19 Aug 2019
If you're starting a tech startup, please don't outsource the development of your MVP to a third party. Find a technical cofounder.
I know I’m not telling you anything you haven’t heard before. But please listen. I've heard too many heartbreaking stories from founders that tried to do it the hard way.
The founders that funneled tens or hundreds of thousands of their own money to a dev shop, without a product that works. Bled dry, a few thousand at a time, hoping that this time, they'll fix all the bugs and ship critical features.
The founders that gave up almost half the equity in their company to launch an MVP. Only leads aren't converting, and maybe they'll find traction if they add another feature or two. But the project's "done", so founders can't get any more time from the dev shop. And new investors won't fund the company because the cap table's all screwed up.
Many years ago, I started a custom dev shop. Pretty quickly, my entire client list consisted of nontechnical founders who were using me to develop their MVP.
I loved startups, so was eager to work on these types of projects. And I was pretty picky about which ones I took on, so only worked on products I believed in. I hit almost all my deadlines, and charged way less than most of the competition.
But a couple years in, I shut down the dev shop to work on Formstack full-time. I transitioned all my clients to other firms or freelancers, and applauded them from afar.
My first startup client brought all development in house shortly after they launched. They raised a few $M from angels and VCs and later exited to a Fortune 100 company.
My other clients met less desirable fates. None of them got much traction with their MVP. I don't remember any raising that much money from outside investors, if at all. Some had enough capital to fund a few more iterations of development to give the company a shot. All those businesses are now long dead.
I've felt guilty about this. I put a lot of heart and sweat into the work I did for them. We built a good relationship while working together, and I wanted to see them succeed. How was I able to make Formstack successful, and not do the same for them? How much of the blame for the failure was mine?
But as I reflected and listened to other founder stories, I realized launching with outsourced development is a near-insurmountable uphill battle. There wasn't anything I could've done differently for my clients. The odds were stacked against us.
You'll Move Too Slowly
It's critical, as an early stage startup, for you to be able to iterate quickly. I don't care how perfect your idea is — you'll need to make frequent changes in response to your product touching real-world customers. You'll more likely be struck by lightning than not have to make changes to your MVP to find traction.
The dev shop's going to be working on many projects in parallel. So your 40-odd hours of resources will be spread across several weeks, not one. Or, they're going to assign resources serially — once your project is "done", they're on to the next one. And good luck getting resources until that one's complete.
Nothing beats working with a cofounder or team member side-by-side, in real time. Critical bug that's preventing new users from signing up? Fix it now. Metrics looking bad and you need to overhaul the onboarding process? Drop everything else and crank away to ship by the end of the week.
Some dev shops will be able to respond quickly, but only for a while. Their business model is always working against you here. For every change, you'll need to go through the process of scoping out requirements, bidding, and scheduling out resources. And as a founder with time working against you, that'll bring lots of stress and frustration.
You'll Burn Too Quickly
If time isn't against you, cash is. Working with a dev shop will always be far more expensive than working with a technical cofounder or team member who's doing the work.
Again, there's no getting around it — there's overhead baked into the business model of the dev shop. They need to make money. For every $10k you pay them, I guarantee that you can find a great full-stack engineer who's eager to work on something with you for a fraction of that price.
And what most first-time non-technical cofounders don't realize is how much work comes after the launch of the MVP. The dev shop may even say that to you, but it's easy to let optimism cloud your judgement. You'll spend a tiny percentage of your total development costs on the MVP. Where it gets really expensive is afterward, when all those bug fixes and iterations start adding up.
You might get into this trap where you blow through your bankroll before you're able to demonstrate traction. Or even if you've already raised some investor money, you might funnel all that to the dev shop before hitting important milestones. In either case, it's practically impossible to get the next round of funding.
In the end, this ends up costing far more equity in the long run. It's cheaper to find a great technical cofounder and give them 20-50% of the company on a vesting schedule.
You Won't Build The Right Thing
The result of all this is that you likely won't get a chance to build exactly what you need to put your startup on the path to success.
It's not only the lack of speed and limits of cash that lead to this. It's the intangible of working with a cofounder that's bought into the startup as much as you are. Someone whose hopes and dreams hinge on making this work. Whose anxieties and fears revolve on making sure this thing doesn't fail. Someone that's thinking about your startup in the shower, on the drive home — just like you are.
You're not going to get this from a front line coder at a dev shop, no matter how skilled they are.
