Buying a used car isn’t just about how it looks—you need a mechanic to inspect what’s under the hood. Technical due diligence serves the same purpose for startups. Investors and partners want a complete picture of the company’s technical foundation to avoid unexpected issues down the road.
This process can be the deciding factor for startups in closing deals, raising capital, or forming strategic partnerships. Whether preparing for an acquisition or pivoting to new technologies, understanding where your code stands—through tools like linters, SAST, and static code analysis—helps you address problems early and show that your tech infrastructure is built for growth. This guide breaks down the process so you can confidently take the proper steps and present your technical health.
What Is Technical Due Diligence?
Technical due diligence is a thorough assessment of a startup's technological assets and capabilities. It involves evaluating the codebase quality, system architecture, infrastructure robustness, security measures, and development processes.
The aim is to identify strengths, weaknesses, and potential risks within the technology stack that could impact the company's growth and investment potential.
Stakeholders Involved
- Founders and CTOs: Provide strategic insights into the technology roadmap and how it aligns with business goals.
- Technical team: Developers and engineers who explain technical decisions, methodologies, and tools for building the product.
- Investors and acquirers: Seek to understand technical risks and validate that the technology can support future growth.
- External auditors: Independent experts who conduct the assessment to offer an unbiased perspective.
Why Is Technical Due Diligence Crucial for Startups?
Technical due diligence determines whether a startup’s technology can support its business goals.
For founders, it’s an opportunity to showcase the strength of their product. For investors, it reduces uncertainty, helping them make informed decisions.
Here’s why it matters:
Investor Confidence
A comprehensive technical review reassures investors that a startup’s technology can scale and deliver on promises. It clarifies whether the tech infrastructure aligns with business objectives and showcases the team’s ability to maintain and improve the product.
Risk Mitigation
By identifying weaknesses early, technical due diligence allows founders to address potential issues before they become critical. Investors can spot red flags, such as technical debt, security vulnerabilities, or scalability challenges, and decide whether these risks are manageable.
Securing Better Valuations
A solid technical foundation enhances the company's perceived value. Investors are more likely to offer favorable terms when the technology is reliable, secure, and scalable. Conversely, unresolved technical risks can lead to reduced valuations or more stringent investment conditions. Presenting a clean, well-documented tech stack positions the startup for stronger negotiations.
When Is Technical Due Diligence Required?
Technical due diligence is essential at specific points in a startup’s growth when the technology must align with business objectives. Here’s when it matters most:
Before Raising Capital (Seed, Series A, B, C)
Investors want to confirm that the startup’s technology can support future growth. Early rounds focus on potential, while later ones examine scalability, security, and operational readiness.
Before Mergers or Acquisitions
Acquirers need insight into the technology’s risks and compatibility with their systems. Identifying technical debt or infrastructure gaps early helps avoid challenges during integration.
Before Partnerships or Strategic Alliances
For partnerships to be effective, both parties need confidence in aligning their systems and technical capabilities. A review helps prevent future disruptions by addressing compatibility issues in advance.
Before Major Product Launches
Launching a product at scale demands that the infrastructure is prepared for heavy usage. This review identifies weak points that could affect performance during high-traffic events.
When Pivoting to New Technologies
Shifting to new technologies carries risks that could disrupt existing operations. A technical review helps uncover potential obstacles early and minimizes operational risks.
Common Red Flags in Technical Due Diligence
We reached out to industry experts to understand the most critical issues that arise during technical due diligence. Here’s what they shared:
The Documentation Disparity Trap
A telling indicator of a company's technical maturity is the balance between external and internal code documentation. While polished user manuals and API guides might impress at first glance, a stark contrast with sparse internal documentation often reveals a concerning focus on appearances over substance.
Mike Sadowski, Founder and CEO of Brand24, says, "This imbalance can mask significant technical debt and signal a disconnect between user needs and development practices."
The overengineering paradox
In early-stage companies, complexity can be a red flag rather than a sign of sophistication.
Ben Miller, COO of Undetectable AI, says that premature investment in complex infrastructure – like dedicated DevOps teams or elaborate AWS setups – often indicates misaligned priorities. "The most promising startups typically start with pragmatic, even 'embarrassingly' simple solutions that prioritize market validation over technical perfection."
The Integration Readiness Blindspot
Many companies overlook what Thomas Franklin, CEO of Swapped, calls "technology-stack integration readiness."
"A system's ability to play well with others is crucial. Proprietary or cumbersome APIs can severely limit a company's growth potential, especially in sectors like fintech, where seamless integration with various partners is non-negotiable."
The Missing Testing Foundation
The absence of comprehensive automated testing infrastructure is a red flag in technical due diligence. Without automated tests, companies risk introducing regressions with each deployment, leading to unstable products and slower development cycles.
Quality automated testing isn't just about catching bugs – it's a fundamental indicator of engineering discipline and sustainable development practices.
The Security Vulnerability Blindspot
Security gaps represent one of the most serious red flags in technical due diligence. They can manifest in various forms, such as insufficient encryption practices, inadequate access controls, or a lack of regular application security audits.
