The growing funding gap

“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?

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?

Hacking the startup life

The founder of the first software company that I worked for put his head through a wall. He was upset about someone leaving, but you know, it was a wall. And his head, which was arguably the most important asset in the company’s portfolio.

At that same company, I had to break up a fight between two designers who couldn’t agree on a page layout. I had to pick one of them up and carry him out of the room until he could cool off. Fortunately, his hair was in a ponytail that day or I might have suffocated.

At another company, one of my standard interview questions for potential managers was, “What will you do the first time that someone comes into your office and bursts into tears?” My favorite answer, after a thoughtful pause was, “Well… first I would offer them a tissue.”

After 20 years working in technology startups, I know I’m not the only person who watches HBO’s Silicon Valley and thinks, “Wow, they’re really toning it down for the masses!” Startup life is hard and a little crazy. We tech people, as a rule, bring our own crazy to the office party. Put these things together and you have a volatile mixture. Blend in long hours, high stakes, and a general sense that there are always too many bases to cover, and it’s no wonder that people lose it once in a while. Of course, it’s only a short trip from “once in a while” to “every day, twice on Fridays.”

There’s a conversation going on about mental health and burnout in startups, and we need to keep it going. My friend Dave Mayer shared some of his own experiences as a founder and friend of founders, and I read another powerful view from the trenches by Sarah Jane Coffey last year. There have even been sessions during Boulder and Denver Startup Weeks dedicated to this important topic.

We tend to glamorize the startup life as a place where brilliant, dedicated, and — most of all — energetic people are changing the world, making it a better place and making their first millions in the process. We are the engine of the economy, the force of innovation, the ones who keep America from falling behind the other superpowers through the sheer power of our brilliance and the sweat of our furrowed brows. We tell each other things like, “I wanted to work somewhere that I knew I could make an impact,” and “I don’t want to be a corporate drone, sitting in meetings all day.” We don’t meet, we scrum! We don’t just write code, we sprint! We work all day, take a short keg break on our rooftop deck, and then we work all night, with the occasional foosball game to keep our reflexes sharp and aggravate our carpal tunnel. Who wouldn’t want to be part of that? Corporate drones, that’s who!

But there’s a dark side to startup life. Yes, you have a greater impact when you’re one of ten people in the company, but those ten people are usually trying to do the work of 30, so you do the math. You’re never bored, but you’re never offline, either. Office perks are fun until you realize that you can never leave, and it turns out that “dedication” and “passion” can quickly become presenteeism and a grinding competition over “who wants it more.” But on the bright side, the stock options are generous!

The problem for leaders is that these changes usually happen when we aren’t looking. The excitement that you feel for your market-beating/world-changing idea masks the little problems until they become crises. You look around at the tired faces of your team and think, “We’re just in crunch time right now. After this push, we can relax.” But this little push is followed by another little push, and then you land your first big customer and they need “a few small enhancements” to make the product work for them, and then there’s the release for the big industry event, and then you find out that you have competitors…. There are blogs to write about your development philosophy and Medium posts to show how awesome your company culture is. Pretty soon, the rooftop deck is covered with snow and you’re explaining to your wife that you just have to do a little bit of work on Christmas to make sure that the release is ready by the first of the year. Meanwhile, the other startup founders you know are bragging about being able to get by on 3–4 hours of sleep a night, and you start to wonder about how to quantify the Sleep Gap as a measure of your company’s competitiveness. When people quit, they tell you that it’s not because they’re unhappy; they just got another offer that was too good to pass up. You notice that the foosball table is pretty quiet these days, but you don’t hear the grumbling that’s replaced it.

The startup monster will eat everything you put within its reach, including your free time, your health, and your family. As leaders, it’s our job to fence it in and protect both our teams and ourselves.

The startup monster will eat everything you put within its reach, including your free time, your health, and your family. As leaders, it’s our job to fence it in and protect both our teams and ourselves.So how do we do this? There’s always more work to be done, and for every triumphant cry of “inbox zero!” there are a thousand whimpers of “I’ll never get through all of this.” The startup employee who leaves at the end of the day thinking, “I have nothing left on my to-do list” either isn’t paying attention or was just laid off.

