Private Equity challenges: The importance of software scalability
In this article
Summary
Software scalability refers to a system’s ability to handle increasing activity and user demand without compromising performance.
In tech-focused mergers and acquisitions, software scalability is crucial for investment managers aiming to grow private equity portfolios and achieve sustainable returns.
As scalability can impact both short-term financial metrics and longer-term growth projections, scalability assessment and IT due diligence are indispensable.
By evaluating a software target’s scalability pre-acquisition, investors can determine both its current value and its potential to deliver long-term growth.
Why software scalability matters in private equity tech investments
The days of sky-high tech valuations are now few and far between. While the tech sector—particularly software IP—still offers lucrative opportunities for private equity investors, the game has changed. Back in 2021, success often hinged on buying low and selling high. But in 2025, the focus has shifted to building “synergies and scale.” And that’s where this article zeroes in: software scalability.
Scalability has long been a selling point for software assets in private equity. Paired with other desirable investment attributes like steady revenue generation, capital efficiency, and delivering measurable results, it made software a pandemic-era favorite while other sectors stumbled. But here’s the catch: scalability isn’t guaranteed.
With the rise of disruptive technologies like AI, it’s no longer safe to assume that every software asset is inherently scalable. Failing to confirm a target’s scalability—especially for AI-powered solutions—can kill a deal’s potential entirely.
Consider this: you acquire a promising business poised to expand internationally, only to realize post-close that their backend systems can’t handle the load. Or you buy software you plan to integrate into your operations—whether to boost productivity, optimize performance, or strengthen cybersecurity—only to discover it’s incapable of scaling to meet your needs. In both scenarios, the lack of scalability undermines the asset’s value and derails your investment strategy.
To avoid these pitfalls and capture the full potential of software scalability, thorough and focused due diligence is essential.
Quick explainer: What is ‘scalability’ in a software context?
We’ll save the deep technical details of software scalability for another article. For now, the key takeaway is this: scalability in software is like scalability in business—it’s about how well a system can grow, expand, and adapt to changing demands and markets.
At its core, software scalability refers to a system’s ability (think programs or apps) to handle fluctuating workloads and user growth without degrading performance. In other words, it’s the capacity of a software system to scale up, out, or even back down as needed, all while maintaining a seamless user experience.
We can think of scalability as extending an ‘accommodation’ to comfortably ‘host’ more visitors. As more people arrive, the house is considered scalable if it can be extended upwards or outwards to meet demand without sacrificing the original quality of the visitor experience.
What happens when software scalability goes wrong: 4 real-world examples
We’ve touched on what software scalability is, but what does it mean in a private equity context?
For private equity investors, the scalability of a software-backed asset can make or break the ROI of the software landscape. Below, we explore four real-world cases where overlooked scalability issues in PE acquisitions led to reputational damage, financial losses, and worse.
1. The Twitter “Fail Whale”
Back in 2011, Twitter (now X) was just five years old but experiencing explosive growth. Originally designed with a smaller user base in mind, the app was suddenly home to nearly 100 million users pumping out around 340 million daily tweets. Twitter’s software needed to scale immediately to keep up with demand.
Unfortunately, Twitter’s relational database used to store tweets and user information, MySQL, couldn’t handle the growing volume of data. This lack of scalability created bottlenecks that caused frequent outages, infamously dubbed the “Fail Whale” incidents.
To address the issue and, frankly, survive as an emerging social media player, Twitter had to overhaul its entire software architecture starting in 2010, a costly and time-consuming process. While the investment in scalability ultimately paid off—X remains one of the most popular social media platforms globally—the restructuring costs and operational disruptions could have easily been avoided if scalability had been prioritized from the start.
2. The Instagram acquisition outage
Another incident of poor scalability concerns another of the world’s social media giants: Instagram. Launched in October 2010, the photo-sharing platform became so popular that, just a year later, Facebook (now Meta) acquired it for $1 billion. But there was a problem.
Whether Meta’s due diligence team failed to identify Instagram’s scalability issues or underestimated their impact is unclear. What we do know is that shortly after the acquisition, as Instagram’s user base grew from Facebook’s larger audience, the app began crashing.
Meta eventually resolved the scalability challenges, but not before suffering financial losses and reputational damage. Had scalability been thoroughly assessed during due diligence, the acquisition could have been much smoother—and less costly.
3. Digital banking scalability failures and loss of customers
Scalability isn’t just about growth; it’s also about managing fluctuations in demand. This is particularly critical for digital banking systems, which must handle unpredictable peaks and valleys in usage.
Over a few months in 2023, several major UK banks experienced outages during high-demand periods like weekends and month-end paydays. Their digital banking systems simply couldn’t scale to accommodate the traffic spikes, leading to app and website crashes.
One of the hardest-hit institutions was the Co-op Bank. The severity of its outages led to a loss of long-term customers—some with over 20 years of loyalty. The financial and reputational fallout was so significant that the Co-op group has been forced to sell its banking arm, with the deal set to close in early 2025.
4. The GenAI honeymoon is over
Lastly, a quick word on GenAI scalability.
