A NON-TECHNICAL FOUNDER’S GUIDE TO TECH STARTUPSSteve Nolan

Copyright © 2015 Binary.Ventures 704.301.1876 info@binaryventures.com

- Steve Jobs Apple, Inc., co-founder, chairman and CEO

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CONTENTS5 THINGS TO LOOK FOR WHEN HIRING A CTO 5 Do They Understand the Position? 6 Do They Have the Right Startup DNA? 7 Do They Have Team Chemistry? 8 Are They a Great Communicator? 9 Do They Have a Passion for Technology? 10

7 KEY FACTORS TO OUTSOURCING DEVELOPMENT 12 Find a Shop That Will Put Skin in the Game 13 Cross Your Ts and Dot Your Is 14 Don’t Settle for Just Any Ordinary Reference 15 Time & Materials vs. Fixed Bid 16 Onshore vs. Offshore 17 Know Your Developers 18 Due Diligence 19

5 KEY FACTORS TO INSOURCING DEVELOPMENT 21 You Get What You Pay For 22 It Takes More Than a Team of Developers 23 Avoid Developer Turnover 24 Consider All Internal Costs 24 Time Can Be Your Worst Enemy 25

ABOUT THE AUTHOR 26

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So you closed out your seed round by tapping into your savings account, friends, family and maybe an angel or two. Everyone loves your killer app idea—but now you have to build it.

So where do you start? Should you hire a Chief Technology Officer and build out a team of in-house developers? Or should you outsource? Both options have their advantages and disadvantages; both have significant risks and rewards. Regardless of your choice, there are several pitfalls you’ll need to avoid—especially if you and your team are lacking a true technical founder.

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– Marc Benioff, CEO, Salesforce

THINGS TO LOOK FOR WHEN HIRING A CTO5

The very idea of launching a new business can be (and should be) all-consuming. It’s the last thing you think about when you go sleep, and the first thing you think of when you wake up.

Starting a new business is extremely exhilarating. It’s also fraught with risk and uncertainty. Having to constantly be raising capital while keeping your existing investors informed and happy is almost a full-time job in itself. Then add the time it takes to actually run the business while protecting the company’s fragile bottom line and keeping tabs on your competition and the ever-changing marketplace, and you begin to understand the importance of hiring a Chief Technology Officer.

Take it from a serial entrepreneur: This business is not for the faint of heart.

One of the many challenges tech startup founders (especially the non-technical variety) encounter when getting their fledgling company up and running is hiring good people.

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A CTO is absolutely crucial to your ability to recruit, hire and lead a team of developers. If your company is lacking a technical founder, finding a good one can be a real challenge.

Employing the wrong person for such a key position can not only cost you a ton of money you don’t have (not to mention equity), but also time—and in the startup world, time is everything. This is especially true if you have yet to build and launch that next killer, industry-disrupting app you’ve set your sights, hopes and dreams on.

For startups that lack a true technical co-founder, the CTO role can make or break your company’s viability and technical acceptance in the marketplace. You have two choices. You can seek out a trusted, technical advisor who may, in return for services and mentoring, accept a nominal sweat equity position, or you can go down the path of attracting, recruiting and hiring a CTO. Because most startups are forced to hire and operate their business on a shoestring budget, you can’t afford to get it wrong.

In order to avoid this costly pitfall, here are the five things you should look for when hiring a CTO.

1DO THEY UNDERSTAND THE POSITION?CTOs are hired to guide and direct your product’s technology path, and because of this, they must be well-versed and diversified when it comes to technology.

A good CTO should also have the personality and leadership traits that inspire confidence in your team and investors alike. Depending on whether you’ve elected to build in-house or outsource development, your CTO will be required to interview, hire and direct your crack team of star coders.

If you have chosen to go down the path of outsourcing your development, he or she will be able to assist the company in its efforts to find a qualified partner you can trust and bank your money on.

Keep in mind, if your startup lacks a true technical founder, a good CTO should not be afraid to call bullsh*t when someone tries to play a technical trump card over you, regardless of whether it’s one of your staff or an outsourcing partner.

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2DO THEY HAVE THE RIGHT STARTUP DNA?Depending on what part of the country you live in, finding a qualified CTO for hire may present a difficult challenge—especially if you are bootstrapping and are relying on selling them on your dream of fame and fortune versus a cushy corner office with a view.

