For many investors in software start-ups, engineering is the least understood function and yet one of the biggest areas of executional risk. This need not be the case.

Investor protection

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For many investors in software start-ups, engineering is the least understood function and yet one of the biggest areas of executional risk. This need not be the case. 

Here are six areas to probe for an early-warning of poor health.

Ease of application development and distribution is creating more competition, changing consumer expectations and shrinking market windows in which software firms can build sustainable growth. To win, they must be able to adapt and innovate faster than ever. No longer can firms survive with poor technology.

In an ideal world, a start-up’s path is a series of accretive iterations — nimble, well-timed tacks pushing the business steadily forward through competitive headwinds.

The reality is more often a scramble — a rush to launch, to find its market, to satisfy initial adopters, to scale. Each change in direction or priority, leaves scars on the firm’s code base and infrastructure, progressively sapping its ability to adapt, grow and compete. 

 

Download a detailed analysis of symptoms and implications of engineering distress

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Without the right design choices and operational disciplines, application and infrastructure can quickly come to resemble the very antithesis of agility and velocity: ossified, costly to operate, unscalable, unreliable or insecure.

Hidden from view, the impact invariably only surfaces in times of crisis or major change — when trying to pivot or move to a new market, reduce cash burn, scale up rapidly or deal with key staff departures. Suddenly product reconfiguration becomes a mountain to climb; geographic expansion demands major effort and capital; services fail under load; costs can’t be easily reined in…

Investment risk

Unsurprisingly, the relative opacity of engineering can be a concern for investors of early-stage companies in particular.

Despite the promise of rapid, easy application creation offered by modern development practices and cloud platforms, there are many ways in which a firm’s application technology can take a wrong turn. For example:

  • Architectural decisions that fail to reflect the dynamics and dependencies of underlying cloud infrastructure, or indiscriminately apply concepts or tools without considering what’s best for the business
  • Cloud-technology choices that lead to the wrong tools for the job – be they core compute, data or network services, or orchestration, provisioning and monitoring and developer tools
  • Monitoring that fails to provide the requisite granularity and actionable insights to protect and grow the business
  • Development operations that lack capabilities, controls and automation to deliver reliably and at pace
  • Security design that either fails to provide the requisite protection or is unnecessarily constraining service efficiency and scalability.

Ask the right questions

For investors from a non-technical background, it doesn’t have to be a matter of crossed fingers or “gut feel”. Signs of distress can be spotted if you know what to look for. Here are six areas to explore: 

1. Rate of development

  • General productivity: Seemingly simple enhancements involve major changes and take weeks not days to complete
  • Fixing high-severity service issues — which invariably involve non-support staff — takes several days
  • Customer onboarding repeatedly consumes development resource

2. Infrastructure cost, utilisation and control

  • Minimum infrastructure or “base-line” cost is a significant proportion of total business outgoings and cost per-user bears no relation to the business model
  • Utilisation of paid-for cloud services is below 50%
  • No-one can tell you accurately what the infrastructure cost was yesterday, last week or last month

3. Service reliability and management

  • Service performance is consistently below customer expectations and/or unscheduled outages add up to more than 60 minutes per week
  • Resolution of issues regularly involves significant proportion — 25% or more — of non-support staff 
  • Handling of demand spikes relies on manual rather than automated capacity-management processes

4. Expansion friction

Launching into new regions requires weeks rather than days or even hours of engineering effort.

5. Vanity technology choices

Novel cloud technologies or services are employed without critical consideration of business impact.

6. Application/platform monitoring gaps

  • Diagnosis of service failures takes days or hours rather than minutes
  • Information-security teams are either overwhelmed or underwhelmed with data
  • User behaviour on the application is not tracked

Any of these items can point to critical shortcomings or inefficiencies in application and infrastructure design, or operational processes.

Note that there is no reference here to types of technology or their relative merits. Instead it’s focussed on probing business outcomes.

Call the coach

Software is now a high-performance discipline where the margins between winning and losing are getting finer. Serious athletes would not think twice about calling a coach if they wanted to up their game. Business is no different.

And of course, there is no getting away from the fact that software and cloud engineering is complex and fast moving. Investment in a health check by external experts will identify areas of weakness and enable timely remediation. There are natural investment or strategic events that would prompt this. For example, funding rounds or significant business-led initiatives such as a market pivot. 

They don’t need to be long, costly or contentious. For an early-stage company, a relatively comprehensive analysis of architecture, systems and processes could be carried out in a few days. Presented and executed correctly, it should provide an opportunity for engineering teams to take stock, learn and grow. 

Improve the odds

Over 90% of software start-ups fail. For those that make it from start-up to scale-up, the odds of success are still stacked against them. Most will have to change course at least once before finding their product-market fit. Those that manage to climb the greasy pole will have taken their applications and platforms from MVPs to production to scaled operations — and kept current as underlying technologies evolve.

Engineering is just one part of what makes a business tick. But its centrality to success has grown significantly as buyers have become more tech savvy and competition has increased.

By asking the right questions at the right times and instigating regular health checks from appropriately skilled experts, this critical executional risk can be mitigated for the benefit of all stakeholders — customers, employees, management, and investors.

Download a detailed analysis of symptoms and implications of engineering distress

investor distress signals image

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