“Engineers can’t be CEOs”

Are software engineers in the South encouraged to lead tech startups?

When a software engineer from the South tries to raise seed funding as the CEO of a software-based startup, A stereotypical response from an investor might be that engineers can’t be the CEO because a candidate well-versed in business will be better suited for the role. It’s an understatement to say that the response is disappointing.

It’s not the response from all investors all the time in conversation with software engineers. In fact, many Southern-based investors specifically seek software developers to lead software companies.

This week’s featured post from Southern/alpha is about two software engineers in Nashville who are also CEOs of their respective startup companies. Both founders discovered that, while raising capital, they encountered a similar response at one time or another. They both discovered angel investment as one solution, and they both were able to grow their companies outside of typical Nashville investment.

Over the past few weeks, I’ve been writing about software engineers in Nashville, and the identity of Nashville technology. This week is a continuation of last week’s post in a conversation I had with Jamie Bailey, founder of Initial State.

Initial State just finished raising a round of $1M from local investors, a number that is still not common among startups raising seed capital. Jamie’s perspective is about funding, something that may not apply to other software developers or their reasons for choosing Nashville as a place to work or live. However, when software engineers have a product, pre-revenue or not, and make the decision to raise funding, they might find themselves in uncharted territory, especially if they are looking for a large seed round (large meaning $1–5M, which by the way, isn’t defined as large everywhere in the U.S.).

I also asked Chris Hefley, CEO of LeanKit, to share some thoughts. Here is the topic:

Jamie Bailey (founder/CEO of Initial State): I have talked with many investors and successful individuals in Nashville who told me they don’t have faith in startups led by CEOs with a technical background such as engineering.

They prefer CEOs with business backgrounds. As one angel investor told me, “In my experience, engineers make really bad CEOs.” (background: I am the founding CEO of Initial State, and I am an engineer).

I have met with several investors who, on the first meeting, tell me how they will help me find a “real” CEO (By the way, that is a great first impression to give as an investor: “Nice to meet you, how about you let me invest in your company and we can start the process of firing you?”).

Both Jamie and Chris are currently CEOs of consumer-facing startups headquartered in Nashville. They both have previous corporate experience. Chris worked at HCA before LeanKit and Jamie previously worked at Lexmark in Lexington, Ky. Both Chris and Jamie founded their startups at around the same time-frame in Nashville, when seed money was even harder to come by for a startup outside of the healthcare realm.

I posed Jamie’s topic to Chris.

Chris Hefley (founder/CEO of LeanKit): I remember hearing something like that really early in the process, from some of the least progressive local investors we talked to. But since then, I’ve found just the opposite. Savvy tech investors want the founding CEO to be the person with the vision and passion for the product, first and foremost, not some outsider brought in to run the company. That doesn’t mean they have to stay in the “engineer” role (I didn’t), but the CEO should be the one with the original vision.

I wondered what was different in the two experiences. Chris did mention that he chose to be a CEO and didn’t stay in the engineer role. That can be a tough decision for a software engineer who has to choose between running a company and building a product, their product. Perhaps investors trusted a CEO with experience at HCA. Perhaps investors didn’t understand Jamie’s product. Perhaps the two were seeking investment from different types of investors, or a completely different circle of investors. I prodded about Chris’ experience, asking him about his investment strategy.

CH: I’ve come to understand that “deal flow” controls an awful lot of the investment strategy of regional investors. LeanKit didn’t fit well within the parameters of the deals local institutional investors and angel networks usually see. Because each firm has to balance the risk in their portfolio, they couldn’t just treat LeanKit as different. The only way they could consider investing in LeanKit was to treat it more like the deals they usually have access to. This was frustrating at first, but now I look at it as an inevitable consequence of having a primarily local investment strategy.But the good news is that there’s lots of angel money out there, looking for a place to go. And it’s not found in the traditional places, like the established angel networks. We essentially built our own angel network one individual investor at a time, and many of our investors added to their investments two, three, even six or seven times over the past few years. It’s a lot of legwork to raise money the way LeanKit did, and there are advantages and disadvantages to doing it our way. But for us, it was definitely the right choice.

Angels, as Jamie also mentioned in conversation, seem to be the key to raising a reasonable seed round of funding to launch a Nashville startup. Angels might not be the only answer, but it’s something both Chris and Jamie have in common.

According to a research report by Atomico*, 133 out of 156 companies (85%) worth $1 billion+ stuck with their founding CEO instead of bringing in an outside CEO. 144 of those 156 $1B+ companies (92%) started out with a founding team with technology backgrounds. This suggests that chances of building a big technology company are far greater when led by technologists. Ben Horowitz echoed a similar thought in his post on “Why We Prefer Founding CEOs” in 2010.

Jamie closed with a final thought:

JB: There are certainly many investors in Nashville that are interested in companies ran by technologists and engineers (as evidenced by our investors). What I don’t know is if my experience would have been any different anywhere else.

The next article will cover location. Is Nashville or the South in general the place to start a consumer-facing company? Chris Hefley had more to add about location of startup companies. I’d like to talk additionally to more software engineers. This topic will also go the other way and continue to cover aspects of software development and the identity of Nashville technology.

• A side note: that same Atomico research points out that 63% of $1B+ companies are founded outside of Silicon Valley.

Read more at Southern/alpha