Startups: When to Hire a CxO

In my last article, I told you that you don’t need a CTO yet, and I received some interesting responses. In one discussion, someone pointed out that this doesn’t just apply to CTOs but could really include any C-level position that the founding team doesn’t already have covered. I agree: I chose to write about the CTO role because it’s closer to my experience, so I end up discussing this function with startup teams, but you could just as easily say, “Don’t hire a CFO yet.” As this person pointed out, you need to take care of the functions that are covered by these roles, but you don’t need to create the titles until they’re absolutely necessary.

So let’s assume you took my advice (because you really should). The logical next question is: when should I hire a CxO? The actual timing varies by your company and situation, but here are some pointers to tell you when the time is right.

When the hat gets too big

“We all wear a lot of hats around here.” I’ve heard this enough times that it might as well be printed on a poster and issued as part of the Entrepreneur Starter Kit, along with a case of ramen noodles and a framed picture of Larry Page and Sergey Brin. Any company, no matter how small, includes basic functions like sales/marketing, finance/accounting, HR, product development, and customer support. Leading the company means ensuring that every one of those areas runs effectively, so every leadership team has to cover a lot of ground in the early days. And if your founding team didn’t come with those skills built in, then someone has to do two or more jobs (i.e., wear more hats).

(Photo Credit: Kris Davidson

As your company grows, the needs in each area naturally grow, as well, but not all at the same pace. HR functions are hard to set up initially, but the difference between one employee and ten isn’t that great. Going from 10 to 50, however, adds a whole new world of complexity as you suddenly become subject to federal leave laws and other requirements. Finance and accounting are really no more than bookkeeping until you start making a profit or bring in significant funding. Then your investors start expecting quarterly finance reports, you start talking about the differences between GAAP and cash accounting methods, and the government starts asking for its share.

The function’s criticality should dictate the seniority of the leader.

As your company’s needs grow, you’ll need people dedicated to each of these functional areas: it’s impractical for the CEO to also be the bookkeeper for a 20-person tech company. But when do you need a full-time leader? Here are some signs that it’s time to delegate a function, but even then you may not be ready for a C-level hire. The function’s criticality should dictate the seniority of the leader. If a function is time-consuming but necessary, then you may be able to get away with a director-level leader who can later join a larger department (operations is a great example of this). However, if the function is core to your business, then hire a senior strategic leader who meets today’s needs and has the capacity to grow the function for the next few years.

• The function is critical to your company strategy but outside of your wheelhouse. In the early multi-headgear days, founders can get away with playing to their strengths (product strategy, financial planning, sales, etc.) while competently covering the other parts of the business. As you start to see success, though, you need to build a team that’s strong across the board. Too many companies stumble just as they’re gaining momentum because their founders are afraid to admit their weaknesses and cling to leadership when they should delegate to an expert. If you’re leading a software company and you aren’t a technologist, then hire one before you become the problem.
• Trying to cover the function part-time has become an impediment to the company’s growth. Even competent leaders become incompetent when they’re overtaxed. Ask your teams to tell you when you’re becoming a bottleneck. When company progress is delayed because certain areas aren’t getting enough attention, then it’s time to hire a new leader.
• The team is too big to manage part-time. When a functional team reaches the size where you can no longer manage them with part-time direction or where keeping that team on track takes up a disproportionate amount of your time, then it’s time to offload the work. Find someone with both the domain expertise and the people management skills to keep the team running efficiently with general guidance from you.

When your investors tell you to

After reading my last article, several people replied, “Why even worry about this? The VCs are just going to replace the entire leadership team anyway, aren’t they?” While slightly hyperbolic, this statement points to an underlying truth: investors want a strong leadership team, and they aren’t shy about taking action when necessary. It even makes sense from the investor’s point of view: they have an investment to protect and they can’t have your underpowered team screwing it up.

