Digital Due Diligence: Red Flags in Codebases

You wouldn’t buy a factory without inspecting the machinery, yet billions of dollars are deployed into software companies every year with only a cursory glance at the “factory floor”—the codebase. Traditional financial and commercial due diligence is essential, but it is no longer sufficient. Digital Due Diligence, specifically deep technical code analysis, is critical to understanding the true risk and potential of a technology asset.

The “Black Box” Problem

To a financial investor, technology can often look like a black box. “It works, customers pay for it, so it must be fine.” This assumption is dangerous. A software platform can appear functional on the surface while rotting underneath from years of accumulated “technical debt.”

key Red Flags to Look For

When we inspect a potential investment’s codebase, here are the “smells” that trigger alarm bells:

1. The “Bus Factor” of One

If the commit history shows that 80% of the core code was written by one developer who “knows how it all works,” you have a massive key-person risk. This “hero developer” syndrome makes the asset incredibly fragile.

2. Lack of Automated Testing

“We test manually.” In 2025, this is unacceptable for an enterprise-grade product. A lack of high unit test coverage (e.g., < 50%) implies that every new feature release carries a high risk of breaking existing functionality. It slows down velocity and kills agility.

3. Dependency Hell

Modern software is built on open-source libraries. If a scan reveals critical dependencies that are outdated, deprecated, or prone to security vulnerabilities (like the Log4j incident), the remediation cost can be massive. It’s also a sign of a lazy engineering culture.

4. Spaghetti Monoliths

Startups often build “monoliths” for speed. Scaling requires breaking this into modular services. If the code is highly coupled—where changing a font size in the UI breaks the database query—you are looking at a “rewrite” scenario, not a “scale” scenario.

The Cost of Remediation

Why does this matter? Because fixing these issues takes time and money—resources that should be spent on growth. If you buy a company expecting to triple sales, but the engineering team has to spend the first 18 months refactoring the backend to handle the load, your investment thesis is broken.

Conclusion

Digital Due Diligence is not about finding reasons to kill a deal. It’s about pricing the deal correctly. Understanding the state of the codebase allows you to quantify the necessary R&D investment post-close. It turns “technical debt” from a hidden liability into a known line item in your value creation plan.