Rise of technical due diligence
The rise in technology-focused investing has aimed a spotlight directly at technical due diligence. Software companies and companies with digital assets are at the center of current investment action. And it’s not just software companies: Deals involving digital assets have increased significantly over the past few years.
As a result, technical due diligence (TDD) – the assessment of the strengths and risks related to the software and the team and process that create it – has come to the forefront of overall deal diligence efforts.
A better way
The rise in digital deals has seen accelerated adoption of the Comprehensive Codebase Scan – software that automatically reviews all of the major components of a codebase, in support of the qualitative reviews by TDD consultants. In the past two years such scans have analyzed over $150 billion of digital transaction volume.
Comprehensive Codebase Scan delivers insights into not just the code’s quality but the software’s “ecosystem,” including intellectual property risk, security risk, development team, and software development processes.
With a sophisticated approach to TDD — one that augments the traditional qualitative review with automated quantitative assessment — investors can minimize risk and accelerate time to value post-close.
M&A professionals are turning to solutions that enable them to approach technology due diligence with the same rigor they bring to financial due diligence. Comprehensive Codebase Scans have three essential characteristics:
- The automated scan provides results in five different components of codebase risk and strengths with a single setup
- It covers the process of code creation—how the code has been built, with what levels of discipline and consistency
- It includes the software developers, too
While it’s expected that any software-based operation will carry some technical debt, that number ought to be much higher in a startup than in a well-established company. M&A professionals need an approach to due diligence that can surface such key information. All this data then needs to be made available in a format that is readily comprehensible to the M&A team, or to the due diligence consultants who are reviewing the deal.
The Sema approach
Sema brings this vision to life with its Sema Code Health Check, an approach to due diligence that evaluates not only the quality of code, but also the quality of developers and their processes, while also assessing code security and third-party intellectual property risk. Outputs include a detailed security report designed to inform critical business decisions.
The Sema solution delves into five key areas: Code Quality, Code Intellectual Property Risk, Code Security, Process Quality, and Team Quality. Through this process, Sema’s insights typically speed up post-acquisition value creation by three to 12 months.
There are other compelling reasons to pursue this path. A company may engage in this type of review as a prelude to making itself available for acquisition. Post acquisition, a buyer may undertake a review as part of the process of onboarding new engineering leadership. In addition, application code-quality comparisons can help drive strategic decisions about business direction.
With Sema’s health check approach already emerging as the gold standard by which tech-centric deals will be judged, M&A professionals and their supporting consultants can start today to pivot toward this modernized methodology.