So if you don’t have the right leadership in place — or even if you think you do — be prepared for some changes when you take on large investors. In case no one mentioned this, large-scale financing is a direct trade of control in exchange for money and experience. Your investors have strong opinions on what works in your industry, and they’ll expect you to listen when they make “suggestions.” The upside is that they also have a network of experienced leaders that they can bring to bear on your leadership problems, so use them.

I’ve seen several companies “bring in the adults” without thought for how they would blend with the existing team, with disastrous results.

Just make sure that you don’t trade too much control in this process: this person still has to fit in with your team and your company culture. I’ve seen several companies “bring in the adults” without thought for how they would blend with the existing team, with disastrous results. You don’t want to hire a new leader and leave them with no one to lead because the entire team fled.

Before your investors tell you to

If you want more control over your team-building, then consider hiring ahead of your needs. Going to investors with a strong leadership team that’s clearly ready for the next phase of growth can speed up the financing process and minimize board-level meddling later on. This approach requires you to spend more money up front, since you’ll be looking at people who are overpowered for the current position, but hey, you have to spend money to make money, right?

If you plan to assemble the superteam before seeking that next round of financing, then focus on the areas that are both critical to the investment thesis and weak points in the current team. Do you plan to increase revenue by 400% in the next three years? Then make sure you have a superstar Chief Revenue Officer. Planning to disrupt an entire market with proprietary technology? Then you need a business-savvy CTO and a Chief Scientist or Product Architect with a stellar resume in your proprietary approach (a couple of patents can’t hurt, either). You don’t need to fill your boardroom table with CxO name cards, but you need to have the right people in key positions if you want to set your investors’ minds at ease.

Hiring senior leaders should always be a careful blend of financial planning, insights into current and future needs, and a comfortable fit within the current leadership team. Take your time and do it well.

Startups: You Don’t Need a CTO (Yet)

“My technical co-founder just quit,” she says, “and he took all of the product code with him. Now I have to negotiate to get my product back.”

“I had to fire my CTO last week,” he says, swirling the coffee in his mug and looking around the coffee shop. “The entire engineering team quit within a few days, so now I’m just hoping nothing breaks before I can hire some people to review the code and learn how it all works.”

I hear stories like this all the time from the startups that I work with and from other startup mentors. Companies who are just starting to get traction are suddenly paralyzed by a loss of technical leadership and lose precious time, money, and reputation strength as they rebuild. The cause: hiring a CTO too early.

Every software company needs technical leadership, and it can seem especially critical in the early stages, but do you need a CTO right out of the gate? Tradition (and perhaps investors) would say so, but experience says otherwise. I couldn’t find statistics on this anywhere, which is a telling fact all by itself, but anecdotally I can say that a majority of successful startups got through two or more CTOs in their first five years of existence (otherwise known as The Investor Financial Model Horizon). Why is this, and what should you do about it?

What does a CTO do?

The CTO is the technology leader for a company. For most companies, this means that he owns all technology, not just the client-facing parts, so this includes corporate IT, infrastructure and hosting, and networking. The CTO makes sure that the product gets built, the servers stay up, and the CEO can get her email.

Being CTO means more than being the lead engineer for a company: it means that you’re the lead technologist and technology strategist.

At a higher level, the CTO’s job is to apply technology to provide competitive advantage for his business. This requires a broad understanding of both business and technology, as well as the ability to effectively apply technological solutions to business problems. Being CTO means more than being the lead engineer for a company: it means that you’re the lead technologist and technology strategist. This is where many CTOs fall short, and where startups get into trouble as they grow, and this is why you may not need a CTO as soon as you think you do.

Why startups change CTOs

To be clear here, we’re looking at changes initiated by the company, not by the CTO. People move on, they find better opportunities, they get bored. This is part of life in the technology industry, and other than making sure that you’re creating a dynamic, fun workplace, there isn’t much you can do about that. What I want to look at is the breakups, the “It’s not you, it’s me. No, actually, it’s really you” moments. Most of the time, startups break up with their CTOs for one of three reasons:

1. Personality conflicts within the leadership team

2. Poor performance

3. The company outgrew the CTO

I’ll look at all three of these, their root causes, and what you, the new entrepreneur, can do about them.