So here’s a thought: stop trying to get to the bottom of the pile. One of the worst mistakes that startups make is that they grossly undervalue their own time. Instead, acknowledge that time is a valuable and limited resource and decide how you’re going to invest it. Start saying, “we’re not going to do that right now,” and keep saying it until you find the most important items, then do them. There are probably a few items on your team’s to-do list (and your own) that you can quickly knock off, but this quickly gets difficult as you’re forced to make tradeoffs and give up things that feel really important. Remember, though, that the most successful startups are those that ruthlessly focused on a single goal until they were big enough to diversify. An unfocused startup is one bad decision away from a death spiral. So, focus. Ruthlessly. If that email, phone call, or feature idea doesn’t move your company definitively towards its goal, then it can wait, maybe forever.

Of course, in order to do this, you need to know what that one goal is. You do know what your company’s one goal is, right? If not, stop what you’re doing right now and go find a quiet corner, a mountain cabin, or a dark closet where you can put a towel over your head, and stay there until you do. Until you know why you’re in business and can clearly articulate that vision, you’re going to do more damage than any competitor could possibly do, chasing after bad revenue, distracting your team with useless projects, and generally diluting your valuable efforts. The biggest complaint that I hear from front-line people in startups is “Management doesn’t know what they’re doing.” The key words to note in that sentence are management and doesn’t know. When you start wandering all over the landscape in search of a purpose, you stop being a leader and you become “management.” Find your vision. Test it. Cling to it. Defend it like a loved one, and don’t let anything, even the lure of side money, pull you away. Even if you decide that you need to pivot that vision, do it purposefully and completely. Charlie Brown can be wishy-washy; you can’t if you expect people to follow you.

Setting the proper boundaries is also about more than good intentions and cleverly worded vacation policies (“take what you need, don’t be a dick” is my favorite so far). If you want your team to be healthy, you have to lead by example. I once had a boss who always made sure that he had the first email in everyone’s inbox every morning and the last one every night. If anyone tried to reply, he would send another response, and another, and another, until the conversation petered out in the wee hours of the morning. He wasn’t inspiring us with his work ethic; he was marking his territory, peeing on everyone’s inbox every day to remind us who was top dog. Unsurprisingly, he also spent a lot of time talking about the level of commitment required to make the company successful. We had a lot of turnover at that company.

On the other hand, the kindest words I ever received from a boss came when I was working late and he walked by my desk on his way home. He stopped, stuck his head around the corner, and said, “I love you. Go home.” For the little worker bee me, that was a freeing moment. With five words, he simultaneously recognized my effort and freed me from defining myself solely by it. When he turned and walked out the door a moment later, he set a healthy example as well.

We need to do more than talk about work/life balance: we need to model it. In my experience, “we work hard and we play hard” really translates into:

1. We work hard and we have a ping pong table that everyone’s afraid to use, or
2. We work hard, drink hard, and code drunk.

How about a new mantra: We work hard, get stuff done, and go home.

Working in a startup shouldn’t feel like an extension of dorm life: it’s healthy to take breaks and explore other interests with people who aren’t paid to be near you. Late nights and weekend work are occasionally inevitable in every startup, especially in software, where major releases and critical commitments inevitably create a last-minute crunch. But when this becomes the norm, you’re heading down a bad road. If the gas pedal’s already to the floor, you have no way to get more speed when the real crunch time comes. Plus, having a happy, supportive family life greatly reduces stress and burnout. The thing is, your family has to recognize you before they can support you.

Finally, in order to do all of these things, a startup needs leaders who understand people and what motivates them. Investors look at founders’ technical experience, industry knowledge, and business acumen, but too often they forget to ask whether these founders are capable of building and retaining a great team to bring their idea to life. It’s impossible to build the next killer app if you keep killing your team’s motivation with blockheaded management decisions.

