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Technical debt arises when development teams take shortcuts to expedite delivery and build code that needs to be modified later, i.e. prioritizing speed over perfect code. It is also a tool to move forward, and if you choose to have technical debt, it must have a strategy, intent, reasoning and a payoff plan. Technical debt can exist in many dimensions, such as in architecture, test automation, infrastructure, organization, process, design and defects.
In an agile development world, a company always has a certain amount of technical debt that is considered healthy; only when the threshold is broken does it quickly spiral out. Waterfall teams operate in a zero tolerance mode for tech debt, a rare and inflexible practice these days. Business stakeholders are a little more tolerant of small debt and can understand the trade-offs, while tech leaders are more strict about it. However, if you see the situation reversed in your organization, you have bigger problems at play.
Startups are feeling the pressure to ship and showing momentum, forcing some early debt to be balanced against a delayed launch. If these debts can grow past a certain point, traction alone will not provide financing at an ideal valuation. Venture capitalists want their money to scale, and the thought of using it to pay back debt is terrifying.
For start-ups, taking on too much tech debt leads to product destabilization. I’ve seen teams work on customization for 12 months and then lose another 12 months to merge and stabilize, delaying fundraising after a failed technical due diligence.
Related: How Should Entrepreneurs Manage Their Debt?
Valuation implications of technical debt
Technical debt is real, as interest payments – and the terms of those payments – arise from your appraisal and manifest themselves in different ways in your P/L. Here are several of these ways:
- Companies with large tech debts need more staff to run existing operations and more developer time to develop new capabilities.
- Overhead costs as a result of the delayed realization of synergies in the event of an acquisition resulted in costs for a longer period of time.
- Potential remedial fines for compliance and security breaches
- Loss of customers and pipeline due to poor customer experience, system failures, degraded performance, timeline delays, and inefficient marketing spend.
- Increased working capital requirements for companies with higher inventory balances.
- Spikes in cloud spend costs, turning small CapEx into monumental OpEx.
- Inability to quickly adapt to changes in the market, causing predatory moves by competitors.
- Multiple versions of the truth create an inability to transform data into information, slowing down and lowering decision making.
- Lower productivity and staff morale; the opportunity cost of management distraction
- Multiple rejections by venture capitalists raise questions about the company’s viability.
As a startup’s go-to-market becomes feature-rich, the technical debt multiplies and the underlying architecture is exposed to its limitations. Many startups are discovering that short-term tech convenience may have negated the company’s long-term success. The technical foundation of any software product is fundamental to future scalability and maintainability. Startups usually operate with a runway of 18 to 24 months between rounds of funding, and heavier debt built up in the early days can shorten this runway by a quarter or two.
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Manage technical debt
Technical debt is always hard to see and easy to feel. One should be aware of addressing the root causes rather than the visible symptoms.
1. Admit the problem
Many tech and business leaders don’t admit to this problem and become defensive during technical due diligence; most smart VCs can see through this and won’t spend money to fix the broken one.
2. Estimate, prioritize and commit
Recovery must be ongoing and prioritized over growth characteristics, and resources must be deployed to resolve the issue early. It’s a tricky situation managing tech debt while balancing customer needs and new product improvements. Many startups are guilty of chasing short-term cash flow and traction, but their valuations die when they look for funding.
3. Solve the problems
People criticize agile methodologies for being unstructured and lacking adequate planning. However, Agile is the new normal that meets the business speed needs of the new era. Managing tech debt in agile requires breaking down the product features into shippable pieces aligned with long-term and valuation-enhancing goals. All technical debt items must be cataloged in the product backlog. I used to study the backlog for technical debt when doing diligences for financing or M&A; it is a practice that professionals follow to the core.
4. Be disciplined
The easiest way to avoid and fight tech debt. Good executives understand the cost of short-term speed and the risk of delivering customer-specific builds. As with financial debt, the longer a debt is ignored, the harder it is to stabilize and scale. Choose the right technologies and make tough decisions to retire them as soon as they are not fit for purpose, and don’t take tedious solutions.
Related: Five Easy Ways Startups Can Manage Debt From Day One
Technical debt and its implications are rife, and the interest on them is paid back by the hour, even if it is not clear to the executives. Like financial debt, technical debt needs to be paid off as it has stifled the growth of many companies and pushed some to the brink of bankruptcy.
Unlike financial debt, growing technical debt has no formal controls such as credit committees, treasury staff, or asset and liability teams to enforce ongoing tracking. Technical debt has to be paid off and costs capital – this will ultimately come from the future value of the company (such as the value being robbed from shareholders and investors). Many companies don’t get financing or pay the price with a lower valuation when due diligence reveals material technical debt.
A level of technical debt is unavoidable and considered the cost of doing business, but it must be handled properly to ensure the long-term viability of a startup.