Personality Conflicts

You see them at every tech meetup: smart business people with big ideas, hunting for a technical co-founder. They walk from one nerdy target to another, sharing the same pitch over and over. “I have a great idea but no way to build it. Will you build it for me? I’ll give you equity! Please be my tech co-founder!”

Every business person thinks that they have to have a technical co-founder, but what they really want is an engineer, and often any old engineer will do. When they cruise the meetups or post on the local message boards or Slack channels, what they’re really asking is, “Are you willing to work for equity on an idea that isn’t yours?” Astonishingly, some people actually say yes to this proposal, but it’s rare that it’s a successful pairing.

Founding a company together isn’t just a transaction; it’s a commitment. If this is a full-time startup, then you’re committing to spending more waking hours with your co-founder than with your family, your dog, and your favorite Netflix series combined. If it’s a part-time startup, then you’re still going to spend hours every week online and in person solving problems, making plans, and hashing out product decisions. Would you marry someone you’d just met at a tech meetup? Then why would you decide to start a company with them?

Would you marry someone you’d just met at a tech meetup? Then why would you decide to start a company with them?

And yet, people do. The lure of free development work is strong, so rather than hiring an engineer or a development company to build the first prototype, business people decide that speed-dating engineers is the best approach for their new company. Unsurprisingly, personality fit often takes a back seat to technical competence in this process, leaving a company with a CTO whose only qualifications for the job are that he knows Python and was willing to work for free. As the company grows and the demands of the role increase, the cracks in the relationship start to appear. Soon, the CEO is saying, “Maybe it’s time we saw other people, because right now I want to punch you right in your beard.”

If you find yourself looking for a technical co-founder, treat this like the most important relationship in your life, because after your marriage, it is, at least for the next few years. Date around first. Look for personality fit, common goals, and a common outlook on life before you start asking about technology stacks. Simply by virtue of being the first employees, you will define your company’s culture through your interactions. They must be healthy. The most successful early-stage CEO/CTO partnerships that I’ve seen were built on years of friendship before ever deciding to build a company together. You need this foundation if you want the relationship to last.

Poor Performance

Great engineers don’t always make great leaders. In fact, I’d argue that most great engineers struggle to make the transition from “smartest person in the room” to “leader of a roomful of smart people.” The skills that we value in a great engineer — strong problem-solving, deep knowledge of multiple technologies, the ability to craft elegant solutions — are very different from the skills required of a good leader. And as any engineer will tell you, engineers are some of the hardest people to manage, making it even harder to bridge the gap from individual contributor to team-builder.

If you have a great engineer on your team, don’t ruin his life by making him a CTO.

I’ve seen many great engineers become nightmarish technical leaders — in some cases taking their companies down with them — simply because didn’t understand the job or lacked the skills to do it well. The very thing that makes people the best individual contributors — pride in what they’re able to accomplish on their own — makes them the worst leaders, because they’re incapable of letting anyone do things differently than they would have done it. They have to learn to take pride in what their team accomplishes — the work they do through many hands instead of just their own — if they’re going to succeed. Many people can’t make that transition.

Engineers, in particular, also struggle with the fact that people are messy. When you’ve built your career on being logical and building complex structures that work perfectly every time, it can be frustrating dealing with people whose moods change every day, who don’t always say what they want, and who get annoyed when you rewrite their code for them. A CTO who doesn’t appreciate the people side of the job will only grow angrier as the company grows, driving away the best team members through his own bad behavior.

In these situations, the best outcome would be to move your leader back into an individual contributor role that plays to his strengths. Unfortunately, if that person is already the CTO, then any move looks like a demotion and the only viable option is often to replace him.

The best way to avoid this problem is to avoid creating it in the first place. If you have a great engineer on your team, don’t ruin his life by making him a CTO. Let him be the development lead, architect, or Chief Scientist. Let him apply his technical prowess to the company’s benefit without getting tangled up in the messiness of people management. If your leader wants the CTO title, then make it clear that hands-on development work will diminish rapidly as the company grows and confirm that this is where he wants to go with his career. If you’re clear in your expectations, then at least no one will be surprised if you have to have the difficult conversation later.

