Top 3 Questions to Ask a Software Company

Early stage software companies make exceptional investments. Licensing software is outstanding profit, and acquisition possibilities from giants of the software industry abound.

Technical due diligence of a software company can be challenging. Given my background of software development and innovation, many investors make requests for due diligence. Often, there isn’t time or budget to perform a complete due diligence study; a quick analysis is the only option.

This do-it-yourself checklist can size up a software company rapidly. The company’s CTO (or lead expert) can answer these questions without taking eons of time to prepare.

Schedule a call with the CTO and ask these questions. Emailing is not as effective; you want to assess how confidently the CTO answers the questions.

QUESTION ONE: “How many test cases do you use to test your software, and how often are those test cases executed?”

If the CTO doesn’t give you an approximation of the number of test cases and the frequency of their execution, then score zero. Test cases less than 1,000 with frequency of testing less than once per month scores one. 1,000 or more cases or frequency once a month or more scores two. More than 1,000 test cases and frequently better than once a month scores three.

QUESTION TWO: “Can you show me a copy of your product roadmap?”

Keep the information confidential – never share a company’s roadmap with anyone. No product roadmap scores zero. If the CTO creates a product roadmap within a week, score one. A CTO who already had a product roadmap scores two. A product roadmap that extends between six to 24 months into the future scores an additional point.

QUESTION THREE: “What differentiates your technology from your competition?”

Surprise or unintelligible answers get zero points. A CTO extolling product differences (as opposed to technology differences) scores one point. If the CTO extolls underlying technology principles, an additional point is scored. Then try for a bonus point by asking, “Can you tell me more about that?” Passion, detailed understanding, and ability to summarize scores another point.

The Results:

0-2: Technology risk. Avoid investing if possible. If you’ve already invested, some leadership should be infused quickly.

3-5: Good foundation, needs improvement. Ask these questions again in six months. Without improvement, consider putting your money elsewhere.

6+: Outstanding. A company with this score will identify and mitigate software risk and increase the probability that you’ll land that home run with your money.

Eric Eaton

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