Who's going to put in the effort to find effective ways to cut development time? Who's going to search endlessly for elusive opportunities for 100x outcomes?
There's no one way to build a successful startup, and exceptions to every rule. I'll even bend my "have a technical cofounder" rule for a few exceptions.
Is your startup not really a tech startup? If custom software isn't really core to your business, then none of this applies. If you're creating a shoe company, work with people that can help you build the best shoe possible, whether or not they can code.
Do you already have a lot of your own money that you're willing to spend to get this startup off the ground? And you're unusually averse to the idea of hiring a half dozen engineers with that money instead? Then go forth and bless a local dev shop with your riches.
Do you have experience launching a successful product within another company? And done so as an engineer or product manager? And you're only planning to hire a contractor or two while you do a lot of the core work, not outsource completely? Then none of this applies either.
What Do You Do Now?
I know it's hard to find a technical cofounder.
Maybe you already hired a dev shop, and they're promising to deliver exactly what you want, on time, and within budget. What do you do?
You need to ignore sunk costs. Find a technical cofounder, or take what money's left and hire a "founding engineer" to work on it with you full time.
Would you start a restaurant without a chef? Then why would you start a tech company without someone who can build your product?
It's hard enough building a company. Give yourself the best chance possible for success.
06 Feb 2019
When I first heard about TinySeed, I was excited. Venture Capital isn't for everyone, and bootstrapping can feel impossible. It seems like there isn't much in between. I'm excited to see new, innovative ways for founders to get startup capital.
But as I dug deeper into TinySeed, I came across this in their FAQ:
Traditionally, venture capital has consisted of unicorn-hunting. VCs are looking to fund the next Facebook or Oculus Rift. If a traditional VC funds your business and it gets to $50m in revenue, generating $20m in profit year over year, it’s considered a miss.
This seems naive, disingenuous, or both. Most (all?) angels and early stage VCs would be elated to fund a startup that grows to $50m ARR with $20m profit.
Dan Primack pointed this out succinctly on Twitter:
And the replies to his tweet are a masterclass in understanding VC. In short, VC expectations are related to fund size, check size, and ownership.
As a founder, you should understand this fund math before you a) raise money or b) write off all angel/VC money as bad.
Here's how TinySeed values your company:
TinySeed invests $120k for the first founder + $20k per additional founder, in exchange for 8-15% equity.
As a solo founder, they'll value your company between $680k and $1.4m pre-money. Compare this to median pre-money valuations from "traditional" angel and seed rounds, which is now around $7M. So you can raise 5-10x more money in exchange for the same equity.
If early stage investors consider 20x return a home run, they'll be very happy to see your $50m ARR "lifestyle business" exit for $140m or more.
If, like TinySeed, the same investors had invested at a 1/10th of the valuation? The resulting 200x return would be an off-the-charts grand slam.
TinySeed may be a great option for some founders. I personally admire much of what they're doing, and might have considered it for Formstack:
- They're targeting bootstrapped companies, and I bootstrapped for 3 years before raising a small angel round.
- It's remote, and I started shortly after our first son was born, so wouldn't move across the country to join an accelerator.
- They're not biased against solo founders, and I was one.
But their terms seem structured just like any angel or early stage VC investment — they give you cash for equity in your company. And at a valuation that might be way below market for your company. And you're required to pay investor dividends in perpetuity if you want to make more than their salary cap.
And they get a participating preferred liquidation preference, which has been absent from clean term sheets for a while now:
If the company sells, investors receive the initial investment back (minus any dividends paid to date), and then the proceeds are divided pro-rata based on ownership.
[UPDATE: This is fixed]
The core value prop for TinySeed seems to be the promise that they won't "force growth."
But I personally haven't seen an early stage investor do this. They're focused on making sure the company exists in the next 12 months. Even YC preaches getting to ramen profitable and default alive so you're not relying on investors for continued survival.
Investors don't want you to grow because they like to gamble with the health of your company. They want you to grow because lack of growth is why most companies die.
This is different than the pressure for huge exits, which comes after raising tens or hundreds of millions of dollars from later stage VCs. Especially when you've put yourself in a position where you have to keep raising money over and over again. At some point, the math just gets to a point where you have to become a unicorn to deliver a home run.
But if you're raising a few $100k, and do it with a standard SAFE, you're not giving investors any leverage. There's no board seat, majority ownership, or preferred stock to force you to do anything. And investors will be as happy as you when you build a $50m ARR company.
If you don't need to raise money to build the company you want to build, don't raise money.
