The investment team at a mid-sized private equity firm had their sights set on a promising B2B SaaS startup. Growth figures were attractive. Monthly recurring revenue was consistent. Churn was low. Early product demos showed a feature-rich platform with impressive UI. Everything pointed to green.
The Head of Investments had already begun initial valuation modelling. But before progressing to term sheets, the internal policy required a third-party due diligence report on the target’s technology stack, security posture, and product maturity. What they expected was a formality. It wasn’t.
The tech auditors sent by the diligence partner spent two weeks combing through the startup’s infrastructure, codebase, and documentation—or lack thereof. The first red flag was version control. Core services were being updated without branching protocols. The second: the backend included a deprecated API still servicing nearly 30% of customer-facing features.
The draft due diligence report outlined the potential impact. Minor at first glance, but compounded under scale. A lack of modularity in the architecture meant every update carried risk of breaking the whole system. No automated tests. No documented rollback procedures. DevOps was essentially manual. The engineering team was small, agile, but dangerously overstretched, and lacking redundancy in key roles.
Meanwhile, the commercial team on the investor side was still excited. A customer satisfaction survey was being finalised. A partner integration announcement was in the works. But the CTO assigned to assess tech alignment raised concerns. “If we integrate this into our portfolio’s existing infrastructure, we’ll inherit a brittle system. No matter how good the revenue looks, this could become a liability within 12 months.”
A revised due diligence report was commissioned—this time with additional emphasis on technical debt, future scalability, and cloud cost optimisation. The updated report not only highlighted risks but also proposed remediation. It included timelines, refactor costs, and suggestions for engineering hires. It even broke down time-to-stability estimates by component, helping finance quantify delay risks. The document became a pivot point. The firm now had to choose: walk away or renegotiate.
The Head of Legal and the Deal Structuring Lead stepped in. Instead of scrapping the deal, they presented a revised offer—conditional upon key technical changes and staged funding tied to refactor milestones. The startup, initially taken aback, acknowledged the issues and accepted the revised deal structure. They appreciated the transparency, and privately, their own engineers welcomed the chance to rebuild the product properly.
Six months after the deal, the engineering team had grown by 40%. A new VP of Engineering had been hired. The CI/CD pipeline was in place. A full QA process was implemented. Most critically, incidents dropped by 70% post-refactor. Customer complaints were down. Renewals were up. Developer morale improved, and the average release cycle time was cut in half.
The post-deal audit team later cited the original due diligence report as the single most influential document in steering the outcome of the acquisition. Not just because it identified flaws—but because it enabled forward planning. Instead of reacting to problems mid-stream, the investors entered the deal with eyes open and a remediation playbook in hand.
What began as a near-miss became one of the firm’s best-performing investments of the year. The platform eventually integrated seamlessly with another portfolio company’s product line, leading to new bundled offerings and a 25% lift in cross-sell revenue. Ironically, the tech debt that nearly derailed the deal became the reason it succeeded—because the risks were surfaced early and addressed head-on.
Without a rigorous report of due diligence, the cracks would have widened post-acquisition. Instead, they were repaired in time. The lesson? Numbers can be bright, but infrastructure can be brittle—and it takes more than instincts to tell the difference.
