An important dimension that a Technical Due Diligence (TDD) considers are the company’s products or services from a technical standpoint. This article explores what product evaluation entails, why it’s important, and the kinds of questions and evidence that investors seek during this assessment.
What is Product Evaluation?
Product evaluation involves a detailed analysis of a company’s products or services to understand their technical quality, development process, and market potential. It includes examining the product lifecycle, the methodologies used in product development, and the technical capabilities of the team responsible for creating and maintaining the products.
Why is this important?
Market Fit and Demand. Investors need to ensure that the product meets market demands and has a strong potential for growth. A product that fits well in the market can drive the company’s revenue and success.
Technical Quality. The quality of the product affects its performance, reliability, and customer satisfaction. High-quality products are more likely to succeed and retain customers.
Innovation Potential. Investors look for products that are not only relevant today but also have the potential to evolve and stay competitive. Innovative products can lead to long-term growth and market leadership.
Development Efficiency. Efficient product development processes mean quicker time-to-market and better use of resources. This can translate to cost savings and a competitive edge.
What Do Investors Look For?
How important this aspect of a TDD is correlated with the Private Equity company’s intent for the target company’s development. While in relatively young companies, the focus is likely to be on getting the product so it has mass-market potential, as the product matures the focus will be more on maintaining the product, evolving it to expand into new markets, and building out innovation either into the existing products, or as completely new product lines.
Product Lifecycle
Questions:
– What stage is the product currently in (development, launch, growth, maturity, decline)?
– How long is the typical lifecycle of products in this industry?
– Are there clear plans for the product’s future development?
Evidence:
– Product roadmaps and timelines.
– Historical data on product performance and updates.
– Future development plans and innovation pipelines.
Development Processes
Questions:
– What methodologies are used for product development (Agile, Waterfall, etc.)?
– How are requirements gathered and prioritised?
– What is the process for testing and quality assurance?
Evidence:
– Documentation of development methodologies and processes.
– Examples of requirement specifications and prioritisation frameworks.
– Testing and quality assurance protocols and reports.
Technical Capabilities of the Product Team
Questions:
– What are the qualifications and experience of the product development team?
– How is the team structured and managed?
– What is the team’s track record in delivering successful products?
Evidence:
– Profiles of key team members.
– Organisational charts and management structures.
– Case studies of previous product successes and failures.
Customer Feedback and Market Performance
Questions:
– What do customers think of the product? Are there any recurring issues or high points?
– How is the product performing in the market compared to competitors?
– Are there metrics to measure customer satisfaction and product performance?
Evidence:
– Customer feedback and satisfaction surveys.
– Market analysis reports and competitive benchmarking.
– Performance metrics such as sales figures, user growth, and retention rates.
Investors expect detailed documentation including product roadmaps, development methodologies, and quality assurance reports. Clear and comprehensive documentation helps investors understand how well-structured and efficient the product development process is and so gain reassurance that their investment will bear fruit.
Data on customer feedback and market performance is crucial. This includes customer satisfaction surveys, market analysis reports, and performance metrics. In many respects, the Product Evaluation provides a bridge between the TDD and Commercial Due Diligence (CDD) and this data provides insights into how the product is perceived by customers and how it stands against competitors.
Information about the product development team, including their qualifications, experience, and previous successes, is important. Investors want to know that the team is capable and has a proven track record in delivering high-quality products.
Product evaluation can provide one of the most engaging and consultative aspects of a Technical Due Diligence. Investors need to ensure that the company’s products are technically sound, meet market demands, and have the potential for future growth. Building this foundation allows for informed decisions that support the company’s success. For founders, having comprehensive documentation and customer data, and being able to articulate how planned improvements align with commercial and strategic direction can help potential investors see how the company’s vision is realised, and smooth the whole diligence process.