Or look to firms like Indie.vc that are structuring funding in a very different way. They apply dividends toward a buy back of up to 90% of investor equity. And dividends are capped at 3x the original investment.
Or look to firms like Lighter Capital that offer debt financing without taking any equity.
But also know that there are "traditional" angels and early stage VCs that you might enjoy working with, and will be aligned with founders. Just raise at a sensible valuation, and build a great business.
08 Jan 2019
I started running frequently a few years ago. I ran my first 5k in 2016, and ran my first half-marathon in 2018.
One of the hardest things I have to do when running is manage my own psychology. Most days, my brain starts telling me it's OK to quit before I reach my goal.
"It's fine. You did well yesterday, take it easy today and make it up tomorrow."
And in a swirl of exhaustion and pain, it's easy to listen.
I realized there's usually only one thing that's physically bogging me down. If I can isolate and eliminate it, the swirl of exhaustion and pain gets a little better.
Is my throat burning? Maybe I just need to take a swig of water.
Is my back hurting? Maybe I just need to adjust my posture.
Have I lost focus? Maybe I just need to play that song that always adds more bounce to my stride.
I see parallels to my time as an entrepreneur. I often found myself in a swirl of exhaustion and stress, nothing going right, wanting to give up. But I had to pause and isolate the pain.
Maybe I just needed to cut enough expenses to give us more runway.
Maybe I just needed to fire an executive that was pulling the team in the wrong direction.
Maybe I just needed to unplug and take a vacation.
Most times, there was one major thing that was bogging me down. And when I isolated and eliminated it, I found a path to keep moving forward.
02 Jan 2019
It's time for me to start writing again.
I've started starting a few times over the years, but it hasn't stuck yet. I'm hoping 2019 is the year it finally takes hold.
I used to blog regularly early in my career, but stopped around the time I launched Formspring. That led to the busiest years of my life to date, which was a good excuse for me to stop writing.
And for a long time now, I've regretted stopping.
Yes, I got busy. But more than anything it's been my insecurities that have held me back from writing more. What can I really contribute in yet another blog post about rehashed topics? Why would anyone care to read my drivel? Why not keep my thoughts to private conversations and personal journals?
But I've noticed a difference between writing in a journal and writing for my blog. There's something powerful in how publishing forces me to think more deeply about what I've written. And there's something magical in a post sparking conversations I wouldn't have had otherwise.
My blog has been instrumental in helping me learn and grow, and I've missed that.
So here I am again, blogging.
The new year is a good excuse to make me take that first step. And maybe sharing my goal publicly will make it harder for me to use "too busy" as an excuse.
Thanks for reading. And thanks for helping me learn.
13 Nov 2016
[Originally posted on Medium]
Look, I get it. Trump won.
I accept it. I’m not whining. I’m not rioting.
And I get it. There are millions of working class people across the country that felt left behind in Obama’s America. They wanted change.
And I get it. It wasn’t about race.
And you especially, I don’t think you’re racist because you voted for Trump. Truly.
But please don’t insult my intelligence by telling me that race wasn’t part of Trump’s campaign.
Please understand why as a black man I’m scared about the next four years in Trump’s America.
Am I supposed to forget that he spent years on the national stage as the leader of the birther movement?
Am I supposed to forget that he started his campaign labeling Mexicans as criminals and rapists?
Am I supposed to forget about all the other times he used racially tinged rhetoric on the campaign trail?
Am I supposed to forget what he said about Judge Gonzalo Curiel?
Am I supposed to forget what he said about the Central Park Five?
Am I supposed to forget all the times he retweeted messages from white supremacists and neo-Nazis?
Am I supposed to forget he hired Steve Bannon, a pivotal figure in the alt-right community, as CEO of his campaign?
Am I supposed to forget his calls for banning Muslims?
Am I supposed to forget his calls to bring back stop and frisk?
Should I go on?
Or did I miss the time that he apologized for any of these things? Where he reached out to the disaffected to clarify his position?
Or did I miss the time when he clearly denounced the acts of intimidation and violence against minorities carried out in his name?
Don’t think I’m pacified because he added Ben Carson to his transition team.
Don’t think I’m pacified because you point out something racist someone else said or did, someone who’s not going to be our president.
Don’t tell me Trump only said horribly racist things and appealed to white nationalists just to get elected. That he didn’t really mean those things.
Don’t tell me he’s really going to be a president for all the people.
Don’t tell me to deal with it.
Don’t tell me to shut up.
That, I do not accept.