Product & tech due diligence in SaaS acquisitions with Dan Bender and Daniel Thulfaut

saas.unbound is a podcast for and about founders who are working on scaling inspiring products that people love, brought to you by https://saas.group/, a serial acquirer of B2B SaaS companies.

In episode #12, Anna Nadeina talks with Dan from code & co, specializing in Tech & Product Due Diligence for Global Investors, and Daniel, our own Head of Product at saas.group who helps assess companies saas.group buys during product due diligence.

When evaluating a potential acquisition, it’s essential to assess both product and technology cohesively. By evaluating these aspects together, investors and acquirers can gain insights into how well the team collaborates, prioritizes, and executes their vision.

According to Dan Bender, the assessment should focus on three main areas:

• Product: Understanding what not to build and ensuring efficient resource allocation.
• Technology: Evaluating hard facts such as architecture, infrastructure, scalability, and security.
• People: Recognizing the importance of quality management practices and identifying key personnel who are crucial to the organization.

Key Metrics for Product Performance

Metrics play a vital role in assessing product performance during due diligence. Dan highlighted that there is no one-size-fits-all solution, as each company varies based on sector, maturity, and deployment. However, some essential metrics to consider include:

• Customer Acquisition Cost (CAC): A critical metric that impacts growth opportunities and commercial health.
• Customer Lifetime Value (CLV): This helps in understanding the long-term value a customer brings to the business.
• Net Revenue Retention: This metric reflects the health of existing customer relationships and the potential for upselling.
• Customer Satisfaction Metrics: Tools like Net Promoter Score (NPS) and Customer Effort Score (CES) provide insights into customer satisfaction.
• Telemetry Data: Tracking usage patterns and customer behaviors can guide product development decisions.

Documentation and Data for Due Diligence

Founders need to come prepared with comprehensive documentation that reflects the actual workings of their company. Daniel emphasized the importance of having:

• A clear vision document and strategy outline.
• User journey maps that connect the user experience with the product.
• A record of releases over the past year, including success metrics.
• Insights into current discovery backlogs and results from past experiments.

Providing authentic artifacts, rather than polished presentations, can significantly enhance the due diligence process.

Common Mistakes in Product Management

During the due diligence process, common mistakes in product management can raise red flags. Some of these include:

• Lack of a dedicated product management function, leading to an imbalance in focus on development and strategy.
• Over-engineered products that complicate the user experience.
• Failure to prioritize customer feedback, resulting in a disconnect between product offerings and market needs.
• Not keeping up with competitors, which can indicate a lack of market awareness and responsiveness.

Deal Breakers in Acquisitions

Identifying deal-breakers is crucial for both buyers and sellers in the acquisition process. Key factors that can derail a deal include:

• Technical Debt: Accumulation of outdated technology can hinder growth and scalability.
• Cybersecurity Incidents: Repeated breaches can compromise customer trust and lead to significant losses.
• Key Person Risk: Relying heavily on a single individual can jeopardize the stability of the company.
• Lack of Integration Capabilities: A product that is not easily integrable can limit future growth opportunities.

Evaluating Development Processes

Understanding the efficiency of development processes is another essential aspect of due diligence. Evaluators should consider:

• The balance between maintaining legacy systems and innovating new solutions.
• Product defect density, indicating how many bugs reach production.
• The level of automated testing and quality gates in place to ensure smooth operations.

These factors collectively inform an investor’s confidence in the team’s ability to deliver quality products consistently.

Quick Hacks for Product Evaluation

During the initial product evaluation, certain quick hacks can provide valuable insights:

• Assessing the user experience (UX) and user interface (UI) can reveal a lot about the product’s functionality and appeal.
• Conducting competitor analysis can help gauge the product’s market positioning.
• Seeking customer feedback through online reviews can provide an unfiltered view of the product’s strengths and weaknesses.

Conclusion

In conclusion, product and tech due diligence are integral to successful SaaS acquisitions. By taking a holistic approach, focusing on key metrics, and avoiding common pitfalls, investors can make informed decisions that drive value. Understanding the interplay between product, technology, and people ensures that acquisitions are strategically sound and poised for growth.