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Do Startups Really Need A CTO?

Early stage tech startups face many challenges when transitioning from business plan to a product launch. These hurdles often result in significant waste of resources and ultimately can lead the startup to a stillbirth.

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Selecting the right CTO and development team is definitely a top concern for non-technical founders to ensure that the design of the Minimum Viable Product (MVP) and stalk is executed efficiently. However, the supply (builders/engineers) and demand (non-tech founders) is completely lopsided. While the unemployment rate in the US currently hovers around 4.9%, unemployment among engineers seems like it is almost non-existent. To throw in another curve ball, according to Michigan Tech, the median salary of a software developer is $108,000. Imagine what type of salary a CTO commands? Not a small feat for an early stage startup.

Is a CTO critical to execute well? How can a non-technical founder find the right development partners? How do you assemble an early stage team of builders without selling your right arm to pay for it?

First Round wrote this insightful 10 year lookback piece where they share discoveries they found through analyzing their 300 portfolio companies. It turns out that technical cofounders are important for enterprise software companies, but not so much for consumer startups. So the old thinking of needing to find a tech co-founder is out the door for consumer facing companies, which greatly widens options for non-tech founders.

Early stage founders are, for the most part, “cash poor, equity rich”, meaning that unless you are backed by venture investors, you are probably bootstrapping and self-funding the entire operation, which can cost a pretty penny. Since cash is king, a common alternative for founders is to incentivize potential partners with a portion of equity in addition to cash. This helps to align interests by tying in your partner in the upside and helps to save money in the short term. A win-win for both parties.

The top considerations for a non-technical founder when looking to work with software engineers are:

  1. Ability to pay a lower cash amount (in exchange for “sweat equity”)
  2. Alignment of interests
  3. Flexibility
  4. Knowledge diversity

Let’s unpack these a little. While #1 is pretty straight forward, alignment of interests between you (the founder) and your development team is key, which is often not the case. For example, a fully outsourced development team is motivated to build a nice-looking web backend to use it as a reference for their future clients, regardless of the success/failure of the product, all the while still pocketing their development markups. On the other hand, a technical cofounder has a stronger commitment to the startup because his equity incentive is dependent on the venture’s success. So it’s important that both the development partner and founders have their interest aligned---> a.k.a benefit from the success of the company together.

For #3, flexibility means that a close relationship between the development team and founders can facilitate a successful feedback loop to help the company be more responsive to the market and customer requirements. This means being able to add and remove features from a development phase one week in advance as opposed to setting the work scope months ahead of time and hoping it strikes a nerve with the target user.

#4 relates to the amount of technologies and languages your development team is able to work with. For example, in a freelancer solution your startup technical capabilities will be restricted to one person’s knowledge base, while in a dev shop you will have access to a much more diversified knowledge pool under one roof.

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As the startup industry evolves, creative business models emerge to solve the lopsided supply/demand shortcoming for builders. One example is the model we created at Watermelon Technologies, which combines the lower cash, alignment of interests and flexibility of a co-founder with the knowledge diversity and commitment of a dev shop. The company offers a cost-based development price to selected startups in exchange for equity and grants the software operation between development phases with a low maintenance fee.

Driving a startup from concept to scale is certainly not an easy task and is not a one-person job. The startups’ success will be defined by finding the right partners. So important to get it right from day 1!

Happy partner picking!

 

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