The Art of Technical Due Diligence: What Investors Look for in Your Stack

If you’re raising funds for your startup, you’ve likely prepared your pitch deck, financial projections, and customer growth numbers. But what about your tech stack? Investors often conduct technical due diligence to ensure your technology is scalable, secure, and well-structured. As a founder, understanding what investors look for during this process is critical to making a strong impression and securing funding.

In this guide, I’ll break down the essentials of technical due diligence, the key areas investors evaluate, and how to prepare your team and tech stack for the spotlight.

What Is Technical Due Diligence?

Technical due diligence is the process investors use to evaluate your technology infrastructure, codebase, and development practices. It’s their way of ensuring your tech aligns with your business objectives and has the capacity to scale as you grow.

This evaluation typically happens after you’ve piqued investor interest but before the funding is finalized. It’s a deep dive into the technical backbone of your startup.

Why Investors Care About Your Tech Stack

Risk Mitigation

Investors want to ensure there are no hidden risks in your technology that could derail your business. This includes identifying potential security vulnerabilities, poorly written code, or over-reliance on third-party tools.

Scalability and Growth

A scalable tech stack can handle user growth and new features without breaking. Investors want to see that your technology is built to grow with your business, minimizing the need for costly overhauls later.

Alignment with Business Goals

Your tech stack should align with your business strategy. For example, if you’re building a high-availability SaaS platform, your architecture needs to support uptime and reliability as a priority.

What Investors Look for During Technical Due Diligence

Code Quality

Investors often bring in technical advisors to review your codebase. They look for:

• Consistent coding standards.
• Well-documented code.
• Minimal technical debt.

Architecture and Scalability

Key areas of focus include:

• How your system is structured (monolith vs. microservices).
• Whether your database design can handle growth.
• The use of scalable technologies like Kubernetes or cloud-based solutions.

Security Practices

Security is non-negotiable. Investors will ask about:

• Data encryption (both at rest and in transit).
• Secure coding practices.
• Regular security audits and vulnerability testing.

Team Competency

Investors evaluate whether your technical team has the skills to maintain and evolve the product. This includes assessing leadership capabilities, engineering processes, and hiring plans.

Third-Party Dependencies

Heavy reliance on third-party APIs or libraries could be a red flag, especially if those tools are mission-critical and lack redundancy plans.

Documentation and Processes

Good documentation signals that your team is organized and prepared for growth. Investors will look at:

• System architecture diagrams.
• Development and deployment workflows.
• Incident response plans.

Preparing for Technical Due Diligence

Conduct an Internal Audit

Before investors dive in, conduct your own technical audit to identify and address weaknesses. This includes reviewing your codebase, documenting your architecture, and ensuring your processes are up to industry standards.

Build a Scalable Infrastructure

Investors will look for scalable solutions like cloud platforms (AWS, GCP, or Azure) and containerization technologies like Docker or Kubernetes. If your infrastructure isn’t scalable, now’s the time to upgrade.

Prioritize Security

Ensure your data is secure with encryption, firewalls, and access controls. Conduct penetration tests and fix any vulnerabilities before investors find them.

Prepare Your Team

Ensure your engineering team understands your tech stack thoroughly. They should be ready to answer investor questions about everything from architecture to deployment pipelines.

Red Flags to Avoid

Poor Code Quality

Unmaintainable or spaghetti code is a red flag. If your codebase is messy, consider refactoring critical sections before due diligence begins.

Lack of Documentation

If you don’t have system diagrams, API documentation, or deployment guides, it signals to investors that your team isn’t prepared for growth.

Excessive Technical Debt

Some level of technical debt is acceptable for startups, but excessive debt without a plan to address it will scare off investors.

Inexperienced Team

If your team lacks the skills to handle future challenges, investors may hesitate. Highlight key hires or plans to bolster your engineering capacity.

Real-Life Example

Imagine you’re running a healthtech startup with a fast-growing user base. During technical due diligence, an investor finds that your database isn’t optimized for high write loads, causing delays during peak usage.

By proactively identifying this issue and migrating to a more robust solution like PostgreSQL or MongoDB before the due diligence process, you demonstrate your team’s ability to recognize and resolve potential risks—a win for investor confidence.

