Technical Due Diligence: What Investors Actually Check Before Writing a Check
A founder's guide to technical due diligence. What investors and acquirers look for in your codebase, team, and architecture before they commit capital.
I have been brought in to do technical due diligence on both sides of the table. I have helped investors understand what they are buying. And I have helped founders prepare for the process before a Series A, a strategic acquisition, and a large enterprise contract that required a security review.
The founders who struggle with technical due diligence are almost always the ones who treated it like a surprise. It is not a surprise. The questions are predictable. The red flags are consistent. And if your codebase is a mess, you can either fix it before you raise, or you can watch the deal terms get adjusted to account for the risk.
Here is what actually gets scrutinized.
What Technical Due Diligence Is Actually For
Most founders think technical due diligence is about proving the code works. That is part of it, but it is not the main point.
What investors are trying to understand:
- Is the technology defensible or is it wrapper code? If your entire product is a prompt wrapped around an OpenAI API call, there is no real moat. That is fine for some businesses, but investors will price it accordingly.
- How much does fixing this cost? Technical debt is expected at early stages. The question is whether the debt is manageable or whether it is so bad that the next 6 months of engineering will be cleanup, not growth.
- Can this team execute at the next stage? Seed-stage code and Series A code look different. Investors are trying to figure out if your team can operate at the next level of scale and complexity.
- Are there hidden liabilities? Open source license violations, third-party IP issues, security vulnerabilities, or compliance gaps can tank a deal or create post-close problems.
Understanding these four questions helps you prepare the right way.
The Technical Due Diligence Checklist
Codebase Quality
This is not about whether the code is pretty. It is about whether the code is safe to invest money into.
Reviewers typically look at:
- Test coverage. Not 100%, but enough to show that critical paths are tested. Under 30% test coverage on a core feature signals that changes break things in production regularly.
- Dependency management. Are you using libraries with known CVEs? When were your packages last updated? A codebase with 100 outdated dependencies sitting in package-lock.json is a liability, not just a maintenance task.
- Commented-out code and dead code. This sounds minor, but it signals that the team is not confident in what they are shipping.
- Documentation at the architecture level. You do not need inline comments on every function. But there should be something that explains how the system fits together, how to run it locally, and how to deploy it.
- Code ownership. Is it all written by one person? If the only developer who can explain the system leaves tomorrow, what happens? Concentrated knowledge is a risk.
Architecture
This is where the real questions come from.
- How does the system handle load? If the answer is "we have not thought about it because we only have 50 users," that is honest. If the architecture makes it fundamentally difficult to scale, that is a bigger issue.
- How are secrets and credentials managed? Hardcoded API keys in the codebase are an immediate red flag. Not because they always mean disaster, but because they mean the team has not thought about security as a practice.
- What does the database model look like? A reasonable schema design with proper indexes tells an experienced engineer a lot about whether the people who built it understood what they were building.
- Is there a clear separation between environments? Production, staging, and development should not be pointing at the same database.
- Where are the obvious single points of failure? Every system has them. The question is whether the team knows where they are and has a plan for them.
Security and Compliance
This section has killed deals.
- Authentication and authorization. Are you using a standard auth provider or did you roll your own? Custom auth systems built by non-security engineers are where breaches happen.
- Data handling and encryption. If you are storing user data, how is it protected at rest and in transit? If you are in a regulated industry (health, finance, legal), have you actually read the relevant compliance requirements?
- Third-party access. What external services have access to your data? What happens if one of those services gets breached?
- Penetration testing. Post-seed, investors in enterprise or regulated markets will often expect at least a basic third-party security assessment.
For most early-stage companies, security hygiene matters more than having passed a formal audit. Investors know audits are expensive. They want to see that you have thought about the problem.
Team and Process
This is the part founders often underestimate.
- How does code get from a developer's laptop to production? If the answer is "one of us SSHes into the server," that is a significant operational risk.
- What does your deployment look like? CI/CD pipelines, infrastructure-as-code, and reproducible environments all signal that the team has built systems, not just software.
- How do you handle incidents? Have you had outages? What happened? Investors are not necessarily scared off by past incidents. They are worried about teams that cannot describe what went wrong and what changed afterward.
- Are there documented processes for onboarding a new developer? If it takes three weeks to get a new engineer productive because nothing is written down, that is a scaling cost.
Intellectual Property
- Do you own what you built? Any contractor who ever worked on your codebase should have signed an IP assignment agreement. If they did not, you may have a shared ownership problem.
- What open source licenses are you using? GPL licenses have copyleft provisions that can affect your ability to keep certain code proprietary. AGPL is even more aggressive. Most investors expect MIT or Apache 2.0 for core dependencies.
- Are you building on top of anything that could change its terms? Some AI model providers restrict commercial use. Some data providers restrict how their data can be used in derived products. Investors will ask.
How to Prepare Before a Round
The founders who move through technical due diligence fastest are the ones who prepare a technical package before the first diligence call.
A useful package includes:
- Architecture diagram. Not beautiful, just accurate. A simple diagram showing your main services, databases, and third-party integrations takes 30 minutes to create and answers 40% of the architecture questions upfront.
- Tech stack summary. Language, framework, database, hosting, CI/CD, monitoring. One page, no jargon.
- Known technical debt log. This is counterintuitive, but being honest about known weaknesses builds more trust than pretending they do not exist. "We know our notification system needs to be rebuilt, and here is how we plan to do it" is a much better answer than having an investor find it themselves.
- Security posture summary. What you are doing today and what you plan to do as you scale.
- Team overview. Who built what, what their backgrounds are, how long they have been with the company.
If you have these materials ready, diligence moves from "we need to schedule four calls and two code reviews" to "let us discuss the architecture diagram you sent over."
The Most Common Deal-Killers
In my experience reviewing codebases for investors and acquirers, these are the things that kill deals or significantly reduce valuations:
| Issue | Why It Matters |
|---|---|
| No test coverage on billing/auth | High liability, high remediation cost |
| Credentials committed to git history | Signals systemic security issues |
| All code by a single contractor who is gone | Knowledge concentration risk |
| GPL-licensed core dependencies | IP ownership questions |
| No staging environment | Every deployment is a production risk |
| No logs or monitoring in production | Cannot diagnose or learn from failures |
None of these are necessarily fatal. But every one of them without a clear remediation plan will show up in deal terms.
What Investors Actually Want to Hear
The answer investors are looking for is not "our code is perfect." It is "we know where we are, we know where we are going, and we are capable of getting there."
Every codebase at seed stage has problems. The question is whether the team is self-aware enough to know what those problems are, disciplined enough to not make them worse, and credible enough to fix them once there is capital to do it.
That is actually not a very high bar. Most founders who lose deals in diligence lose them because they were unprepared, not because their code was genuinely bad.
If you are preparing for a technical due diligence process and want a third-party review of your codebase before the investor conversation, that is something I can help with.