Look around your leadership team. You probably have the business person, the sales person, and the technical person, but who’s the people person? Who among your executives is specifically charged with making sure that the rest of the company moves with purpose and vision? Who has actually built a high-performing team before? Who knows what to do the first time someone bursts into tears in their office? You need one of these, and no, that’s not HR’s job. HR’s job is to keep you from being sued when one of your executives inevitably says something dumb that offends someone. This is a job for your core leadership team. Motivating and caring for your people is as critical to your success as any patent or proprietary technology, because, let’s face it: for most technology companies, our people are our competitive advantage. They’re also our most expensive assets. As the cost of hardware and infrastructure continues to drop through virtualization and distributed computing, we’ve reached the point where replacing an engineer is more expensive than replacing a server. If you can’t find any other reason to protect your people from burnout, at least consider it a prudent financial move. You have a CEO, a CFO, and a CTO. Who’s your Chief People Officer?

The startup life is great. You get to wake up every day feeling like you’re changing the world for the better, or at least building a killer product that will have the world beating a path to your door. You get to have a say in the company direction and have beers with the CEO, all while wearing jeans and a T-shirt. You get to use phrases like, “killing it,” “secret sauce,” and “industry disruption” with perfect seriousness, even after the third beer. You also have a chance to make a genuine difference in the lives of others, even if that impact is limited to the people you work with.

We can do better at this. We need to do better, by recognizing our shortcomings and refusing to let our enthusiasm overshadow our better judgment. We need to recognize that, in this case, passion and ingenuity aren’t enough. They need to be accompanied by vision, focus, and empathy. We need to make our people part of our investment plan and be careful not to burn them out in our race for greatness. In short, we need to do more than build better products.

We need to build better startups.

You have to give to succeed

Giving is a way of life in my family. I’ve talked before about how we make this a priority in our lives and our finances, and we try to make it a part of our everyday lives as well. For years, when anyone left the house for the day, they would leave with the words “Be a blessing!” in their ears. We want to be more than good people; we want to be a blessing to the world, and every part of my personal life is tuned toward that purpose.

Work? Not so much. Putting other people first at home is one thing, but doing it at work always seemed to be the fast track to a career in doormats and punching bags. When your boss has Sun Tzu’s The Art of War on his desk, maybe graceful capitulation isn’t the best strategy. So I learned to keep my generosity at home and to be more strategic in my dealings at work.

I had a certain image in my mind of what a “giver” looked like: nice, soft, beaten down, carrying some girl’s books to school while she walked arm-in-arm with the jock who would shove him in a locker later. In other words, a wimp.

I had fallen prey to the myth that “nice guys finish last.” If you wanted to succeed, you had to take: take every opportunity handed to you, take advantage of every weakness, take every bit of energy you had and put it toward your own success, because no one was going to give you anything. Did I like it? No. Was I comfortable behaving that way? No. But that was the way it was, so I could either toughen up or get used to doing everyone else’s work.

And yet I still wanted to make the world better, and not just during my few non-work hours. So I learned to camouflage my giving. I read The Art of War and hid my feelings under a gruff exterior. Better to be thought brusque than soft, right? I justified my mentoring and coaching because it made someone a better employee rather than a better person. I gave time and support and help, but I kept score because that’s how you make sure that no one’s taking advantage of you. I became a successful manager, but I wasn’t a whole person. I was living in hiding.

One day as I walked miserably to work, I decided I was done. I wasn’t going to keep trying to be one person at home and another at work. I decided that my mission, my ministry if you will, was to make work better for everyone. I couldn’t change everyone’s work environment, but I could certainly change mine. I could make work more fun, more generous, for myself and everyone around me. In short, I could start giving again. I would still be smart about it, because I wasn’t about to become a doormat and I was (I hoped) too smart to let someone trick me into doing their work for them, but I could be intelligently generous. My back was strong enough to carry a little more of the load for other people. I could help them with their problems too, whether or not they were on my to-do list. I could show others how to succeed with the confidence that it didn’t threaten my own prospects.

And you know what happened? I thrived. I wasn’t just happier, I was more successful. I took on bigger challenges, I built stronger teams, and I earned more money for my company. My true self turned out to be better at my job than my old, false self had ever been. My bosses noticed, and they promoted me. More challenges, bigger teams, more success. It turns out that giving works.