While the hype around this disruptive tech is undeniable, investors and PE players are cautioned against acquiring pilot AI systems without proper due diligence—especially since some so-called “AI-powered” assets aren’t truly AI at all. Recently we also published a detailed article about this, but it’s not just us warning about inflated or fake AI.
In a recent McKinsey Insights article, it was argued that gen AI’s “honeymoon phase” is over.
McKinsey warns that many GenAI pilot initiatives may appear promising, but they often lack the scalability needed to deliver long-term value. Without scalability, these assets hit costly bottlenecks as soon as investors attempt to expand their capabilities.
Why software private equity investors should care about scalability
Scalability should be a top priority for software private equity investors—both as a risk factor and a source of value. While we’ve covered the risks of unscalable software, let’s now shift focus to the advantages of investing in software assets with strong scalability.
7 key advantages of scalability in software private equity assets
- Translating investment into growth: Most private equity players invest in software to increase the value of their portfolios. Software scalability allows for growth without risking costly bottlenecks and remediation, both improving returns on the investment and time-to-market.
- Stabilizing the competitive advantage: The ability to scale a software product quickly, efficiently, and without degrading performance is what allows tech players to maintain their competitive advantage. Netflix, for example, maintained the competitive advantage it had achieved via first-mover status by scaling “quicker than anybody else,” according to industry strategist Brandon Katz. As he explained, “That scale in turn [led] to a shorter road for a new original [TV show or movie] to become a hit because they have such a wider audience available to sample.”
- Maintaining the customer base: As seen in our Co-op bank example above, poor scalability can lead to service outages and unsustainable customer churn. Scalable software ensures investors can grow their new assets while retaining its existing customer base, preserving the value of the investment.
- Market expansion: Breaking into new markets or adapting software to new hardware platforms demands scalability at the core of the system’s architecture and codebase.
- Effective risk management: Scalable software is better equipped to handle sudden peaks, stresses, and strains, minimizing the risk of downtime during crucial moments of value creation. These could be high-demand periods such as IPOs or during peak trading times when operational reliability is vital.
- Cost-effectiveness: Software scalability also drives cost efficiency in multiple ways. Features like elastic scalability can adapt to both peak and off-peak demand, reducing energy and infrastructure costs. Similarly, scalable systems can lower per-user costs as the user base grows. Smart scalability solutions—such as deploying AI chatbots for customer service instead of hiring additional staff—help optimize operational expenses and enhance the return on investment.
- Optimized entry and exit values: Assessing scalability upfront allows private equity investors to negotiate better deals. If a target’s software isn’t scalable, it justifies a more realistic (and often lower) investment offer. On the flip side, addressing scalability issues during IT due diligence and implementing a clear plan to enhance scalability can significantly boost the asset’s market valuation at exit.
How to assess software scalability during private equity due diligence
To wrap up our discussion on the importance of software scalability in private equity, let’s outline some key aspects of an effective scalability due diligence strategy.
Key areas to assess
When assessing a target software asset for scalability, these are some critical areas to scrutinize:
- System architecture: Is the software built with modular, cloud-native design principles that enable scalability? Or is it monolithic, creating operational bottlenecks as the system grows?
- Infrastructure readiness: What infrastructure supports the software asset? Can the platform be scaled horizontally, for example, by adding resources or servers to meet growing demand?
- Database performance: How well can the database handle large volumes of concurrent transactions? Remember the problems Twitter faced in scaling its MySQL database back in 2011.
- APIs and integrations: Are the APIs efficient and secure? Can they handle increasing user demand without slowing down? Smooth integrations are key to ensuring scalability without performance degradation.
- Code quality and technical debt: According to our research, poor code quality often correlates with high technical debt. Private equity investors should closely analyze the quality of the target’s codebase to identify any technical debt that could impede scalability. This is especially important given that private equity acquisitions often target assets with subpar codebases, making due diligence here even more critical.
The long-term value of scalable software for PE portfolios
Simply put, software scalability is a critical element for sustainable growth in PE-backed companies.
Without the ability to scale an acquired software asset quickly and elastically, investments can face operational bottlenecks that stall value creation, damage reputations, drive away users, and sometimes cost more to fix than the original investment.
On the flip side, prioritizing software scalability offers significant advantages. Scalable software can help maintain a competitive edge, retain customers, improve cost-efficiency, and lead to both lower entry valuations and higher exit opportunities. In short, scalability is a cornerstone of success for any tech portfolio.
To ensure the software you invest in can scale effectively and deliver the ROI you expect, scalability testing must be central to your IT due diligence process. Tools like automated load testing and code auditing can help streamline and enhance this process, providing faster and more accurate insights into an asset’s scalability.
As Luc Brands, our CEO here at Software Improvement Group (SIG), puts it: “At SIG, we believe private equity firms are not as in control as they could and should be. We ensure thorough code analysis, benchmarking, architecture investigation, and cost modeling. This approach guarantees clarity regarding the true scalability of acquired assets.”
To learn more about what SIG could do for you, get in touch today.
