Do You Really Want to Be CTO?

 "If you could just build the product, hire the team, and prepare an investor presentation by Monday, that'd be great...."

"If you could just build the product, hire the team, and prepare an investor presentation by Monday, that'd be great...."

You finally did it: after years of building software for someone else, you took the leap and joined a startup. Now you’re building software for yourself. All the risk (and a 30% stake in the rewards) is yours. Then comes the day when your co-founders ask that fateful question: “What title do you want?”

You’ll be tempted, my friend, to reach for that brass ring, to claim the right of First Techie, to confidently say, “Why, CTO, of course!”

Hold on there, Tiger.

Sure, it looks great on a business card and your mom will be impressed, just as soon as you explain to her, for the hundredth time, what you do. And it will be nice to go to the next tech meetup and tell strangers that you’re the CTO for that tech company that they haven’t heard of (yet). And for a while those will be the only changes. But wait, there’s more.

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Do you like meetings? Because you’re going to be attending a lot of them (and even hosting a few yourself!). Investor meetings, strategy meetings, planning sessions, interviews – your day is going to be chock-full of talking, so go buy a notebook and prepare to sit there pretending to take notes just like all the other senior leaders.  You can try to get out of them by being cranky every time someone wants to talk to you or by claiming to be too busy writing code – and I'm sure that’s what you’d rather be doing – but it won’t work. You’re in charge of a whole chunk of the company now, so get ready to represent.

I’m sure that you love problem-solving – you wouldn’t have gone into engineering if you didn't – but how do you feel about people problems? You don’t have to worry about that too much when the development team is you and maybe one other person, but what about after that Series A round? You’re in charge now, so you get to build a team! Interviews, coding tests, career discussions, mediating personal disputes… Remember looking at your Director of Engineering at your old workplace and thinking, “I am so glad that I don’t have her job”? Guess what, now you do, plus your own!

As CTO, you’re in charge of the whole thing: people, processes, and technology! And while code might be complex, at least it’s consistent: the same command will behave the same way today and tomorrow as is did yesterday. People, on the other hand, are messy. They have moods, frustrations, and personal lives that impact how they feel when they come to work. Your best engineer today could be a hot mess tomorrow, and it’s your job to straighten them out. Forget about writing code: you’re a bio-hacker now.

Some people like this kind of thing. They even see it as the next challenge in their careers, an opportunity to step up from “just an engineer” to “an engineering leader.” They don’t mind getting messy and maybe even get excited about measuring their output in terms of the work they do through others rather than what they deliver on their own. They’re ready to stop building code and start building companies. Others, though, fall for the title and look back a year later thinking, “Dear God, what have I done?” They self-destruct.

Are you longing yet for those quiet days where you could just put on your headphones and code? It’s not too late to avoid this trap. This time, when your co-founders come around handing out titles, look at them calmly and say:

“How about Chief Scientist?”

Wanted: Someone to Make My Life Easier

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Wanted: Someone to Make My Life Easier

The job posting reads:

Hands-on Director/VP of Engineering
Looking for someone to build the engineering team for our fast-growing startup. Must be able to hire and inspire a high-performing development team, build the organization, and define new processes to support a larger team and a more complex product. Must be hands-on with our chosen technology stack and able to code at least 20% of the time. Should be able to grow as we grow, taking on more leadership while remaining a technical leader. Email CTO@mystartup.com with your resume and Github address.

It’s one of many that I see in the Denver area as overwhelmed CTOs try to clone themselves to support their company’s growth. With limited budgets and unlimited demands on their time, these leaders look for a “twofer” hire: someone who can lead the engineering organization without taking a seat away from a working developer.

At lunch with some local CTOs, though, the conversation around the table tells a different story:

“It feels like I’m spending all of my time interviewing when I should be coding,” says the CTO of a predictive analytics company, shaking her head. “I know that getting new people in the door will help in the long run, but my team is bottlenecked now. And the newbies have to be set up with new equipment, trained, and brought up to speed on our product. How do you manage people and write code at the same time?”