Until recently, I thought I was an aberration, the kind of statistical anomaly that makes people buy lottery tickets, because I didn’t see a lot of other successful givers around me. Then Micah Baldwin recommended a book by Adam Grant called Give and Take: Why Helping Others Drives Our Success. This book clarified everything that I had felt about work and life, but it showed one more thing: not only do givers succeed, they’re more successful than takers and matchers. The ripple effects of a generous lifestyle not only create a better world for the people around you, but for yourself as well.

If you want all of the details, then buy the book. I’d give you my copy, but Amazon hasn’t figured out how to let me loan a copy of a Kindle book yet (I could loan you my Kindle, but I’m not that much of a giver). In short, though, here are the concepts:

Everyone has a “reciprocity style,” the way they interact with others and score those interactions. Most people occupy the middle of the spectrum as “matchers,” expecting a quid pro quo interaction where the scales even out (I scratch your back, you scratch mine). A smaller percentage are “takers” or “givers.” Takers look to get the most out of every interaction, harvesting their relationships for their own benefit. Givers, on the other hand, offer help and resources without worrying about whether they’ll be paid back. As Grant puts it:

If you’re a taker, you help others strategically, when the benefits to you outweigh the personal cost. If you’re a giver, you might use a different cost-benefit analysis: you help whenever the benefits to others exceed the personal costs.

When Grant studied the reciprocity styles of some of the most successful industry leaders, he expected to find alpha-male takers dominating, just as they dominated every room they walked into. And while he found many, as well as some matchers, he found a surprising number of givers at the top as well. In fact, some of the most successful, most loved leaders were givers rather than charismatic takers.

Digging deeper, we can see why:

• Most people are matchers, so they have a strong sense of fairness. When they see an imbalance, they seek to redress it, so the natural balance ends up working against takers (who gain for themselves only) and for givers (who help others, creating a “karmic debt”).
• Takers are often aggressive networkers, but that’s because they’re busy burning their bridges behind them, draining relationships of value and moving on. Givers, even those who dislike “networking” (whew!) have deep, strong networks full of people who are eager to help them when given the chance. This creates a deep well of resources when they need help.
• Takers and matchers see most situations as a zero-sum game, where a bigger slice of the pie for me comes at your expense. Because givers tend to look at the world differently, specifically by empathizing and seeing things from another’s point of view, they frequently come up with creative solutions that enlarge the pie, meaning that there’s more for everyone. So when you cooperate with a giver, everyone wins!
• Because they’re always maneuvering for their own advantage, takers have very different relationships with people depending upon the power structure in the relationship. They are very charming and deferential, even submissive, with people who they perceive as higher up or able to help them, but unkind or even abusive with the people below them. This two-faced approach of “kissing up and kicking down” offends most people’s sense of fairness and, if they succeed and climb higher in an organization, creates an army of subordinates who are eager to see them fall. Givers, on the other hand, work to lift up the people around them regardless of their relative stature. This creates stronger organizations made up of people who want to see the giver succeed.

Backed by both anecdotes and strong research, Grant shows that smart givers can avoid becoming doormats and not only become successful, but do so by building stronger, healthier companies and relationships. In the middle of a year continually tainted by the actions of our President, the Taker-in-Chief, this gives me hope, not just for myself, but for our society. While the takers may thrive for a while, they do so while sowing the seeds of their own destruction. Meanwhile, the givers of the world, supported by the matchers, build the strong future that continuously replaces them. Back to Grant again:

This is what I find most magnetic about successful givers: they get to the top without cutting others down, finding ways of expanding the pie that benefit themselves and the people around them. Whereas success is zero-sum in a group of takers, in groups of givers, it may be true that the whole is greater than the sum of the parts. As Simon Sinek writes, “Givers advance the world. Takers advance themselves and hold the world back.”

So I’ll leave you with this thought: what kind of a company, or group, or world, would you rather belong to?

A zero-sum environment characterized by backstabbing, power plays, and constant maneuvering for position, where every meeting starts with a silent stack-ranking of the people in the room. A place where a bus must be driven through every hour, because someone’s getting thrown under it in every meeting. Where giving is a sign of weakness and keeping score is the only way to know if you’re better than the person next to you. Where the top-ranked person gets all the credit and his underlings get all the work and blame. Where the key character traits are self-interest, pride, and irascibility.

