Mar 6, 2016

Investor CTO

For the past 6 months I've contributed my time to 2 startups. In that time, I've become keenly aware of two things: 1) there are a lot of startups that need technical and management help and 2) my background in software development and executive leadership enables me to provide valuable advice and hands-on implementation to help those startups. The model is simple: I take a reduced compensation rate in addition to an equity stake in the company that has an attached pre-defined equity maturation event. Now my time is limited, so 2 or 3 startups constitutes a full book at the moment. It pays to be selective like most investors are.

I've taken alot of meetings with founders and would-be founders. Building a pipeline of potential clients is as much work for me as it is the startups I work for. I see founders that fit in 2 camps: those that have deep expertise in a domain and decide to take a run at making a business out of it. We'll call them domain founders. Then there are those that have deep experience working for companies and are trying to make a go at a market that is new to them. We'll call them experienced founders. With domain founders, it's important to be able to work with someone who knows that they can't do it all and is open to "coaching up". I tend to provide input well beyond technical aspects and more into how to scale or growth-hack various parts of the business. Experienced founders typically underestimate how the lack of knowledge in a new market will hinder their path. I call them experienced founders because they know how to scale at a certain point, but they lack that zero to one growth experience. With these founders its key to emphasize how risk is viewed differently in a startup. Getting to market fast, cutting scalability corners, honing in on your hypothesis, and testing the market in various ways is key.

My most selective criteria is whether I can work with the team. I'll take an initial meeting and a first engagement at no cost. It's worth it to invest my time upfront for free if there is an opportunity. What makes a good team? Proper role definition and open mindedness go a long way in my book. They say you need a hacker and a hustler. That's a good attempt at initial role definition. Often times, I'll come into a company that doesn't fit that mold, and you have people stepping on each others toes. That's fine, but it needs to be sorted quickly. And that process is never ending. Being open minded, is a must-have. Nobody can predict the future, as Daniel Kahneman states "experts are no better at predicting the future than dart throwing monkeys". If there is contention, state how you intend to objectively move through that disagreement and what the risk is associated with you being wrong. I've been hugely wrong. But in the end, I was glad to be proven wrong, because that was a big win the for business. Third, I'm a fan of the no asshole rule. I've met founders that are bullies and run over a conversation. They interrupt their people and generally think they are God's gift to free market enterprise. You spend more time working with people than you do your family, so my investment is more than fiscal. I need to enjoy working with these people, and assholes just won't cut it. Finally, I need to work with competent people. Both intellectually and emotionally competent people. There is a famous TED talk that says "people don't buy what you do, but why you do it". Often times that 'why' can get distorted and convoluted . I would restate "people buy who you do it with first over what you do and why you do it". Team is number 1 in my book. And it seems that I'm not the only one. In a recent survey of software devs, culture and colleagues rank above building something significant.

Second to the team, is knowing how my skills can help this business succeed. If you're working with hardware, I'm not a great fit. If you're working with enterprise software, I'll pass. If you need to build an MVP, I'm interested. If you need help managing your development team, I'm all ears. If you're trying to raise capital, I can help you scope your efforts and be an experienced asset on the team. It pays to tell people 'no' and be specific about my value-add. After all, I'm expecting these fledgling companies to give me a longer term stake in their business and I have to feel that I can provide value.

As the team and product grow and scale, I get to see who isn't pulling their weight. I don't time for passive equity holders. A new startup will go through phases. Maybe there are more technical needs in the beginning, and marketing needs to hold off. This is why role definition (which changes over time too) is important. Accountability needs to be clear. Startups go through phases: building an MVP, getting early adopter traction, scaling past $1 million, raising capital... I like to have a good sense for who is going to contribute and how much. If I see passive equity holders along the way, I will voice my concerns. After all this is an investment for me, and I don't need dead weight pulling down my investment. Warren Buffet's model is simple "estimate an investment’s intrinsic value, handicap its risk, buy using margin of safety, concentrate, stay in the circle of competence, let it roll as compounding did the work.” I believe as a partial investor in a company I can provide much more value for the long term and decrease the odds of failure substantially.

One aspect of this position that I enjoy more than I ever thought is the creative thinking you can apply to building a business. Tech is full of business models that never existed. In fact, the concept of "business model" didn't really exist until the dot-com tech bubble. Adjusting to the constantly changing field of information: competitors, market, full of opportunities to exploit. If you can't see the opportunity in things, startups are the wrong game for you. As John Maynard Keynes states "A large proportion of our positive activities depend on spontaneous optimism rather than on a mathematical expectation”. I enjoy the possibilities of the game. And that is likely the biggest draw for me. I could make more money in a corner office, but I much prefer the wild west of startups. As Warren Buffet states "we enjoy the process far more than the proceeds".

Being an investor-CTO is as much a new adventure for me as the startups are for those I consult for. I still have alot to learn. But Boulder is a burgeoning town for startups. And I'll never close the door on joining one of these teams fulltime.

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