Another CTO chimes in. “I never got the chance to figure that out, because we never grew. When I joined my company, I expected that I’d get the chance to build my management skills and move away from the code, but I still only have two developers besides me after three years. The CEO keeps saying that new funding is just around the corner, but I can’t wait any longer. I took a 40% salary cut to co-found a startup, but that just doesn’t make sense anymore.”

The third CTO just nods. His consumer marketing company shut its doors a few weeks ago, so he’s just figuring out what he wants to do next. I doubt it will be another early-stage startup, though.


There’s a myth in our industry that you can write code and manage people, and that every engineer should do both if they want to advance their career. While I know people who are good at both, they’re generally the rare kinds of people who can hold two opposing concepts in their minds at the same time. And they never get to straddle those two areas for long; they either become a senior people leader or a senior technologist.

Code and people sit on opposite ends of the attention spectrum. Coding requires focus and precision, while people create interruptions. Code is logical, people frequently aren’t. Technology is an ever-expanding set of tools and options that requires time and energy if you want to stay current. A growing team requires the same levels of time and energy if you want them to stay productive.

Until we come up with a way to stop time, every technology leader will have one foot in two boats, and the faster their organization grows the more rapidly those boats will separate. Eventually, each leader must choose where their attention goes: will it go to their people or to their technology?

  (Photo credit:    David Constantine   )

(Photo credit: David Constantine)

As a result, any leader who can effectively grow an engineering organization and code is already a person in transition: they’ve built up enough technical skills to lead other engineers, but they’ve begun to move away from the code and toward the people side of the spectrum and they’ve decided that they like it. When you apply these filters to an already insufficient population of software engineers and add in the risk tolerance required to forgo the big salary and stability of a larger company to join a startup, the intersection becomes vanishingly small.

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Startups who enter this tiny battleground are at a distinct disadvantage relative to their larger competitors, whose size both requires more managers to prop up their structure and enables them to pay large salaries to get them. If an engineer can code and manage people, then the logical choice is to take the large salary and the greater career opportunities — not to mention the free food and, well, everything else — at Google. And if someone has those skills but wants to go the startup route? Well, she’s likely to end up as a co-founder. Some startups do get lucky in this environment, but far too many end up paying too much in cash and equity for someone who isn’t ready for the job.

So why do companies keep playing this low-odds, high-stakes game? I don’t think they realize that they have a choice. Most founding CTOs — and many CEOs — started as engineers. They learned how to manage people, or at least deal with them effectively, in order to start a company. Now, when the time comes to hire, they go with what worked. They think, “I built the first version of the product and talked to investors and told one or two other engineers what to do, so that’s what success looks like in this role.” They try to clone themselves.

The problem with cloning, though, is that it breeds weakness into a population. Variety provides strength, and complementary skills build a great organization.

Recently, a CTO friend told me, “I’m wearing 5 different hats now. I need someone who can take at least two.” We talk a lot about the number of hats that a startup CxO has to wear, but in this case I prefer the metaphor of spinning plates. The startup CTO has to cover at least 5 different areas in order to keep their product moving forward:

  • Product ownership
  • Software development and technical leadership
  • Quality assurance
  • Development processes and controls
  • Growing the team and people’s careers
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All these plates must stay up to keep the company growing and the product selling, and any extended period of neglect in one of these areas is met with the sound of crashing china.

So how about getting some help?

Instead of fighting it out with other startups and tech behemoths on a tiny battleground, how about exploring new territory? Instead of searching for that purple unicorn developer who loves code, people, and low pay all at once, how about searching at the other intersections?

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What if my CTO friend found a great engineering leader who loved people and process? Could she hand those things off and keep doing some of the development for a while? Practically speaking, most founding engineers are reluctant to let go of the code for a long time anyway, maybe it’s better to wait a little longer find the right technical leader without burdening them with the people problems. What if she found a great product leader who could also manage a development team? In my experience, those two skillsets have a much higher level of overlap than a hands-on developer and skilled people manager, so why not play better odds?

