Diligencing Software
My favorite panel at Wharton’s ETA Conference this Friday covered the topic of diligencing and building software-based businesses. All three panelists shared great insights. A few highlights are listed below:
Steve Divitkos - Mineola Search Partners
- Technical issues manifest as business problems. Another reading: improper product management (i.e., translating of business problems into engineering tasks) leads to technical debt and vice versa.
- Be wary of availability bias when dealing with techical debt. In other words, measuring the ROI on addressing technical debt is difficult. And in other words again, it is not clear how to measure value created from risk mitigation.
- Software deals after 2019 are more like growth equity than they are like search deals (i.e., these deals are not profitable and on multiples of revenue rather than profit)!
Promise Okeke - NovoPath
- It is critical that you reinterpret due diligence reports on your own terms.
- Get out there are speak with the developers writing code. Product and team managers have all sorts of incentives to tell you nice things; to find out what’s really going on, one must talk to the programmers and get into the code.
- Niche productts that require domain expertise will have high retention and low churn. It is no different for software products.
Scott Barstow - Pacific Lake Partners
- A critical red flag that may not show up on due diligence reports: does the engineering team love their craft? And do they care about the product?
- And more red flags from Scott: long implementation cycles, lots of client-specific work, missed commitments, infrequent releases, quality assurance processes
- Great founders will be in love with a problem, not the solution; in this case, managers need to embrace the world of software and the challenges that come with building software.
Overall, while there’s plenty of truth to “all software tastes like chicken”, managers would be well-advised to get their hands dirty and really understand how software is built.