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Technical Debt occurs when a development team takes shortcuts to build code that needs to be refactored later to shorten the deadline. In other words, I prefer speed over complete code. It’s also a tool for moving forward, and if you choose to take on technical debt, you need strategy, intent, reasoning, and a profit plan. Technical debt can arise in many aspects, including architecture, test automation, infrastructure, organization, processes, design, and defects.
In the world of agile development, companies always carry a certain amount of technical debt that is considered healthy. Spiral out quickly only when the threshold is breached. Waterfall teams operate in a zero-tolerance mode for technical debt. This is an unusual and inflexible practice today. Business stakeholders are somewhat more tolerant of small debts and understand the trade-offs, but technology leaders are tough on it. However, if the situation is reversed within your organization, you have a bigger problem.
Startups are forced into early debt and feel the pressure to show momentum in exchange for delayed releases. If these debt items are likely to grow beyond a certain level, traction alone will not be able to finance them at ideal valuations. Venture capitalists want to expand their money and the idea of using it to pay off debt is terrifying.
For early-stage companies, too much technical debt leads to product instability. We’ve seen teams working on customization for his 12 months, then losing another 12 months for integration and stabilization, and delaying funding due to failed technical due diligence.
Related: How should entrepreneurs manage debt?
Impact on Technical Debt Valuation
Technical Debt is a reality as interest payments (and installments of those payments) arise from valuations and show up on the P/L in various ways. Here are some of these methods:
- A company with technical debt needs more people to run existing operations and more developer time to build new features.
- Overhead costs from delayed realization of acquisition synergies resulted in longer term maintenance costs.
- Potential remedial fines for non-compliance and security breaches
- Lost customers and pipeline due to poor customer experience, system outages, poor performance, delayed timelines, and inefficient marketing spend.
- Businesses with high inventory balances require more working capital.
- Cloud spending costs skyrocket, turning small CapEx into tremendous OpEx.
- It fails to adapt quickly to market changes, causing predatory moves from its competitors.
- Multiple versions of the truth hinder the transformation of data into information, slowing decision-making and reducing quality.
- Declining staff productivity and morale.Opportunity cost of management distraction
- Multiple rejections from venture capitalists cast doubt on the company’s viability.
As startups get to market more feature-rich, technical debt doubles, exposing the underlying architecture to its limits. Many startups are finding that short-term technological convenience may have ruined their long-term success. A software product’s technical foundation is fundamental to its future scaling and maintainability. Startups typically work with 18-24 months of runway between funding rounds. A large amount of debt accumulated early on could cut this runway by a quarter or two.
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Managing technical debt
Technical debt is always invisible and easy to feel. We need to be conscious of tackling the root cause rather than the visible symptoms.
1. Admit the problem
Many technical and business executives do not acknowledge this issue and become defensive during technical due diligence. Most knowledgeable VCs can see through this and don’t spend money fixing broken things.
2. Estimate, Prioritize and Commit
Fixes should be made on an ongoing basis, prioritized against growing features, and resources dedicated to resolving it early. Managing technical debt while balancing customer needs and new product enhancements can be challenging. Many startups are guilty of chasing cash flow and traction in the short term, but killing valuations when they go out to raise money.
3. Decompose the problem
Some criticize Agile methodologies for being unstructured and lacking proper planning. Agile, however, is the new standard for the needs of the new age of business velocity. Agile management of technical debt involves breaking down product functionality into shippable pieces with long-term and evaluation-promoting goals. All Technical Debt items should be cataloged in the Product Backlog. When I did my due diligence for funding and M&A, I was poring over the backlog of technical debt items. It’s a practice that experts follow to the core.
4. Be disciplined
The easiest way to avoid and fight technical debt. Good executives understand the short-term cost of velocity and the risks of delivering customer-specific builds. As with financial liabilities, the longer a liability is ignored, the harder it is to stabilize and expand. Choose the right technology, make the hard decision to retire it as soon as it no longer serves your purpose, and don’t go through nasty workarounds.
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in conclusion
Technical debt and its implications are widespread, and interest on this is paid back by the hour, even if it’s not obvious to management. Like financial debt, technical debt has stunted the growth of many companies and pushed some to the brink of bankruptcy and must be paid back.
Unlike financial debt, growing technical debt has no formal controls, such as credit committees, finance staff, or asset-liability teams, to enforce ongoing tracking. Technical debt has to be paid off and has a capital cost. This ultimately stems from the company’s future value (such as value stolen from shareholders and investors). Many companies don’t get funding or pay the price with a lower valuation when diligence reveals significant technical debt.
Some amount of technical debt is inevitable and seen as a cost of doing business, but it must be handled correctly to ensure the long-term viability of a startup.