Harnessing Experience at a Fraction of the Cost

As a startup, one of the most important decisions you can make is ensuring you have access to experienced technical leadership. While hiring a full-time CTO can be expensive, there’s a better alternative than going it alone: the fractional CTO.

Five Years of Giving Dangerously

Who Cares if it Scales?

Across the country, in every accelerator, exec team meeting, advisor session, and board meeting, startups are asked the same question:

“But how will it scale?”
My answer: “Who cares?”

Startups: You Don’t Need a CTO (Yet)

The 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.

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.

“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.

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.

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?

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?

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?

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.”
  4. It builds a community around these young companies.

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. What do you think, intelligent reader? How do we close this gap?