Why Private Equity Firms Need to Combine Technical and Product Due Diligence for Smarter Investments

Private equity firms have been shooting from the hip for the better part of the last decade, oftentimes investing aggressively without performing an appropriate level of proper technical due diligence. Instead, they’ve largely invested through fear of missing out, chucking money at runaway trains with fantastical valuations. Investors are beginning to recognize that they need to stop, pop the hood, and ensure they aren’t being sold a lemon.

Technical due diligence is the bedrock of the diligence process, but product due diligence helps evaluate an organization’s ability to absorb and deploy capital efficiently.

It’s the combination of both technical and product evaluation that paints the whole picture. Product abilities and problems are both amplified as a team grows. Although a technical co-founder can essentially manage things through to launch, they can be quickly overwhelmed when the product hits the growth stage. You could even find yourself in a situation where the CTO acts as a product decision-maker.

Without performing both levels of private equity IT due diligence, you run the risk of a bad investment that drains capital and fulfills no promises. Technical due diligence tells you what an investment has, while product due diligence tells you where it can go.

Asking questions about how the product team is organized right now is a great start. Meeting the product team and talking with them about how they operate and how efficient there are, what experiences they have in terms of rapidly scaling teams, and being able to deploy capital quickly, allows you to evaluate the actual experience and make better decisions.

There are six core benefits of combining tech and product due diligence over just technical evaluations alone:

1. It helps you fully understand the client’s goals and the capacity they have to deploy capital efficiently.

2. It reveals more of the company’s vision and road map.

3. It allows you to observe how product and tech teams work together.

4. It can give you a better feel for whether the business is on track.

5. It can defend the technical roadmap—it acts as a fact check.

6. Good product evaluations ensure a firm is building the right thing, while technical due diligence ensures the team can execute its goals without being bogged down by restrictive debt.

When performing product due diligence, you get a real sense of the philosophy the product team uses to evaluate success. Without it, you’ll never know who has their act together and who is running on pure instinct. Do you know how often I’ve heard from companies that raised $100 million in a series B and added 150 people to their headcount without the first clue how to onboard them? Last year, Meta announced the largest layoffs in its history for similar reasons.

In a firm with an immature product org, that new expensive headcount will simply show up for work with no team and no idea what it’s doing for the first month. Any new investment deserves time to resettle, but the team also needs direction from a consistent leader in the beginning. You can’t simply release new hires into the wild and hope they perform.

Everybody thinks they’re Steve Jobs, and if Elizabeth Holmes taught us anything, it’s the enormous red flags that comparison should throw up. Jobs himself wasn’t even half the man his legend became, and Apple has very advanced onboarding systems in place.

If a founder is comparing themselves to Jobs, they’re likely referring to his success and showmanship instead of any practical principles. It means they’re likely to talk big or squander capital, and you’ll end up holding the bag.

More firms are performing technical due diligence now to help mitigate the risk of the fast-dealing days of yore. But don’t overlook the importance of adding product due diligence to the mix. Combined, these two forces will provide a much deeper insight into the company’s full potential.