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Code quality: Is this indicator of a well-run software business going overlooked by investors?

"The significance of code quality goes beyond mere functionality—it reflects the development team's culture and, by extension, the potential for scalability and synergy generation..."

Investors are well accustomed to considering financial health, legal risks, and growth potential as the key indicators of a good investment, and these are certainly key when it comes to acquiring software-led businesses as well. However, far fewer think to look at code quality, even though understanding and evaluating code quality is becoming an indispensable part of the tech investment decision process, directly influencing the scalability, maintainability, and EBITDA potential of tech assets, writes Philippe Thomas, CEO of Vaultinum

Decoding Code Quality for investors

To understand code quality is to understand the engine that drives a tech company's value proposition. Code quality refers to the reliability, maintainability, scalability, and interoperability of software—key factors that determine a tech company’s capacity to grow and integrate with future technologies. 

Take, for instance, a scenario where an investor, such as a Private Equity firm, neglects to assess code quality and then realises, post-acquisition, that its software can't handle more users without major refactoring. This oversight can lead to unexpected costs and delayed product scaling, directly affecting the investment's return.

To assess code quality properly, investors need to start by evaluating code hygiene, which hints at how well the software can adapt and accommodate future growth. This involves examining the Git history which reveals software development trajectories and whether there are any issues with scaling up.

It's also important to understand the distribution of coding expertise within the team, as centralisation can indicate future bottlenecks and risks. Finally, having a third party conduct a source code scan gives an unbiased perspective, uncovering potential blind spots and offering a holistic view of the asset's value.

Code Quality: a scalability and EBITDA growth indicator

The significance of code quality goes beyond mere functionality—it reflects the development team's culture and, by extension, the potential for scalability and synergy generation. An analysis of Git history, for instance, can predict disruptions or declines in code quality, and more importantly, the technology's ability to scale without significant additional costs.

For example, consider a startup whose codebase has been diligently managed, with a history of consistent commits in their Git repositories indicating regular updates and refinements. This pattern suggests a culture of continuous improvement signifying a good coding culture within the company. In contrast, a codebase with erratic commit patterns, featuring large chunks of code updated infrequently, could signal a disjointed team or a lack of coherent process, which are potential red flags for investors.

See also: COBOL code base in production hits 800+ billion lines

An analysis of Git history is not just about assessing past performance but also about forecasting future challenges. For instance, if the Git history reveals an increasing reliance on deprecated libraries or a trend of bypassing code reviews during critical releases, it can be an indicator that the software might face major roadblocks when scaling up. Such insights can forewarn investors of the need for significant additional investments to restructure the codebase for growth.

Further, the concentration of technical expertise is a critical point of consideration. A sole developer, or a small group, holding the coding expertise can spell challenges for scaling and maintaining profit margins. This dynamic must be weighed carefully in post-acquisition strategy formulation. Such insights could drive decisions around team expansion, training, or even technological overhauls to distribute knowledge more evenly and safeguard the asset's operational continuity.

Understanding the broader tech ecosystem

Understanding the quality of code also means looking at how well it fits within the larger tech landscape. The implementation of Continuous Integration/Continuous Deployment (CI/CD), automation strategies, governance over open-source software, and the harmony of the tech stack, all offer invaluable insights. These facets, when integrated seamlessly, not only speak volumes about the code's quality but also shed light on the technical leaders’ prowess in fostering a culture of code quality within the development team.

One way to gauge the coherence of a tech stack is by examining the number of programming languages used in the software's codebase. This offers a straightforward inquiry for investors to pose to a target company. Generally, the greater the number of languages used, the more challenging it becomes to find developers proficient in each of those languages, thereby potentially compromising the software's long-term maintainability.

Cybersecurity: The non-negotiable priority

No conversation about code quality would be complete without addressing cybersecurity. Poorly written code can be rife with vulnerabilities. For instance, in 2018, Marriott disclosed a massive data breach that affected up to 500 million guests. The breach, which stemmed from vulnerabilities in the software of their acquired Starwood properties' reservation system, not only led to the exposure of customer information but also resulted in substantial regulatory fines, legal fees, and expenses related to notification and protection services offered to affected customers, IT security upgrades, and so on.

To prevent such scenarios, a thorough examination of cybersecurity measures is imperative. This involves looking at the company's approach to security from the ground up, ensuring best practices in secure coding are followed, and that there are processes in place for regular pen-testing, security audits and timely updates. An investment’s future is not just about what it can earn but also what it can avoid losing. Cybersecurity due diligence is thus not just about defense but also about securing the value of the investment itself.

Closing thoughts

Investments in the tech industry require more than just legal or financial acumen—they demand an intricate understanding of the underlying technology. Investors, therefore, should place a premium on comprehensive code audits, where patterns in Git history, the dispersion of coding expertise, and the integration of modern development practices like CI/CD become predictive indicators of a tech asset's longevity and profitability.

These measures, coupled with a steadfast commitment to cybersecurity, form the bulwark against potential value erosion and position the investment to capitalise on growth opportunities while mitigating risks.

In the end, the insights gleaned from code quality assessment can become powerful tools in an investor's arsenal, enabling informed decision-making and fostering a competitive edge in the dynamic landscape of tech investments. It is through such diligence and foresight that investors can not only capture but also amplify the true essence of technological prowess in their portfolios.

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