How Do You Prepare For VC Technical Diligence?
"Let’s look this guy up,” I said to Jeroen, my cofounder and VP Engineering, about the expert the VC firm was using to do technical diligence on us. I then did a search on LinkedIn and found “Peter’s” resume.
“Well, there’s good news and bad news,” I said to Jeroen.
“What’s the good news?” Jeroen asked.
“The good news is Peter at least has relevant industry experience. The bad news is he’s not that technical.”
You have to expect the worst when VCs do technical diligence on your company.
“What do you mean?” Jeroen asked.
“Take a look at his bio. He’s spent the bulk of his career in management roles, not engineering roles.”
Jeroen scrolled through Peter’s bio on my computer. Then he said, “You’re right.”
“I think we should prepare for a technical review, but you’ll probably have to dumb it down. But my worry is this (the review) is going to turn into something else.”
Jeroen nodded his head in agreement. “I know,” he replied.
Many times technical diligence turns into a business review.
I’ve been through so many VC technical reviews in my career that I could see this coming. You were going to have a pseudo-technical person do the analysis of our technology.
However, this is likely over the person’s (Peter in this case) head, so it’s going to morph into a comfortable space for Peter. That space is a business review.
The review was on the phone, and Jeroen started going through the technology at a very basic level.
Jeroen would explain a bit of the technology and Peter would answer, “I see.”
15 minutes later, Jeroen finished his overview. He asked Peter, “Do you have any questions?”
“No, I don’t,” Peter responded. “But I do have some questions on the business side.”
“Here we go,” I said to myself. I’d been at this exact place before so many times. The technical expert wants to play VC and shine a light on alleged problems with the company.
This means you have to prepare for a technical review, and you have to prepare for a business review too. In fact, it's probably more important that you do a good job of preparing for a business review.
Treat the expert with respect and answer any business questions the person has, so they get a good idea of how you are going to win. Then hold your breath.
So the report the expert writes up for the VC can have little to do with your technology and more to do with however the expert feels about your business strategy. This gives you the feeling that the technology review part of the diligence process is somewhat of a crapshoot. In other words, you don’t know what will come from it.
You’ll likely find strategic investors will do a much better job of technical diligence than VCs.
Conversely, my experience with strategic investors is much different. We had several strategic investors look at investing in our company. Every time the strategic went deep technically.
This isn’t much of a surprise because strategics usually will have their best engineers do a detailed review with your technical team. That’s strength versus strength in my opinion.
And I always loved this because we had great engineers, and I knew this would come through in the review process. Sure enough, this basic rule always held true.
So always prepare for a tough, detailed technical review regardless of whether you are meeting with VCs or strategics. Then be prepared to be underwhelmed by the experts VCs ask you to meet with.
For more, read: The Nine Facts Of Fundraising You Need To Know