Outgrowing your CTO

Every software startup needs “the technical guy.” When you sit down with potential investors, this is often the first question they’ll ask, “Which one of you is the businessperson, and which one is the techie?” This is because, practically speaking, someone needs to build the product. But does this person need to be the CTO?

Before they even have a business, most startup teams sit down and hand out titles:

“I had the idea and I’ll be the face of the company, so I’m the CEO. Jan is the sales specialist so she’ll be our CMO. What, Jan? They call it Chief Revenue Officer now? Fine, you’re the CRO. Todd, you’re the programmer, so from now on you’re our CTO. Try to let me do most of the talking. OK, let’s go build a unicorn!”

The problem with this, similar to the speed-dating scenario above, is that Todd’s primary qualification for being CTO is that he was the first one on the team who knew how to code. Todd may be a brilliant engineer, but is he able to build a team? Can he run the technology side of a business? Does he have the faintest inkling of what the product strategy should be, or is he just a good typist?

As a company grows, writing code quickly becomes the least of the CTO’s responsibilities. In fact, if your engineering team is larger than ten people and your CTO is still writing code, you have some serious prioritization problems. Some CTOs are prepared for this change and even welcome it as the next step in their career evolution. Many, though, look at these company-building activities as a distraction from their “real job” of writing code. They either ignore the bigger responsibilities, leaving the rest of the leadership team to pick up the slack, or they do them poorly.

If your engineering team is larger than ten people and your CTO is still writing code, you have some serious prioritization problems

There are two ways to avoid this trap:

Make your CTO replaceable. Many founding teams include “the First Techie,” someone who knows how to build the MVP and convince investors that you know what you’re doing. This person may want their role to grow as the company grows, but they may also want to just keep building cool stuff. If possible, try to discuss this in the early days of your company’s existence, and if your tech leader wants to stay close to the code, have a plan for him to replace himself as soon as it makes sense. Laying this out from the beginning avoids hurt feelings or painful changes down the road, and enables your tech leader to manage expectations with a development team that could otherwise turn mutinous if they think their leader is being disrespected.

Startups that address the changing leadership needs early can create a special role for their founding techie, being with a Chief Scientist or Product Architect title as soon as the company grows to the point that it needs a true CTO.

Don’t hire a CTO until you need one. If you don’t have a clear technology leader as part of your founding team, but your leadership team can successfully decide how best to use technology to create competitive advantage, then don’t make it one person’s job yet. Wait until you’ve grown enough that you need to specialize. This can create some awkward moments when potential investors ask, “So which one of you is the techie?” but you can handle that by designating one of the team to act as the face of the technical organization for the moment.

This doesn’t mean that your company shouldn’t have technical leadership at a tactical level. You still need to build the product, after all. Building a development team around strong technical leaders will be critical to any software company’s success, and you can do this with appropriate management levels and titles. Rather than handing out titles for people to grow into, focus on building a solid team that delivers a competitive product.

At some point in your company’s growth — probably in the post-product, post-revenue stage — someone is going to have to own the technology strategy and execution. They’ll need to look outside the company to understand technology and market trends, then work within the company to build teams who can develop product, manage infrastructure, and find the best applications to keep the company humming. They’ll need to set the product roadmap and be the face of technology to customers and investors. Now is the time to search for a true CTO, a technology leader, and if you can defer that hire until you truly need it, you’ll have a better idea of what kind of leader your company needs. Better yet, you’ll actually be able to afford the right one.

Great companies are created by looking at a business or market from a different angle, finding the need that no one else has seen, and building a product that meets that need in new and exciting ways. Building great startup teams requires the same willingness to look beyond the norms and find the best people to get the job done, regardless of title. It also requires you to recognize what you need to be successful today, tomorrow, and next year, and to find people who can take your company and your product where you want them to go.

Sometimes, that means leaving a seat open until you’re actually ready to fill it.