When you look beyond the specifics of software engineering to the larger problem of growing a company, your options multiply and your odds of success increase dramatically.

So what’s your goal for your next hire? Are you trying to clone your skills or complement them? Do you want to cover more ground or go deeper in one area of the company? Do you want to fight it out with other companies on the traditional battlegrounds or are you willing to discover new territory? How long can you wait and how much do you want to pay?

Next time you want to grow your leadership team, allow me to propose a new job posting:

Wanted: skilled plate-spinner with demonstrated talent and ability to lead in at least two of the following areas:

- Living at the intersection of business and technology and defining how best to apply technology to solve wicked business problems (sometimes called product ownership).

- Designing and building elegant code in our chosen technology stack, with a passion for learning new technologies and applying them in new and interesting ways.

- Building tools and processes that keep production software running with high quality and minimal downtime.

- Designing and implementing the right processes and controls to keep a growing team running at peak efficiency even as it grows and the issues become more complex.

- Finding the best people, forming them into a high-performing team, and keeping them excited about their job and their prospects year after year.

Send resume and a description of how you’d make my life easier to CTO@mystartup.com. We can’t wait for you to help us grow.

 

 

I give this article a 4.5 out of 5

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It’s annual review time once again, that precious time of year when every manager gets to say to his underlings, “Remember when you really annoyed me last February? I do!” It’s a time for cheers, tears, and annoyed grunts. Much like Christmas or our wedding day, we enter with big expectations and some of us get lucky, while others end up with cake all over our faces, wondering who all these strangers are and who stole our pants. Maybe that’s just me. Either way, that was one strange review process and I’m glad I only worked there for four years.

Anyway, performance reviews can be extremely valuable if done correctly (and with minimal de-pantsings). They offer an opportunity to step aside from the day-to-day, reflect on how other people are doing their jobs, and then tell them what you think of them. Constructively, of course (or not, if you want them to quit). This process is called “feedback,” and like the screeching sound created by holding an electric guitar too close to a speaker, it’s an acquired taste that can make you look like a genius if you do it correctly. And I want nothing more than to make you look like a genius, especially if you work for me, because then I can take credit for hiring you. Reading this article counts as mentoring, by the way. Without further ado, here are 5 tips for giving the kinds of performance reviews that will have people asking for them every quarter!

1. No surprises

If you spent an entire year working side-by-side with people and none of them ever gave a hint as to how they feel about you and your work, you should check to see if you are invisible or someone’s imaginary friend.

I open every performance conversation with the phrase, “None of this should come as news to you….” This is because, if I’ve waited for a whole year to tell someone what they’re doing well or poorly, then they really shouldn’t have stuck around. We all want to hear praise when we do something well, and people who say, “The work is its own reward” are either liars or living in complete solitude. If you spent an entire year working side-by-side with people and none of them ever gave a hint as to how they feel about you and your work, you should check to see if you are invisible or someone’s imaginary friend. As a manager, you owe it to your people to say, “Good job,” “Thank you,” and “Wow, I never would have thought of that,” especially when it’s true. I’m not talking about fawning over people and telling every one of them what a special, special flower they are. That’s up to their parents. But if they do something well and you want to ever see them do it again, you need to tell them.

If, on the other hand, someone does something that you don’t want them to do, you need to correct them so they don’t keep doing it. I’ve seen managers wait an entire year before telling someone that they had been making obvious mistakes that irritated everyone around them, mainly because the manager wouldn’t have an uncomfortable conversation until they were forced to. By that point, the damage was done and the person was left saying, “Why didn’t you tell me that I was doing that? Everyone hates me now!” That sort of surprise leaves you feeling like you’ve just come home from a cocktail party, only to have your wife tell you that you had a huge piece of spinach in your teeth for the entire night and excuse herself by saying, “I didn’t want to embarrass you.” Man up (or woman up, if you prefer) and have the uncomfortable conversation immediately, so that, at review time, you can say, “I know you’re working on this, and you’re already improving.”