Key Questions Investors Ask During Technical Due Diligence

Is Your Technology Proprietary or Open Source?

Investors will want to know if you own your technology outright or rely on open-source tools. While open-source tools are often cost-effective and widely used, heavy reliance without customization or differentiation could be seen as a lack of innovation.

How Do You Handle Downtime and Failures?

This question tests your preparedness for unexpected issues. Be ready to discuss:

• Your backup and disaster recovery plans.
• How quickly you can restore service during outages.
• Your approach to incident reporting and resolution.

What Metrics Are You Tracking?

Investors look for data-driven decision-making. Key metrics might include:

• System uptime.
• Response times for APIs.
• Error rates and how you address them.

What Are Your Hiring and Scaling Plans?

Your current team might be enough for today’s needs, but can they support future growth? Highlight your hiring strategy, onboarding process, and plans to scale your team as the company grows.

How Do You Ensure Quality Control?

Quality assurance is a critical area. Be ready to explain:

• Your testing frameworks (unit, integration, and end-to-end testing).
• Whether you use automated testing or rely on manual checks.
• Your process for code reviews and bug fixes.

Advanced Strategies to Impress Investors

Adopt DevOps Best Practices

Demonstrate a mature development process by integrating DevOps tools and methodologies. This includes:

• Continuous Integration/Continuous Deployment (CI/CD) pipelines for faster, more reliable releases.
• Infrastructure-as-Code (IaC) for scalable deployments.
• Monitoring tools like Datadog or New Relic to ensure system performance.

Showcase Innovation in Your Tech Stack

Highlight unique aspects of your technology, such as:

• Proprietary algorithms or machine learning models.
• Custom-built frameworks or tools tailored to your business.
• Integration with cutting-edge technologies like blockchain or AI.

Document Everything

Even startups without robust infrastructure can impress investors with thorough documentation. Prepare:

• API documentation with examples of common use cases.
• Detailed architecture diagrams showing how your components interact.
• A roadmap outlining future technical improvements.

Preparing for Specific Investor Types

Angel Investors vs. VCs

Angel investors might focus more on your team and vision, while venture capitalists will dig deeper into scalability and risk factors. Tailor your preparation accordingly.

Strategic Investors

Strategic investors (often from your industry) will examine how well your technology integrates with their ecosystem. Be ready to discuss how your platform can complement their offerings.

Corporate Investors

Corporate investors often have stringent security and compliance standards. Address these proactively by showcasing your adherence to regulations like GDPR, HIPAA, or SOC 2, depending on your industry.

How to Handle Weaknesses Identified During Due Diligence

Be Transparent

If an issue is identified, acknowledge it honestly. Explain how you plan to address the problem, whether it’s refactoring your codebase, scaling infrastructure, or hiring additional talent.

Focus on Quick Wins

Identify and prioritize low-hanging fruit that can be resolved quickly. For example:

• Fix security vulnerabilities.
• Add missing documentation.
• Streamline deployment processes.

Highlight Mitigations for Long-Term Risks

For larger issues that require more time to resolve, outline a clear plan with milestones. Investors will appreciate your proactive approach.

Real-World Example: Passing Due Diligence with Horizon-Labs.co

One of our clients, a healthtech startup, faced concerns during due diligence over the scalability of their backend systems. The investor flagged issues with their monolithic architecture and lack of redundancy.

Horizon-Labs.co stepped in to:

• Refactor their backend into microservices.
• Implement Kubernetes for container orchestration.
• Set up robust monitoring with AWS CloudWatch.

Within weeks, the client’s tech stack was not only investor-ready but optimized for long-term growth. They successfully secured a seven-figure investment.

Common Myths About Technical Due Diligence

“Only Large Startups Undergo Technical Due Diligence”

Even pre-seed startups can face technical due diligence. Investors need to ensure their money is going toward a solid foundation, regardless of your size.

“As Long as My Product Works, the Tech Doesn’t Matter”

A functional product is only part of the equation. Scalability, security, and maintainability are just as important, especially if your goal is to grow quickly.

“Investors Won’t Understand Technical Details”

While many investors aren’t technical, they often bring in expert advisors for due diligence. Be prepared to explain your technology clearly and concisely to both technical and non-technical audiences.