… or…

A place where people support each other, working through problems together. Where a leader’s job is to make his people successful, lifting them up and coaching them to become better at their jobs and happier in their lives. Where giving is a sign of strength and deep reserves, and those who help are given more and better responsibilities. Where your status is measured by the people you’ve helped to grow and move on rather than the ones you’ve forced to stay, and those who stay do so because they can’t think of a better place to work. Where no one has to announce their accomplishments because others have already done it for them. Where creative solutions not only help individuals, but help the company win in their market. Where the key character traits are generosity, humility, and self-control.

These are obviously extremes, and no one workplace, family, or country is purely one or the other. I can tell you, though, having worked in places that came close each of these extremes, I know where I’d rather be, and I know how to get there.

By giving.

Startups: When to Hire a CxO

In my last article, I told you that you don’t need a CTO yet, and I received some interesting responses. In one discussion, someone pointed out that this doesn’t just apply to CTOs but could really include any C-level position that the founding team doesn’t already have covered. I agree: I chose to write about the CTO role because it’s closer to my experience, so I end up discussing this function with startup teams, but you could just as easily say, “Don’t hire a CFO yet.” As this person pointed out, you need to take care of the functions that are covered by these roles, but you don’t need to create the titles until they’re absolutely necessary.

So let’s assume you took my advice (because you really should). The logical next question is: when should I hire a CxO? The actual timing varies by your company and situation, but here are some pointers to tell you when the time is right.

When the hat gets too big

“We all wear a lot of hats around here.” I’ve heard this enough times that it might as well be printed on a poster and issued as part of the Entrepreneur Starter Kit, along with a case of ramen noodles and a framed picture of Larry Page and Sergey Brin. Any company, no matter how small, includes basic functions like sales/marketing, finance/accounting, HR, product development, and customer support. Leading the company means ensuring that every one of those areas runs effectively, so every leadership team has to cover a lot of ground in the early days. And if your founding team didn’t come with those skills built in, then someone has to do two or more jobs (i.e., wear more hats).

(Photo Credit: Kris Davidson

As your company grows, the needs in each area naturally grow, as well, but not all at the same pace. HR functions are hard to set up initially, but the difference between one employee and ten isn’t that great. Going from 10 to 50, however, adds a whole new world of complexity as you suddenly become subject to federal leave laws and other requirements. Finance and accounting are really no more than bookkeeping until you start making a profit or bring in significant funding. Then your investors start expecting quarterly finance reports, you start talking about the differences between GAAP and cash accounting methods, and the government starts asking for its share.

The function’s criticality should dictate the seniority of the leader.

As your company’s needs grow, you’ll need people dedicated to each of these functional areas: it’s impractical for the CEO to also be the bookkeeper for a 20-person tech company. But when do you need a full-time leader? Here are some signs that it’s time to delegate a function, but even then you may not be ready for a C-level hire. The function’s criticality should dictate the seniority of the leader. If a function is time-consuming but necessary, then you may be able to get away with a director-level leader who can later join a larger department (operations is a great example of this). However, if the function is core to your business, then hire a senior strategic leader who meets today’s needs and has the capacity to grow the function for the next few years.

• The function is critical to your company strategy but outside of your wheelhouse. In the early multi-headgear days, founders can get away with playing to their strengths (product strategy, financial planning, sales, etc.) while competently covering the other parts of the business. As you start to see success, though, you need to build a team that’s strong across the board. Too many companies stumble just as they’re gaining momentum because their founders are afraid to admit their weaknesses and cling to leadership when they should delegate to an expert. If you’re leading a software company and you aren’t a technologist, then hire one before you become the problem.
• Trying to cover the function part-time has become an impediment to the company’s growth. Even competent leaders become incompetent when they’re overtaxed. Ask your teams to tell you when you’re becoming a bottleneck. When company progress is delayed because certain areas aren’t getting enough attention, then it’s time to hire a new leader.
• The team is too big to manage part-time. When a functional team reaches the size where you can no longer manage them with part-time direction or where keeping that team on track takes up a disproportionate amount of your time, then it’s time to offload the work. Find someone with both the domain expertise and the people management skills to keep the team running efficiently with general guidance from you.