Recently, I spoke to a startup founder who had invested her life savings, professional reputation and forgone career into pursuing her entrepreneurial dreams. Like many startups that fall into the non-technical founder trap, she found herself in a prolonged court battle with the company she outsourced her technology to and had to sue. It was a nerve-wracking process that involved risking hundreds of thousands of dollars and dedicating a lot of time, which got worse when her co-founder found the prospects of a lengthy court battle too much and bailed on her.

Fortunately, she won her suit. Upon being awarded her settlement money nine months later, she quickly pivoted and applied to all the top incubators and tech-accelerators in the Valley. But she found it impossible to be accepted into most without a technical co-founder, and so was forced to play the dating game of finding and hiring a CTO.

What she found was disheartening. She described her ordeal of countless interviews with technical prima donnas as nothing shy of speed-dating with sleazy car salesmen. She had no idea if they truly qualified or were just blowing smoke and trying to take advantage

of her lack of technical prowess. She eventually discovered that any CTO worth their weight comes with a high price tag and—more importantly—is usually gainfully employed elsewhere. If they were working for another startup, then they had other factors to consider, such as walking away from a company they are fully vested in.

If you find yourself in a similar situation of needing to hire a CTO, be leery of a CTO who is conveniently in-between gigs. The good ones are rarely unemployed; if they are, it is truly temporary in nature, so recognize the fact that you may have to strike fast. Find out what startups they have been a part of and why they left.

Be careful of hiring a CTO with no startup experience. Finding a qualified CTO who comes from the corporate nine-to-five world is possible, but keep in mind that that world has paid holidays, month-long paid vacations and matching 401K plans. Compare that to the long hours and unpredictability of an ever-pivoting bootstrapped startup. The two worlds are night-and-day different; your well-meaning corporate CTO may not have the patience or fortitude to embrace the agility of a tech startup. Not only that, but the long, odd hours of a startup can also affect their personal lives. If your prospective new CTO is married or in a long-term relationship, find out if their significant other fully supports them in this role.

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3 DO THEY HAVE TEAM CHEMISTRY?Having a tightly knit team that shares the same ideals and goals for the company is great. But does your team also share the same work ethic?

I have seen firsthand how quickly friendships can deteriorate when someone doesn’t carry their weight. Your company’s chemistry changes for the worse as the cancer breaks down team cohesiveness with jealousy and in-fighting. Team chemistry is so critical to your startup’s success that you can’t afford the distraction, so don’t underestimate its importance.

Often, the very act of asking someone to join the “band” after you get started—especially if you are awarding them equity—can cause team chemistry to change. Because the odds of success are so stacked against fledgling startups, it is absolutely critical to

the company’s long-term survival that you mitigate the risk of not having your core team on the same page. Include your co-founders in the hiring and interviewing process.

Ask yourself: will this prospective CTO be in it to make everyone’s dreams and aspirations a reality, or will they just be treading water, waiting for the next big thing to come their way? Dig deep in their past; look at their track record. Insist on talking to the founders they worked with in the past, and don’t be afraid to ask the hard questions. Find out if they were in line with their company’s product and business strategy. Were they a team player—especially when it counted most?

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4ARE THEY A GREAT COMMUNICATOR?A good CTO should be able to effectively communicate across a multitude of situations, from negotiating a managed services contract for your hosting platform or architecting your cloud-based solution, to sitting down with investors or developers answering questions about everything technology related.

Your prospective CTO should be confident in their abilities, but humble—not filled with hubris and unwilling to take ownership of past failures. A good CTO understands the responsibility this position demands and has the perseverance it takes to solve difficult problems.

During the interview process, ask them about one of the greatest technical feats they ever accomplished and how they overcame the challenge. Were they unafraid to admit failure and risk a different approach in order to save the day? A good CTO should not be fixated on the technology, but on the product and solving the day-to-day problems that arise.

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5 DO THEY HAVE A PASSION FOR TECHNOLOGY?Passion for technology is a key indicator of whether or not your prospective CTO has the technical chops to lead your company. Keeping up with trends and breakthroughs in technology can be a full time job, so don’t be afraid to ask them what they do in their spare time. At the last software company I co-founded, we learned that what made exceptional technical leaders stand out from the wannabes was their passion for technology. More often than not, they have attended Startup Weekends and developed apps just to play around in new technology and for the pure thrill of doing it. If tech is their hobby, then chances are they have the passion for the job.