2. Be specific

If you feel like your people are wandering around making terrible decisions, maybe you need to look at the guidance you’re providing.

I once dated a girl who told me, “I need you to make me feel special. And you need to be more attentive.” I had no idea what to do with that guidance. Was I supposed to praise her constantly? Buy her gifts that I couldn’t afford? Stare at her for hours on end? How was I supposed to make her feel anything? Maybe I was supposed to slip Xanax into her drink. Would that make her feel special, or just sleepy? I couldn’t handle the confusion, so I broke up with her. (I feel compelled at this point to state that this was not my wife, because she’s awesome and would never say crazy things like this. Hi, honey!)

Sometimes, while trying to be helpful, we can sound like crazy work girlfriends: “You need to be more motivated!” “I need to see that you really care about your career here at Acme Corp.!” “The client feels that you aren’t really looking out for them. Go fix that. But don’t give anything away for free! Oh, and make them feel special!” General guidance leads to general behavior (also known as “erratic,” “hit-and-miss,” or “spotty improvement”). If you feel like your people are wandering around making terrible decisions, maybe you need to look at the guidance you’re providing. Are you giving them a specific target to hit, or are you just pointing them in the general direction of “better?” Can you remember the last time you pointed out a specific example of something they did well or something that they shouldn’t have done? Human brains can handle abstract concepts, but we’re still wired for narrative. If you can tell me a story with a happy ending, then I can generalize it to bring about other happy endings. If you illustrate my own personal office tragedy for me, then you can help me rewrite it in my head so that the ending is better next time. If you just tell me to be happy, then eventually I’m going to have to break up with you and find someone who can show me how that’s done.

3. You aren’t a mind reader

When you give in to that desire to know why people do things, instead of focusing on what they did, then you brand them in your mind, for good or ill.

Speaking of narrative, we all love to tell ourselves stories about the people around us, and every good story needs motivation and characterization. Jack sold the cow for a handful of beans because he was foolish and a dreamer, but he stole the giant’s treasure because he wanted adventure and he loved his mother very much. He killed the giant because, underneath the foolishness, he was also very clever. This works well when you’re writing fiction, but it can be disastrous when you’re dealing with real people. You can assume that Jack screwed up the budget because he’s lazy and doesn’t pay attention to detail, but what if he’s actually very conscientious and Jill gave him the wrong information? You’ve already decided that Jack is lazy and stupid, so you aren’t going to trust him with important tasks anymore. He gets bored with simple activities, which only reinforces your image, so eventually you fire him. Then he goes on to become the CFO of your competitor, Giant Industries, and crushes you (see what I did there?).

We all want to understand other people’s motivations, especially when they do something we don’t like. We want to know why they did that annoying, hurtful, or dumb thing so that we can make them never do it again. The problem is, unless you ask the person why they’re acting a certain way, you’ll never know for sure. In fact, you really can’t know for sure even if you ask them, because sometimes people lie. And sometimes they don’t even know. And the problem with these assumptions, especially assumptions about a person’s character or capabilities, is that they’re permanent. Jack can’t stop being stupid even if he wants to.

When you give in to that desire to know why people do things, instead of focusing on what they did, then you brand them in your mind, for good or ill. Now, that’s not to say that some people aren’t stupid, careless, or lazy. There are plenty of those people around, and their consistent behavior will show it over time. It just doesn’t do you any good to make that decision for them, because what are you going to do: tell them to stop being lazy? If that was your answer, please reread Tip #2, above. Whatever a person’s inherent character traits or innate capabilities are, they’re beyond your reach. All you can monitor, quantify, or change is their behavior, so that needs to be your focus. Which bring us to…

4. Behavior leads motive

When striving for better performance, the wise manager focuses on behavior first and motive second.