Frequently Asked Questions (FAQs) about Technical Due Diligence:

Q: What is the first step in preparing for technical due diligence?

A: The first step is conducting an internal audit of your tech stack. This includes reviewing your codebase, documenting your architecture, assessing your security practices, and ensuring your system is scalable. Identifying weaknesses early allows you to address them before investors evaluate your systems.

Q: How long does technical due diligence typically take?

A: The process can take anywhere from a few days to a few weeks, depending on the complexity of your tech stack and the level of detail the investors require. Preparing thoroughly in advance can help streamline the process and minimize delays.

Q: Do all investors conduct technical due diligence?

A: Not all investors conduct technical due diligence, especially at the pre-seed stage. However, as your startup raises larger rounds, technical due diligence becomes more likely, particularly with institutional or corporate investors.

Q: Can a startup fail due diligence?

A: Yes, startups can fail due diligence if significant risks are identified that investors deem unresolvable or too costly to fix. However, being transparent about challenges and presenting a plan to address them can help mitigate concerns and keep investors engaged.

Q: How should I document my tech stack for due diligence?

A: Include detailed architecture diagrams, a list of technologies and frameworks used, API documentation, security protocols, and deployment workflows. The goal is to provide investors with a clear understanding of how your system operates and scales.

Q: What if my startup doesn’t use cutting-edge technology?

A: Cutting-edge technology isn’t always necessary. What matters most is whether your tech stack is appropriate for your business needs, scalable, secure, and maintainable. Investors are more concerned with functionality and alignment with your goals than chasing the latest trends.

Q: Are third-party integrations a red flag during due diligence?

A: Not necessarily. Third-party integrations are common, but over-reliance on them without redundancy plans or alternatives can be concerning. Demonstrating that you have fallback options for critical dependencies reassures investors.

Q: How do investors evaluate team competency during technical due diligence?

A: Investors assess your team’s ability to manage and grow your tech stack. This includes reviewing the experience and skills of your engineers, understanding your hiring plans, and ensuring your leadership team can make strategic technical decisions.

Q: What tools can help during the due diligence process?

A: Tools like GitHub for codebase transparency, Jira for workflow documentation, and AWS or GCP dashboards for system performance metrics can provide clear insights into your processes. Monitoring tools like Datadog can also showcase how you handle system health.

Q: What role do technical advisors play in due diligence?

A: Technical advisors are often hired by investors to review your technology. They analyze your code quality, architecture, scalability, and security practices to provide an unbiased assessment. Being prepared for their questions can leave a positive impression.

Q: How important is scalability in technical due diligence?

A: Scalability is a top priority, especially for startups with growth potential. Investors want to know if your infrastructure can handle increased traffic, user growth, and feature expansion without significant rework.

Q: Can poor security practices derail funding?

A: Yes, inadequate security practices are a major red flag. Issues like lack of encryption, weak access controls, or unpatched vulnerabilities signal risk to investors. Strengthening your security posture before due diligence is crucial.

Q: What happens if a problem is identified during technical due diligence?

A: If an issue is found, investors will often give you an opportunity to address it. Transparency is key—acknowledge the problem, explain its impact, and outline your plan to resolve it. A proactive response can maintain investor confidence.

Q: How do I demonstrate cost-efficiency in my tech stack?

A: Highlight how your stack minimizes unnecessary expenses, such as using cloud platforms for flexible scaling or leveraging open-source tools when appropriate. Investors value startups that manage resources wisely while building for growth.

Q: Should I involve my technical team in due diligence meetings?

A: Yes, involving your technical team shows that you have skilled experts who can answer detailed questions about your stack. This reassures investors about your team’s ability to manage and grow the technology.

Q: Can Horizon-Labs.co help with technical due diligence?

A: Absolutely. Horizon-Labs.co specializes in preparing startups for technical due diligence by optimizing tech stacks, documenting processes, and addressing scalability and security challenges. Contact us for a consultation.

Q: What level of detail should I provide about my tech stack during due diligence?

A: You should provide a clear overview of your architecture, including diagrams, a list of technologies, and details about your development and deployment processes. Highlight key components like databases, APIs, third-party integrations, and scalability strategies without overwhelming investors with unnecessary complexity.

