Why do we love investing in hackers?

The best deal in venture capital is to find a computer scientist with a great idea, and fund their salary for a year to build it – in exchange for 10% of the company. In the 90s, that’s how a lot of big internet success stories and smoking holes alike got funded. For a glorious, brief period of time between 2009 and 2013, that model worked too – though for mobile apps that time.

Investors love seeing strong technical talent on a startup founding team. Can you even wrap your head around the idea of funding a sole founder CEO who has no internal means to execute on their vision? AKQA’s CTO Rei Inamoto famously described the startup founding dream team as “a hacker, a hustler, and a hipster.” Two out of three of those are “individual contributors” – the hacker (engineer) and hipster (designer) are able to generate work product on their own. Today’s Letter is all about the magic of investing in individual contributors, and the dangers of reading a founding team incorrectly.

Where are the Individual Contributors?

The startup ecosystem is full of founders looking for investors. That’s a given. But there’s another cliché, just as common – the “business” founder courting a “technical co-founder.” The glaring stupidity of that arrangement is threefold:

1) Ever heard of a technical founder with a great idea looking for a business-savvy co-founder to help them get it off the ground? No, dummy, they just build and ship.

2) Ever heard of an individual technically talented enough to build a market-viable MVP who’s out looking for great ideas so that they can leave their 200k/yr jobs to eat ramen for equity? No, you’d be better off looking for a Nigerian prince who legitimately needs your help  warehousing silver.

3) Where’s the line between co-founder and first employee? When the seed check runs out and you can’t pay your “technical co-founder” anymore, will they stay alongside you and work for ramen? Or will they go take one of the million engineering jobs available to them and promise to help you out on the side?

Here’s the truth. Founding teams come together organically, or they don’t. Friends with differing skillsets see the same problem and are inspired to solve it. One may have a great network and ability to forge strategic partnerships, another may design great products, another may know how to build them That’s a founding team. The minute you start shopping for co-founders like you’re looking for investors, the jig is up.

What’s the big deal about technical talent being on the founding team? Why isn’t it good enough to go out and hire your senior technical talent? Well, founders know what VCs know. Unless technical talent is bought in, the escape velocity is FAR too low for them to be trusted. What’s the big risk to your business-minded founder if the money runs out? A sales job is going to magically pop up for him? No, he’s going to keep cranking on the startup. There’s some unsavoury analogy to be made here about infidelity in relationships and its relationship to opportunity. The engineers and designers have it. The MBAs … less so.

How can investors evaluate the status of individual contributors on the founding team? This is tough. A cogent origin story is a good start. A team full of MBAs, dreamers, and visioneers with one token technical signatory is a red flag.

Ultimately, we want to help people who can help themselves. We want to believe that if our founders could just FOCUS on their world-changing idea, they’d create immense value. That can only be the case when the talents required to EXECUTE the idea are endemic to the founding team.

Technical talent can be outsourced (and hired for) far more easily than “business” activities like partnerships and sales. That is not the point. Proper selection and management of outsourced teechnical talent isn’t the point either. The point is that individual contributors have the skills under their own recognizance to build the product AND the business. Nobody acquires a business plan. A business plan does not IPO.


4 Individual Contributors to Recognize

A decade ago, individual contributors in venture-backable companies were limited largely to software developers and graphic designers. Today, it pays to keep a more open mind:

  1. Analysts. There is a big difference between an MBA who has been managing others for decades, and a top-notch analyst. Sure, they may have read the same books in school. But individual contribution is about attitude just as much as it is skillset. Analysts with current skills should be able to build peerless financial projections, break down markets with clinical precision, and draw category-defining insights from the same information available to everyone else. Know what you’re buying. Ensure your analyst-founder not starting a startup to start a startup. Bosses burn their analysts out early, and they become desperate for the sweet relief of management. That will not be available to them the first 5 years of their startup, but they may not realize that.
  2. Electrical & Mechanical Engineers. Some of the most exciting companies being built today have nothing to do with the internet. TAE is making nuclear fusion power a reality. Apeel Sciences is making expensive produce last longer with a coating made out of tomatoes. Software engineers may have been the darlings of the oughties, but we ought to pay attention to the builders who ply their trade in more solid media.
  3. Digital Marketers. Just as writing object oriented code is a trade, conducting effective digital marketing has become a trade. Software engineers may specialize in front end, database, application, data science, and myriad other sun-sectors. Likewise, the best digital marketers have become ultra specialized in their platforms of choice: messenger, LinkedIn, FB/insta, E-mail, yada yada. In the past, a “digital marketing strategist” might have sounded appealing. Now, you want someone who can go beyond writing the copy and pointing in the direction of the battle. You want someone you has a knowledge of platform-specific TACTICS and the personality to stay on top of their game as the field moves dynamically. Best-of-breed marketers move the needle and decide which brands and products grow. Lesser marketers burn runway with expensive paid campaigns and come armed with excuses. Buyer beware.
  4. Industry Specialists. Many industries have been disrupted by total outsiders. Airbnb and Uber did not have hoteliers or taxi drivers on their founding teams. However, much of the low hanging fruit in the “put it online” game has been picked. Hell, who imagined mattresses would turn into a disintermediation bloodbath? Simply put, if you want to disrupt the industries that are still run by luddites, it pays to have an enlightened luddite bought in. Sure, you can pay for your starry-eyed founders to get up to speed. Or, you can bet on a team that already has industry buy-in and a co-founder who’s able to quickly cut through the chaff without opening up Google.

 

Get the Urbach Letter in your inbox.

  • This field is for validation purposes and should be left unchanged.