What is performance but behavior over time? Good performance, bad performance, high performance or low, it’s nothing but the sum of our daily activities gathered up into an annual bundle. Do you really need to know that I nailed that client presentation because I want to have your job within three years? Or that I finished that project early because I wanted to take a long weekend? Or that I was late to the big meeting with the Sea World account because I have a crippling, inexplicable fear of dolphins? You don’t really need to know what my motives are as long as you’re getting the behavior that you need. But most of us want to do the right things for the right reasons, and we want the same from the people around us.

So how do we get there? For years, consultants, pastors, life coaches, and motivational speakers have tried to change behavior from the inside out. By changing people’s motives, we hoped to change their behaviors. Motivate the employees and they’ll work harder. Teach the fat people to want to be skinny and they’ll change their eating habits. Tell the criminals that crime is bad and they’ll stop doing it. We thought it would be easier, because once you changed the one thing (motive), then all the other things (behaviors and actions) would naturally follow. One is less than a bunch, so the math seemed easy. There are three problems with this:

  1. Internal motives are closely held, often core to a person’s self-image, and really hard to change.
  2. Even with the right motives, people often still do the wrong things.
  3. Even good motives can conflict and cancel each other out.

I want to lose 25 pounds. I am motivated to do so by all of the pictures on the health magazines that show me what my ripped abs look like, if I can just find them under that layer of extra insulation. I know that I will be healthier if I lose 25 pounds and that being healthier is better. All of my motives are correct. And yet, the 25 pounds remain (year after freaking year). So am I poorly motivated, or am I embracing the wrong behaviors?

Did I mention that I also enjoy food? This is also a good motive, but it conflicts with my desire to lose weight. Given the choice between not eating something delicious and eating it, I will generally choose to follow the motive that puts something delicious in my mouth. I don’t overeat, binge, or try to eat my feelings, so this isn’t an unhealthy motivation, but it’s keeping that 25 pounds hanging around (did I mention year after freaking year?).

In Outliers, Malcolm Gladwell points out that it isn’t the most motivated (or even talented) players who succeed in professional sports. It’s those who work the hardest, those who have the right behaviors. Whether they’re doing it because they love their Mama and want to buy her a house or because they hate A-Rod (and who doesn’t?) and want to beat him until he cries like a little girl, it’s the actions that they take in response to those motivations that make them successful. In the same way, when striving for better performance, the wise manager focuses on behavior first and motive second. If you tell your people what you want them to do — and make it specific enough for them to take action — then you have a much higher chance of success than if you try to make them feel better about their jobs.

The interesting thing about this is, when the behavior is better, then the job satisfaction and the motivation tend to follow. When I do something well, I’m happy about it, which makes me want to do it more, which makes me better at it. When I do something poorly or I receive negative feedback, I don’t like that feeling, so I don’t want to do that thing again. Proper feedback and guidance on behavior, then, leads to better outcomes, which lead to better motivation. I may still be doing well because I want your job, but if I and my teammates are all doing a great job, then you’re likely to get promoted, so you won’t need that old job anyway. Everyone wins.

5. Don’t forget to dream

Get through the boring stuff... and take advantage of this annual break in the action to think about what might come next.

Let’s face it: unless you enjoy making people uncomfortable or you’re one of those people who offers “constructive criticism” to the wait staff, performance reviews kind of suck. And if you’re following these tips, especially #1, they can start to feel unnecessary as well. So if you’re like me and you can start your reviews with, “This shouldn’t be news to you…” then use this opportunity to dream a little. Get through the boring stuff — “You’re awesome, I helped make you that way, and you’re already improving on that little thing we talked about last week” — and take advantage of this annual break in the action to think about what might come next. What are your dreams for your team, as a group and as individuals? What could they do that would make you stand and proudly watch them like a dad whose kid just hit a home run? What will make them glad to come to work each day, what challenges make their eyes light up? How can you help them be so awesome that they don’t even need you anymore? What do they want to do next? Don’t know the answers? Here’s a thought: ask them. After all, it’s their performance review. Shouldn’t they get a chance to talk, too?