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– Bill Gates, Co-Founder, Microsoft

KEY FACTORS TO OUTSOURCING DEVELOPMENT7

Once you’ve secured funding and are ready to build a product to launch your new business, it’s time to hire a developer.

Assuming you and your team are not experienced mobile or open-source developers, you will need to decide between building an in-house team or outsourcing your development. Unless you have experience in this area, outsourcing the development of your product may be the more prudent option. Just make sure you do your due diligence beforehand when selecting a partner.

Take it from someone with over fifteen years of hands-on experience in outsourcing software development: Building custom software is hard. Building it for someone else is even harder. Not surprisingly, building it for someone who has no software experience is harder still.

That’s why we wanted to share with you the five key factors you must consider when outsourcing development.

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1FIND A SHOP THAT WILL PUT SKIN IN THE GAMEA surprisingly high number of our startup clients—nearly one in three—come to us after unsuccessfully trying to outsource their development elsewhere.

In one case, a client had spent over $50,000 in development to build a mobile app. The firm they hired was a .NET shop that had never built a mobile app before. You can imagine the results.

Another client had hired two different development partners to build his application. Although the resulting product worked properly, the foundation for the app itself was a half-baked idea. Since the development shops had no skin in the game, the onus was on the client to fully flesh out the idea, but he lacked the experience to do so effectively.

Find a firm that wants your product to be successful. If you can, find one that isn’t afraid to take some sort of equity stake in your business. This should ensure that they will ask the hard questions and invest the time and energy needed to make sure your product is the very best it can be.

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2CROSS YOUR Ts AND DOT YOUR IsDon’t hire a contractor or third party to build your software unless you have a services agreement in place. Be sure to have an attorney review the agreement before signing it. The agreement should address your claims to the source code used to create your software and should have specific clauses that ensure that your intellectual property is also protected. Have your attorney run background checks on your development partner to make sure that there aren’t any outstanding judgments or liens against them. You should also call the Better Business Bureau and make sure that the firm is reputable and has an unstained background.

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Most development shops have a standard list of happy former clients they use each time a prospective new customer asks for references. Find out how old these references are. If they are old, insist on speaking with several of their current clients as well.

A client who is currently working with the team on an ongoing project will provide invaluable insight. Find out if the firm is hitting their deliverables. Is the client happy with the communication and progress being made?

Ask both former and current references what would they do differently knowing what they know now.

Putting out an RFP (Request For Proposal) can be time-consuming and as a rule, most good dev shops avoid responding to them, but that doesn’t mean that you shouldn’t get at least two to three competitive bids from other reputable firms.

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DON’T SETTLE FOR JUST ANY ORDINARY REFERENCE3

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4TIME & MATERIALS VS. FIXED BIDThe last software company I co-founded avoided fixed bids like the plague. We felt that there were too many variables out of our control. Instead, we provided our clients—most of whom were large enterprises—an initial proposal based on a time and materials estimate. Then, once the business requirements and functional specifications were documented and the scope was locked down, we provided a second estimate to ensure that our budget and schedule reflected the reality of what we were being tasked to build.

99.9% of all projects grow in scope. With over 15 years of experience in the custom coding trenches, I have yet to encounter a project that did not change in scope once development started. For this and other reasons, most dev shops work on time and materials.

If you are lucky enough to get a fixed bid contract, you should insist on milestone payments with a significant (at least 20%) portion of the cost due upon final sign-off of UAT (User Acceptance Testing). Make sure you understand how they handle change orders; change order management can feel like you are being nickeled and dimed by your vendor, as they will charge for every single change.

While time and material contracts can avoid these unpleasantries, not having a price guarantee might be a risk your fledging startup cannot afford. Make sure you insist on weekly reports showing your current burn rate and % completion. Keep in mind that one small pivot can easily cost you tens of thousands of dollars and weeks in delays.

5 ONSHORE VS. OFFSHORE

Offshoring development can be an appealing option, with lower labor costs and favorable exchange rates translating to tremendous cost savings over onshore development. However, there are many pitfalls you need to be aware of.

When interviewing offshore companies, find out if they offer any onshore resources with whom you can interface. Having to wait until midnight to get on a Skype call with your dev team half way around the globe can be very frustrating, not to mention the toll on your good night’s sleep.