When your investors tell you to

After reading my last article, several people replied, “Why even worry about this? The VCs are just going to replace the entire leadership team anyway, aren’t they?” While slightly hyperbolic, this statement points to an underlying truth: investors want a strong leadership team, and they aren’t shy about taking action when necessary. It even makes sense from the investor’s point of view: they have an investment to protect and they can’t have your underpowered team screwing it up.

So if you don’t have the right leadership in place — or even if you think you do — be prepared for some changes when you take on large investors. In case no one mentioned this, large-scale financing is a direct trade of control in exchange for money and experience. Your investors have strong opinions on what works in your industry, and they’ll expect you to listen when they make “suggestions.” The upside is that they also have a network of experienced leaders that they can bring to bear on your leadership problems, so use them.

I’ve seen several companies “bring in the adults” without thought for how they would blend with the existing team, with disastrous results.

Just make sure that you don’t trade too much control in this process: this person still has to fit in with your team and your company culture. I’ve seen several companies “bring in the adults” without thought for how they would blend with the existing team, with disastrous results. You don’t want to hire a new leader and leave them with no one to lead because the entire team fled.

Before your investors tell you to

If you want more control over your team-building, then consider hiring ahead of your needs. Going to investors with a strong leadership team that’s clearly ready for the next phase of growth can speed up the financing process and minimize board-level meddling later on. This approach requires you to spend more money up front, since you’ll be looking at people who are overpowered for the current position, but hey, you have to spend money to make money, right?

If you plan to assemble the superteam before seeking that next round of financing, then focus on the areas that are both critical to the investment thesis and weak points in the current team. Do you plan to increase revenue by 400% in the next three years? Then make sure you have a superstar Chief Revenue Officer. Planning to disrupt an entire market with proprietary technology? Then you need a business-savvy CTO and a Chief Scientist or Product Architect with a stellar resume in your proprietary approach (a couple of patents can’t hurt, either). You don’t need to fill your boardroom table with CxO name cards, but you need to have the right people in key positions if you want to set your investors’ minds at ease.

Hiring senior leaders should always be a careful blend of financial planning, insights into current and future needs, and a comfortable fit within the current leadership team. Take your time and do it well.

Startups: You Don’t Need a CTO (Yet)

“My technical co-founder just quit,” she says, “and he took all of the product code with him. Now I have to negotiate to get my product back.”

“I had to fire my CTO last week,” he says, swirling the coffee in his mug and looking around the coffee shop. “The entire engineering team quit within a few days, so now I’m just hoping nothing breaks before I can hire some people to review the code and learn how it all works.”

I hear stories like this all the time from the startups that I work with and from other startup mentors. Companies who are just starting to get traction are suddenly paralyzed by a loss of technical leadership and lose precious time, money, and reputation strength as they rebuild. The cause: hiring a CTO too early.

Every software company needs technical leadership, and it can seem especially critical in the early stages, but do you need a CTO right out of the gate? Tradition (and perhaps investors) would say so, but experience says otherwise. I couldn’t find statistics on this anywhere, which is a telling fact all by itself, but anecdotally I can say that a majority of successful startups got through two or more CTOs in their first five years of existence (otherwise known as The Investor Financial Model Horizon). Why is this, and what should you do about it?

What does a CTO do?

The CTO is the technology leader for a company. For most companies, this means that he owns all technology, not just the client-facing parts, so this includes corporate IT, infrastructure and hosting, and networking. The CTO makes sure that the product gets built, the servers stay up, and the CEO can get her email.

Being CTO means more than being the lead engineer for a company: it means that you’re the lead technologist and technology strategist.

At a higher level, the CTO’s job is to apply technology to provide competitive advantage for his business. This requires a broad understanding of both business and technology, as well as the ability to effectively apply technological solutions to business problems. Being CTO means more than being the lead engineer for a company: it means that you’re the lead technologist and technology strategist. This is where many CTOs fall short, and where startups get into trouble as they grow, and this is why you may not need a CTO as soon as you think you do.