You’re doing a great job. Keep up the good work.

The Giving Season

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I’ve spoken a lot about giving to others and the impact that it’s had on my life. Around this time last year, I encouraged people to join me in pushing back the darkness in the world by “turning on the light,” giving gifts to their neighbors, friends, and even strangers without expecting anything in return. When the world seems bent on evil and destruction, you have two choices: you can get angry and add to the noise or you can fight back with love. My family and I choose the latter, and I hope that you, gentle reader, will do so as well.

I try to do find ways to give and to help others all year long, but there’s something about the last six weeks of the year that calls to me to do more, give more, spread more light. This week, I thought about why that is and I came up with three reasons:

It’s the Holidays

Whether or not you want to attach special meaning to the December holidays, time of year is special in America. We’re bombarded with images of happy families getting together to eat, give presents, and enjoy each other’s company. We’re supposed to be happy and loving or we’ll end up on the Naughty List, so those who consider this “the most wonderful time of the year” are especially open to acts of kindness and more willing to pass them on. And those who don’t have family and friends around them feel that absence more keenly this time of year, leading to depression and the “holiday blues.” Families who can’t afford a big Christmas feel their poverty more keenly when their kids see all the toy commercials and hear their friends talking about what they want to get. In all these cases, a simple act of kindness has far greater impact during this season.

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It’s dark

Days are getting shorter, nights are getting longer. As we head into the depths of winter, we’re surrounded by darkness. When you turn on the news or look at Twitter, it can feel like the darkness is entering your very soul, and you can’t even go for a walk to shake off the feeling because it’s cold, dark, and probably wet. We need an antidote to the darkness, which is why all of the holidays emphasize some sort of kindling of lights. The Christmas lights and Chanukah or Kwanzaa candles can light our homes, but we need something to light our souls as well. Doing a kindness for a stranger, grieving with someone who has lost loved ones, or buying food and gifts for a family in need lights up your soul like fireworks and drives the darkness back.

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It’s a time of renewal

As we wrap up the old year and begin the new one, we look back at what we’ve done and look ahead to what we hope to do in the year to come. You might not bother with new year’s resolutions (really, how many times can you lose that same twenty pounds?) but you can’t help but stop and reflect during those long, dark winter nights. When we look back at what we’ve done, it’s nice to include those small gifts, those quiet kindnesses, those anonymous contributions that made someone else’s day a little brighter. And when someone does us a kindness it gives us a spark of hope that next year can be better than this one has been.

Go spread some light

As we close out another hard year, my family and I will be turning on the light wherever we can. We’ll be giving gifts to families in need, buying coffee for strangers, and reminding our loved ones how much they mean to us. I hope that you’ll join us and shine a light that drives back the darkness.

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The growing funding gap

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“Pre-seed is the new seed.”

“We need to see traction before we can write a check. Come back when you have a product and customers.”

“We don’t do sub-500K rounds anymore. If you want less than that, talk to your friends and family.”

There’s a growing gap in the funding market, and early-stage companies are finding it more and more difficult to raise the money they need to get their products off the ground. Those that do spark investor interest face constant pressure to think bigger, ask for more money than they need, and commit to accelerating their company’s growth before they’re ready. None of this is healthy.

I’ve seen this trend in the Boulder/Denver market over the past couple of years and I’ve confirmed it with friends and peers in Boston and the Bay Area: VCs and angel investors are moving up-market, de-risking their investments by waiting until a company has already proven its viability by releasing a product and winning its first few customers. Meanwhile, most entrepreneurs’ friends and family haven’t gotten any richer, leaving a growing gap between “I have a great idea” and first launch of a product. What’s an entrepreneur to do?

