Does your startup need a CTO to raise money?
“You need a CTO to raise money” — That’s the advice many startups tell me they get from fund raising consultants. Formulated this way, I think this is misguided, possibly dangerous.
First, a couple of disclaimers:
I don’t know how the original advice was formulated. No doubt it was more subtle and complex than this. But this is how it was reported to me and therefore, I fear, how it was understood by the startup founders.
I am not a fund raising consultant and I claim no expertise in that field. I am a CTO with 23 years of experience in IT, most of them working for startups, whether my own or others’. I have witnessed several fund raising operations, sometimes as the startup’s CTO.
So why do I think this advice, in this simplistic formulation, is misguided or even dangerous?
First, it often leads you to give away a significant chunk of equity to a total stranger, for what is generally a poorly defined job, and at best a part-time one. This seems an expensive and risky proposition to me.
CTO is a very misunderstood position. To most, it seems to be a not-too-junior developer. This is just plain wrong. If you need someone to write code, that job is called “software developer”. A CTO is not meant to write code (at €1000+ per day, why on earth would you want them to write code?). A CTO’s responsibility is to give you high-level advice on technology and make high level infrastructure and architecture decisions to keep your tech aligned with your business objectives. In early-stage startups, this boils down to managing the technical debt, and seldom requires a full-time person.
Structuring your startup according to perceived requirements by investors is a losing game. By the way, I’m sure that is not what fund-raising advisors mean — but it is the way it’s interpreted by startups. Far better to structure your startup according to what you need and can afford. A good rule of thumb is: Would you still do it if you were unable to raise the funds?
To state the obvious, investors say no to pitches far more often than they say yes. If they don’t like your pitch, they’ll find a reason to say no. Not having a CTO is as good a reason as another. It may not even be the real reason, just the “polite” one given.
I strongly doubt that the absence of a CTO will be the only reason for saying no. If it was, and investors liked your pitch otherwise, they would give you the money and tell you to hire a CTO with it.
The investors (the actual decision makers at VCs) are, by necessity, very smart. They are perfectly capable of understanding why you don’t have a CTO, or only a part-time CTO, and of balancing this against other factors in your pitch. As I mentioned above, if they like your pitch but think you need a CTO, they’ll fund the position.
I suspect that the “no CTO” factor applies more strongly during the initial screening by analysts. VC analysts, bright as they are, are meant to ascertain the facts and apply the guidelines. It’s way beyond their paygrade, and possibly a career-threatening risk, for them to put forward a startup that does not meet these guidelines.
So I imagine there is some kind of checklist, and “Do they have a CTO?” is an item on it. Again, I find it hard to believe that this single question is enough to bin your pitch. More likely, it is evaluated in combination with other factors. (And if that checklist exists, the item on it is surely more subtle, like “How is their tech team organized?”)
If you do feel this is a concern, and you want to raise your chances to overcome this screening hurdle by officially having a CTO, what can you do?
First, if you can afford it, sign up a part-time CTO. There are now a few providers offering this service (disclaimer: we at Dzango offer part-time CTO services too). Make sure that as part of that deal, they agree to have their name on your pitch deck. If you dont want to offer equity, try offering a success fee.
If you cannot afford this, find among your friends and acquaintances a senior IT consultant. Ask them to review your infrastructure and the architecture of your app; if possible to audit your code once in a while. Ask them if they are willing to have their name as CTO on your pitch deck. They should be ready, if the investors want to speak to them — a very unlikely event— to talk intelligently about your technology. I am not suggesting that you lie to investors (please, never do that!). The setup I’ve just described is actually a far more legitimate definition of the role of a CTO than naming your top developer as your CTO.
Failing this, please clarify with your fund raising consultant: do they mean that you need a software developer rather than a CTO? If you have an in-house developer, can you put them instead in your pitch deck as senior developer or, if they have less than 5–6 years of experience, as lead developer? Can you make hiring a CTO one of your reasons for raising capital?