Why startups change CTOs

To be clear here, we’re looking at changes initiated by the company, not by the CTO. People move on, they find better opportunities, they get bored. This is part of life in the technology industry, and other than making sure that you’re creating a dynamic, fun workplace, there isn’t much you can do about that. What I want to look at is the breakups, the “It’s not you, it’s me. No, actually, it’s really you” moments. Most of the time, startups break up with their CTOs for one of three reasons:

1. Personality conflicts within the leadership team

2. Poor performance

3. The company outgrew the CTO

I’ll look at all three of these, their root causes, and what you, the new entrepreneur, can do about them.

Personality Conflicts

You see them at every tech meetup: smart business people with big ideas, hunting for a technical co-founder. They walk from one nerdy target to another, sharing the same pitch over and over. “I have a great idea but no way to build it. Will you build it for me? I’ll give you equity! Please be my tech co-founder!”

Every business person thinks that they have to have a technical co-founder, but what they really want is an engineer, and often any old engineer will do. When they cruise the meetups or post on the local message boards or Slack channels, what they’re really asking is, “Are you willing to work for equity on an idea that isn’t yours?” Astonishingly, some people actually say yes to this proposal, but it’s rare that it’s a successful pairing.

Founding a company together isn’t just a transaction; it’s a commitment. If this is a full-time startup, then you’re committing to spending more waking hours with your co-founder than with your family, your dog, and your favorite Netflix series combined. If it’s a part-time startup, then you’re still going to spend hours every week online and in person solving problems, making plans, and hashing out product decisions. Would you marry someone you’d just met at a tech meetup? Then why would you decide to start a company with them?

Would you marry someone you’d just met at a tech meetup? Then why would you decide to start a company with them?

And yet, people do. The lure of free development work is strong, so rather than hiring an engineer or a development company to build the first prototype, business people decide that speed-dating engineers is the best approach for their new company. Unsurprisingly, personality fit often takes a back seat to technical competence in this process, leaving a company with a CTO whose only qualifications for the job are that he knows Python and was willing to work for free. As the company grows and the demands of the role increase, the cracks in the relationship start to appear. Soon, the CEO is saying, “Maybe it’s time we saw other people, because right now I want to punch you right in your beard.”

If you find yourself looking for a technical co-founder, treat this like the most important relationship in your life, because after your marriage, it is, at least for the next few years. Date around first. Look for personality fit, common goals, and a common outlook on life before you start asking about technology stacks. Simply by virtue of being the first employees, you will define your company’s culture through your interactions. They must be healthy. The most successful early-stage CEO/CTO partnerships that I’ve seen were built on years of friendship before ever deciding to build a company together. You need this foundation if you want the relationship to last.

Poor Performance

Great engineers don’t always make great leaders. In fact, I’d argue that most great engineers struggle to make the transition from “smartest person in the room” to “leader of a roomful of smart people.” The skills that we value in a great engineer — strong problem-solving, deep knowledge of multiple technologies, the ability to craft elegant solutions — are very different from the skills required of a good leader. And as any engineer will tell you, engineers are some of the hardest people to manage, making it even harder to bridge the gap from individual contributor to team-builder.

If you have a great engineer on your team, don’t ruin his life by making him a CTO.

I’ve seen many great engineers become nightmarish technical leaders — in some cases taking their companies down with them — simply because didn’t understand the job or lacked the skills to do it well. The very thing that makes people the best individual contributors — pride in what they’re able to accomplish on their own — makes them the worst leaders, because they’re incapable of letting anyone do things differently than they would have done it. They have to learn to take pride in what their team accomplishes — the work they do through many hands instead of just their own — if they’re going to succeed. Many people can’t make that transition.

Engineers, in particular, also struggle with the fact that people are messy. When you’ve built your career on being logical and building complex structures that work perfectly every time, it can be frustrating dealing with people whose moods change every day, who don’t always say what they want, and who get annoyed when you rewrite their code for them. A CTO who doesn’t appreciate the people side of the job will only grow angrier as the company grows, driving away the best team members through his own bad behavior.

In these situations, the best outcome would be to move your leader back into an individual contributor role that plays to his strengths. Unfortunately, if that person is already the CTO, then any move looks like a demotion and the only viable option is often to replace him.