Q: Can legacy systems negatively impact due diligence?

A: Legacy systems aren’t necessarily a dealbreaker, but investors will want to know how you manage and plan to modernize them. If you rely heavily on outdated technology, demonstrate a clear plan for updates or migration to ensure long-term scalability and maintainability.

Q: Are compliance and regulatory standards part of technical due diligence?

A: Yes, especially for industries like healthcare, finance, or e-commerce. Investors may review your adherence to standards such as GDPR, HIPAA, PCI DSS, or SOC 2. Having certifications or audits in place strengthens your case.

Q: How can startups with limited technical documentation prepare for due diligence?

A: Start by creating high-level documentation if detailed resources don’t exist. Focus on essential elements like system architecture, deployment workflows, and security protocols. Tools like Lucidchart or Confluence can help organize and visualize this information.

Q: How do investors evaluate deployment pipelines during due diligence?

A: Investors look for efficiency, reliability, and scalability in your deployment process. Highlight features like CI/CD pipelines, automated testing, rollback mechanisms, and your ability to deploy updates quickly without downtime.

Q: What should I showcase about my development processes?

A: Investors are interested in your approach to development, including agile practices, sprint planning, code review processes, and your use of project management tools like Jira or Trello. These details demonstrate how effectively your team works together.

Q: Can startups without a fully built product pass due diligence?

A: Yes, but you’ll need to show substantial progress on your prototype or MVP and a clear roadmap for development. Investors will focus on the quality of your current work, your team’s capabilities, and your timelines for delivering the finished product.

Q: How should I handle questions about technical debt during due diligence?

A: Be transparent about any technical debt and explain how you’re managing it. Share specific plans for reducing debt, such as refactoring code, addressing bottlenecks, or replacing outdated technologies. Investors appreciate founders who acknowledge and proactively manage these challenges.

Q: Is performance testing important for technical due diligence?

A: Yes, performance testing data, such as response times, system uptime, and scalability under load, provides investors with confidence in your product’s ability to handle growth. Tools like Apache JMeter or LoadRunner can help generate this data.

Q: What is the role of intellectual property in technical due diligence?

A: If your startup has proprietary technology, investors will review its uniqueness and ownership. Ensure all intellectual property is properly documented, patents are filed if applicable, and employee contracts include IP assignment clauses.

Q: How do I address gaps in my tech stack during due diligence?

A: Identify any gaps early and create a plan to address them. For example, if you lack a robust security framework, implement encryption and access controls. Being proactive shows investors you’re prepared to adapt and improve.

Q: How do cultural practices in my team affect technical due diligence?

A: Investors may evaluate your team culture to ensure it supports growth and innovation. Highlight practices like collaborative decision-making, a focus on continuous improvement, and your ability to attract and retain talent.

Q: Are early-stage startups expected to have enterprise-level tech stacks?

A: No, early-stage startups are not expected to have enterprise-level infrastructure. What matters is whether your current tech stack supports your immediate needs and can scale as you grow. Investors want to see a clear progression plan rather than perfection.

Q: Can outsourcing development affect technical due diligence?

A: Outsourcing isn’t a red flag if managed effectively. Be ready to explain your process for selecting and managing external developers, how you ensure quality control, and your plans to transition to in-house development as you scale.

Q: How can a technical co-founder help during due diligence?

A: A technical co-founder can provide in-depth insights into your stack, answer investor questions directly, and demonstrate the technical leadership needed to scale. If you don’t have a technical co-founder, ensure your lead engineer or CTO is involved in the process.

Q: Can Horizon-Labs.co assist with pre-due diligence audits?

A: Yes, Horizon-Labs.co offers services to help startups audit their tech stack, optimize systems, and prepare comprehensive documentation to ensure a smooth due diligence process. Contact us to learn how we can support your journey.

Horizon-Labs.co: Your Edge in Technical Due Diligence

At Horizon-Labs.co, we’ve helped startups like Flair Labs and Yura Health navigate technical due diligence with ease. From preparing documentation to optimizing your tech stack, we ensure you’re ready to impress investors at every step.

Contact us at info@horizon-labs.co or schedule a consultation at horizon-labs.co/contact. Let’s build the confidence you need to secure your next round of funding.