The Technical Debt Denial
While some technical debt is inevitable, what's concerning is the lack of acknowledgment or planning around it. The actual red flag isn't the existence of technical debt but, as Jon Morgan, CEO, Business and Finance Expert of Venture Smarter, points out, "the absence of a clear strategy for managing it. Companies should have realistic plans for addressing system inefficiencies while maintaining forward momentum."
The Data Governance Gap
Jacob Kalvo, CEO of Live Proxies, shares how companies handling sensitive information often prioritize immediate functionality over proper data governance.
"The inability to articulate clear data lifecycle management practices – from collection to storage and security – can indicate serious scalability and compliance risks lurking beneath the surface."
The Key Person Risk
One of the most insidious risks in technical organizations is what Dima Eremin, CEO of BluedotHQ, calls "key-person dependency"---when critical system knowledge is concentrated in a single individual or small team, it creates a dangerous vulnerability.
The Decision Paralysis Pattern
John Beaver, Founder of Desky, identifies a subtle but dangerous red flag: endless evaluation masquerading as thorough planning.
"When teams get stuck in analysis paralysis, constantly debating technical choices without making progress, it often indicates deeper decision-making confidence and risk tolerance issues."
How the Technical Due Diligence Process Works
Technical due diligence is structured to uncover a startup’s technical strengths and weaknesses through a series of focused evaluations. Here’s how the process typically unfolds:
Initial Review
The process begins with gathering high-level information, including technical documentation, system architecture, and product roadmaps. This phase provides context and helps identify any immediate red flags, such as outdated systems or missing documentation.
Detailed Code Review
Evaluators dive into a codebase review to assess its structure, quality, and maintainability. This step highlights technical debt, identifies gaps in coding practices, and uncovers areas that may require significant rework. Consistency in coding standards and proper error handling are also assessed here.
Security Assessment
The security review identifies the product’s infrastructure, code, and process vulnerabilities. It includes testing for common weaknesses, such as insecure APIs, and reviewing the startup’s data protection and compliance approach.
Scalability and Infrastructure Evaluation
Evaluators examine whether the technology infrastructure can support future growth. This includes reviewing architecture decisions, load testing, and identifying bottlenecks that could affect performance during scaling.
Cloud services, databases, and deployment pipelines are closely analyzed to assess how well they handle increased demand.
Team and Processes
The final step examines the team’s ability to maintain and enhance the product over time. This includes evaluating development practices, version control, CI/CD pipelines, and project management tools.
The goal is to confirm that the startup has a well-organized team structure and reliable workflows to handle product maintenance and future improvements.
Technical Due Diligence Checklist for Startups
This checklist covers critical technical areas, offering a structured way to assess risks and readiness:
Code Quality Review
Evaluate the codebase for code quality: readability, consistency, and maintainability. Reviewers look for technical debt, adherence to coding standards, error handling, and test coverage to highlight risks that could impact future development.
Security Vulnerabilities
Assess vulnerabilities across infrastructure, applications, and development processes. This includes reviewing access controls, encryption methods, previous security incidents, and adherence to relevant compliance frameworks.
Open Source and Licensing Compliance
Audit the use of open-source libraries and third-party tools to identify licensing risks. Properly document all dependencies to avoid legal conflicts or security vulnerabilities tied to unsupported software.
Infrastructure and Scalability
Evaluate whether the infrastructure is robust enough to support growth. This includes assessing cloud architecture, server configuration, databases, and network setup for potential performance bottlenecks.
DevOps and CI/CD pipeline
Analyze the automation processes that support continuous integration and delivery. This step checks how efficiently code is built, tested, and released, minimizing the risk of deployment issues or downtime.
Documentation and Knowledge Sharing
Review the quality of technical documentation, including system architecture, process guides, and API documentation. Also, assess how well knowledge flows within the team, mitigating the impact of staff turnover.
Intellectual Property (IP) Protection
Evaluate the steps taken to protect proprietary technology, trademarks, and patents. Ensure that there are no conflicts with third-party IP that could impact future operations or legal standing.
Business Continuity and Disaster Recovery
Assess the startup’s preparedness for unexpected disruptions, including system outages or data loss. This involves reviewing backup policies, recovery processes, and redundancy to safeguard operations during critical failures.
Dependency Management
Identifies critical third-party dependencies, such as APIs and external tools, and assesses the risks of relying on them. This step ensures that the startup has plans to address issues if these external services become unavailable or obsolete.
How Codacy Drives Better Technical Due Diligence
At Codacy, we help startups stand out during technical due diligence by automating the heavy lifting involved in code quality and security assessments. Our platform continuously scans code to uncover bugs, technical debt, and inconsistencies, giving development teams the insights they need to keep their codebase clean and ready for review.
We also integrate security checks throughout the development pipeline, identifying vulnerabilities and risks in the code and its dependencies. This helps startups address potential issues early and present a reliable, well-documented technical foundation to investors and partners.
With Codacy embedded into daily workflows, startups reduce the friction of due diligence by proactively managing code quality and security. This accelerates the review process and signals to stakeholders that the technology is built with scalability and stability in mind.
Get your codebase investor-ready with Codacy. Automate quality checks, uncover vulnerabilities, and deliver confidence in every line of code. Get started for free.
