist sympathises with the Angels dilemma, suggesting “it’s virtually impossible for Angels to know how to go in and verify that there is a market for a technology in anything more than a superficial sense”. Grahame (2007), CEO of Linc the Business Angel Association for Scotland said “a huge amount of judgement is based around the entrepreneur or the management team… clearly the technology has to check out… and then 95% of it is gut feel, do we want to back these people?” In truth, both statements are underpinned by their detailed understanding of the structural issues of Angel groups, their inability to pay for such due diligence (due to the non-profit status of Angel groups – it’s the individuals who invest and make the money not the Angel group), the breadth of knowledge required and the groups reliance on the good will of individual group members.

So, what do we need to audit/investigate a potential investment opportunity? I would suggest three things, experience, information and process. In recognising these three points BBAA will be assembling a range of experience in their technical committee (meeting in February 2012) with a view to defining the appropriate processes for the various aspects of due diligence. Pera will be focusing on the technical due diligence of new technologies/products and the commercial opportunity they present. Pera would welcome your thoughts, experiences or challenges around these two areas and look forward to hearing from you.