Traditionally, entrepreneurs have filled this gap with individual equity transactions — “sweat equity” for early employees— or by building the first version of a product themselves. As engineering salaries continue to go up, though, fewer engineers are willing to work for equity alone or for a reduced salary with a large equity component. And why would you, if you can make $150K or more working at a slightly larger startup or get Silicon Valley salaries and all the perks by joining the Googlesoftazon development office that just opened down the street? The competition for engineering talent keeps heating up, and there’s no end in sight. Again, this leaves many entrepreneurs at a disadvantage as the price tag for getting to Minimum Viable Product continues to rise.

“So go find a technical cofounder,” reply the Silicon Valley traditionalists. “Investors won’t talk to anyone who doesn’t have a technical expert on the founding team.” Interestingly, this traditional approach has a curious side effect: it decidedly tilts the playing field for early-stage companies in favor of engineers. If you’re an engineer who has an idea for a new product or technology-enabled service — and aren’t all services tech-enabled at this point? — then you can start building tonight. If you’re a business person with a great idea and a deep understanding of the market opportunity, you’re still crippled until you can find an engineer to build the tech. Hence the roving bands of business people roaming from technical meetup to technical meetup searching for a “technical cofounder,” when what they really need is any engineer who believes enough in their idea to work for free until they can raise enough funds to pay them. Even companies who have their first engineer struggle to find the second and the third, unless they have friends willing to moonlight.

There’s a hidden bias here, too: despite the “diversity initiative” whitewashing in the VC market, minority and women-owned businesses are still getting the short end of the stick from investors, meaning that the playing field isn’t just tilted in favor of engineers: it’s tilted in favor of white, male engineers. And within my admittedly small sample size of the 5–10 women-owned companies that I’ve mentored this year, women in particular are offered extortionary terms from the engineers they ask for help.

I’ve already talked about the risks to your company of seeking a technical cofounder when you really need an engineer, but what about the risks to the market? How many great business ideas are dying on the vine because their owners don’t know how to code? How many engineering-led companies are hammering the market with brilliant solutions to the wrong problems? We need a better solution.

One solution would be for investors to stop swinging for the fences with every investment. Instead of asking how this new company can be a unicorn in three years — and potentially forcing a healthy young company to accept an unhealthy amount of risk in exchange for your money — how about looking for investments that return 5X returns with lower risk, or investing in companies that provide a healthy cash return with greater potential upside than your average index fund? What if we treated startup investments with the same diversification strategy that we apply to the rest of our investment portfolio?

Of course, if you’re already diversified elsewhere, then your startup investments start to feel like house money, where high risk/high return is the most reasonable investment strategy, so maybe we can’t look to investors to close this gap. Maybe we need to look around, instead.

Why does an early-stage company need money? To get that elusive traction: to build a product and get people to buy it. So what if we cut out the middle man? What if you could find a group of development shops, designers, and sales firms who were willing to invest some of their idle capacity in getting young companies off the ground? Idle capacity — “bench time” — is the bane of every consultant’s existence, and we always struggle to make it worth the money we’re spending. What if these companies and freelancers could put that time toward building and selling a company’s first product, in return for reduced rates and a piece of equity in the company? Could we make that work?

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I see a lot of benefits in this approach, as well as some complications:

  1. It invests idle capacity in something other than busywork.
  2. It creates an early relationship between entrepreneurs and service providers, which becomes more profitable as the company grows and gets funding.
  3. It lets non-technical founders separate “I need a cofounder” from “I need something built,” giving them the time to find a real technical leader for their company rather than hiring the first engineer who will work for free.
  4. It builds a community around these young companiess.

The challenges are:

  1. Securities law limits how equity is granted, sometimes in challenging ways.
  2. Many helpers = many names on the cap table, a negative for investors.
  3. Cash is always less risky than equity, so a service provider has to have a higher risk tolerance if they want to sign up to help early-stage companies.

I don’t have all the answers for this one, but we have a gnarly problem that needs to be solved if our entrepreneurial ecosystem is going to stay healthy. Fortunately, solving problems is what we do best. What do you think, intelligent reader? How do we close this gap?