Investment Lessons Learned — Lesson 2: Don’t invest in teams that don’t have technical co-founders
This is the second part of a series of articles aiming to reflect on some of the mistakes we made while selecting startups to invest in.
In the first part (Investment Lessons Learned — Lesson 1: Only Invest in Full-time Founding Teams) I analyzed one of the most important mistakes we made. Even though many of these failed startups looked good on paper, and the team looked liked they had the talent to make it, not being fully committed to the project was their undoing.
In this second part I’ll dig into another reason why many of the startups we funded ended up under-delivering; They didn’t have a technical co-founder among their ranks.
Finding the right technical guy is quite a challenge. They are not easy to come by, they are in high demand, and sought after by companies bigger than any startup you might be building. It’s no surprise that most startups that were founded by non-technical people find it so hard to add a developer to the team, be it as co-founder or first employee.
Most of these teams end up hiring a 3rd party software factory to develop their prototype/MVP, hoping they get enough traction and/or funding fast enough, in order to make those first desired technical hires.
In the past, when we’ve come across startups that happened to be building something great but the team was incomplete, we tended to give them a try anyway. We believed, that with the funding we provided, they would be able to replace their outsourced technical team with at least one hire.
The reality is that most of them kept deferring their decision to severe ties with those devshops until it was too late, harming the future of the company beyond repair.
I’ve seen the following situation repeat over and over:
“We don’t have a technical co-founder but it’s our priority to find one ASAP”
“We just need to finish this one feature, then we’ll look for a developer.”
“We can’t afford to hire someone full-time, yet.”
“Once the product finds some traction we’ll get rid of the external developers and hire someone.”
“The team we hired is late again with their delivery and underperformed once again. We’ll fire them as soon as we get the source code.”
“In the end we decided to keep working with them. They promised they would assign someone specially for us and they even cut their prices!”
But why is it that important to have a technical co-founder or at least a well trusted technical employee within the team, from the very beginning?
1. It helps you rapidly execute on your learnings
When you start a company, you need to make as many mistakes as possible to learn the most as fast as you can; and this applies specially to the product component of the company.
If you can build something, launch it, and have some people use it (even if it’s just friends or family) you can quickly see what’s good and what’s wrong and change it.
If you don’t have someone who can actually make those changes to your product when you need it, you’ll take longer to complete the learning cycle and start again. The longer you take to build, test, validate and rebuild your product, the harder it gets to get to a point you can launch.
Even worse, if you’ve already launched, and you need to make these changes in response to requests or complains, not having someone in the team 100% committed to product development will contribute to having users dropout in mass.
2. You can fix anything, anytime
How many times have you had to make last minute changes or fixes to your product? How do you do it when you can’t code and you don’t have someone who does around you?
Depending what kind of company you hired (and how much you pay them) they will be able to help you, but not as fast as you’d want.
Granted, having a technical co-founder or employee doesn’t guarantee they will be there for you anytime, all the time, but they are more likely to be there than someone that doesn’t really care about your success, that doesn’t have to put their skin out there.
3. Your product just gets better
Products get better the more you work on them. The more you discuss your product with the rest of the team, the better results you’ll get (As long as you know how to hold productive meetings, of course).
What happens when you don’t have someone with the technical expertise participating in such important meetings? Usually, bad decisions get made. Or at the least, these meetings are not as productive as they could be if they counted with the participation of someone who really understood the feasibility of the product roadmap.
Can you possibly know, without someone who understands software development, if what you plan to build next is doable? How long it will take? What roadblocks will you encounter along the way? What things could prevent the product from actually working?
4. In the long run it’s cheaper
Hiring an external team might seem simpler and cheaper than hiring a developer, at least at first. No employees to worry about, no commitment, no awkward conversations about salary raises. Just agree on a price and get to working.
One could argue that if you find the perfect 3rd party provider and they deliver just as promised, there’s no need to have a technical co-founder or in-house developer, but the reality is that 99% of the time estimations will not be accurate and one way or another you’ll end up spending more time and or money than you initially thought.
Having a technical co-founder doesn’t guarantee estimations will be accurate; but, generally, it yields better results and you have the insight of someone that is fully committed to the project, someone who understands very well where you are and where you want to be.
If you are in crunch mode (and you’ll be) tossing more dev hours from a company can quickly turn very expensive. If you have a technical co-founder they would probably do it as part of their normal routine. A very committed first hire would probably help without overcharging you.
Finally, if you are lacking in funding, and with an attractive porposal, you could potentially find a first hire willing to give up on a portion of his salary in favor of equity. With an external dev shop this could also be done but it’s a much riskier proposition. Generally, in the long run an external team will not be very involved in the project and still will hold a hefty portion of your company.
5. It’s probably safer as well
When you hire an external team it’s probable a lot of people will be involved in creating your product. Designer, project managers, developers, even the owner of the company if it’s a small dev shop.
If your product involves novel patents or unheard of technology, it’s very likely you’ll want as fewer hands as possible (and eyes) on what you are building.
Even if that’s not the case, you still want to make sure you own the code that’s being produced and that it’s being stored safely while in production and available to you at any moment, specially if things go bad with the development team you hired.
Having someone in your team, a technical co-founder, that understands the importance of safekeeping not only the sourcecode but also your users data, that knows where it’s kept and how to retrieve it, is key and will prevent a lot of headaches. I’ve heard plenty of times how some unscrupulous devs have held their clients code as ransom to keep milking them for their money.
What we’ve learned
I know that when you can’t find the right people to join your team as technical co-founder it seems that the easiest route is to go out and hire an external team. Heck, at some point in my life I even promoted that route. It’s easy to find small dev shops that will help you build your product at a reasonable price, they (supposedly) can be fired at any moment, and if you get lucky there won’t be any delays in the promised delivery date. Lately, we’ve also seen a surge of deals where these software factories reduce their fees in exchange for some equity in the company.
As tempting it may sound to work with these companies, I’d try to see it as a temporary measure while you ACTIVELY look for a technical co-founder. Product is key for a company to succeed and it’s constant development shouldn’t be an afterthought or something left out to someone who is not really invested in its success.
As an investor we won’t be investing in teams that don’t have at least one technical guy in charge of the key features of the product. Without them, no matter how good the rest of the team is, it’s just a matter of team until the company falls apart.