The best way to avoid this problem is to avoid creating it in the first place. If you have a great engineer on your team, don’t ruin his life by making him a CTO. Let him be the development lead, architect, or Chief Scientist. Let him apply his technical prowess to the company’s benefit without getting tangled up in the messiness of people management. If your leader wants the CTO title, then make it clear that hands-on development work will diminish rapidly as the company grows and confirm that this is where he wants to go with his career. If you’re clear in your expectations, then at least no one will be surprised if you have to have the difficult conversation later.

Outgrowing your CTO

Every software startup needs “the technical guy.” When you sit down with potential investors, this is often the first question they’ll ask, “Which one of you is the businessperson, and which one is the techie?” This is because, practically speaking, someone needs to build the product. But does this person need to be the CTO?

Before they even have a business, most startup teams sit down and hand out titles:

“I had the idea and I’ll be the face of the company, so I’m the CEO. Jan is the sales specialist so she’ll be our CMO. What, Jan? They call it Chief Revenue Officer now? Fine, you’re the CRO. Todd, you’re the programmer, so from now on you’re our CTO. Try to let me do most of the talking. OK, let’s go build a unicorn!”

The problem with this, similar to the speed-dating scenario above, is that Todd’s primary qualification for being CTO is that he was the first one on the team who knew how to code. Todd may be a brilliant engineer, but is he able to build a team? Can he run the technology side of a business? Does he have the faintest inkling of what the product strategy should be, or is he just a good typist?

As a company grows, writing code quickly becomes the least of the CTO’s responsibilities. In fact, if your engineering team is larger than ten people and your CTO is still writing code, you have some serious prioritization problems. Some CTOs are prepared for this change and even welcome it as the next step in their career evolution. Many, though, look at these company-building activities as a distraction from their “real job” of writing code. They either ignore the bigger responsibilities, leaving the rest of the leadership team to pick up the slack, or they do them poorly.

If your engineering team is larger than ten people and your CTO is still writing code, you have some serious prioritization problems

There are two ways to avoid this trap:

Make your CTO replaceable. Many founding teams include “the First Techie,” someone who knows how to build the MVP and convince investors that you know what you’re doing. This person may want their role to grow as the company grows, but they may also want to just keep building cool stuff. If possible, try to discuss this in the early days of your company’s existence, and if your tech leader wants to stay close to the code, have a plan for him to replace himself as soon as it makes sense. Laying this out from the beginning avoids hurt feelings or painful changes down the road, and enables your tech leader to manage expectations with a development team that could otherwise turn mutinous if they think their leader is being disrespected.

Startups that address the changing leadership needs early can create a special role for their founding techie, being with a Chief Scientist or Product Architect title as soon as the company grows to the point that it needs a true CTO.

Don’t hire a CTO until you need one. If you don’t have a clear technology leader as part of your founding team, but your leadership team can successfully decide how best to use technology to create competitive advantage, then don’t make it one person’s job yet. Wait until you’ve grown enough that you need to specialize. This can create some awkward moments when potential investors ask, “So which one of you is the techie?” but you can handle that by designating one of the team to act as the face of the technical organization for the moment.

This doesn’t mean that your company shouldn’t have technical leadership at a tactical level. You still need to build the product, after all. Building a development team around strong technical leaders will be critical to any software company’s success, and you can do this with appropriate management levels and titles. Rather than handing out titles for people to grow into, focus on building a solid team that delivers a competitive product.

At some point in your company’s growth — probably in the post-product, post-revenue stage — someone is going to have to own the technology strategy and execution. They’ll need to look outside the company to understand technology and market trends, then work within the company to build teams who can develop product, manage infrastructure, and find the best applications to keep the company humming. They’ll need to set the product roadmap and be the face of technology to customers and investors. Now is the time to search for a true CTO, a technology leader, and if you can defer that hire until you truly need it, you’ll have a better idea of what kind of leader your company needs. Better yet, you’ll actually be able to afford the right one.

Great companies are created by looking at a business or market from a different angle, finding the need that no one else has seen, and building a product that meets that need in new and exciting ways. Building great startup teams requires the same willingness to look beyond the norms and find the best people to get the job done, regardless of title. It also requires you to recognize what you need to be successful today, tomorrow, and next year, and to find people who can take your company and your product where you want them to go.

Sometimes, that means leaving a seat open until you’re actually ready to fill it.