Cultural and language barriers often make User Story creation a challenge, requiring multiple rounds of review just to fix spelling and grammar issues. Don’t underestimate the effect of a lack of English skills. It is one thing to overlook poor grammar and spelling in an email, but when it works its way into your popup screens, menus and content, you will soon find yourself spending long hours nitpicking every screen and dialog. The cost savings of offshoring can quickly evaporate when you add on the time and cost of increased project management.

Depending on which country the shop is located in, government regulations can create barriers to development. Dev shops in China, for example, cannot integrate Facebook into their code and properly test it.

Lastly, each country has different holidays and religious factors that may suddenly delay your project’s launch—be sure to do your research on this often overlooked stumbling block.

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Regardless if you are looking at a dev shop down the street or one halfway around the world, insist on learning more about their employees. Do they use contractors, or are their developers gainfully employed? What portion of their staff is senior vs. inexperienced? One seasoned developer with 8–10 years of experience is typically 3 times faster than someone with 1–2 years of experience. Resist the lower bill rate for inexperience.

Find out what your prospective development partner’s thoughts are on the dev team he plans to assign you. Can you see the resumes of the team and their experience? Try to determine how long the team has been working together and how many projects they’ve worked on. A well-oiled machine will be one where the team members have worked together successfully on previous projects. You want to avoid getting a team of developers who have never worked with one another before. Insist on interviewing the tech lead and project manager via video or conference call to ensure they share the same vision as you and your team. This will also help ensure that their communication skills are up to par.

6 KNOW YOUR DEVELOPERS

When you are doing your due dillence, ask about employee turnover. Staff attrition is often a tell-tale sign that the company maybe underpaying their employees or running a sweat shop. Regardless of the reason, you should avoid this type of firm at ALL costs. The last thing you want is to have your dev team pack up their bags in the middle of your project. I know of several startups who had this happen to them in Pakistan and India. Third world countries with emerging tech industries, robust economies and a growing labor shortage often can be the culprit of high turnover. Many of today’s developers (regardless of country) have very little loyalty to their employers and are willing to leave at the hint of a better offer.

7 DUE DILIGENCEInsight can often be hiding in the details. More often than not, documentation can tell a lot about a development shop. Regardless if the shop prefers to create User Stories or Business Requirements & Functional Specification Documentation, these artifacts act as blueprint for your application. After signing a mutual NDA, ask to see several examples of documentation from recent projects. Were the documents thorough and well thought out, or did the author(s) leave a lot to be desired? Did the firm use version control on their documents?

While you are doing your due diligence, you should ask to see sample code for review. Proper code should follow the standard practices of an N-Tier architecture. The premise behind N-Tier architecture is that your business logic, presentation, database, etc., are built on their own separate layers. This not only assists with scalability issues, it also makes code infinitely easier to support and enhance in the future.

We recently had a client who’s in-house team had created a critical application for their organization. They hired us to redesign the UX of the app. During our discovery, we found out that the users were equally unhappy with the application’s performance as with its aesthetics. We performed a simple code review and determined that the team had built the application without utilizing a proper N-Tier architecture. To make the updates they wanted, the client could not go back and refactor the poorly constructed code base. Their only recourse was to scrap the code and start from scratch.

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– Bijan Sabet, General Partner, Spark Capital

KEY FACTORS TO INSOURCING DEVELOPMENT5

Building custom software is a challenge. Even the very best companies with seemingly unlimited resources have struggled with launching a solid, bug-free product from time to time—even Apple.

While it is not mandatory that you know how to code, it does give you an appreciation for what is required to build something out of nothing. If your startup doesn’t have a technical founder, find a trusted source within the startup community. More often than not, they can help play lifeguard when it comes to building an in-house team.

Use careful consideration when deciding whether to outsource your development or build an in-house team. Both options have their merits, and which one you choose will vary based on your circumstances, runway and burn rate.

To help with this decision, here are five factors you should consider before building an in-house team.

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Having worked for two leading software companies and founded not one, but three software companies of my own, I can tell you that finding good people is the linchpin of building a stellar team.

If you lack a technical founder, then we recommend hiring a CTO or temporarily bringing in a well-respected technical advisor to help you conduct technical interviews ensuring your developers can walk the walk.

Be leery of hiring junior developers with only one to three years of experience. While their salary requirements can be attractive, there is a much greater potential for lengthy delays due to the amount of mentoring and handholding required.

Senior developers with eight to ten years of experience can carry a heavy price tag, and the good ones are almost always gainfully employed and will require much persuasion and several weeks’ notice before leaving their current employer. But despite the cost and challenge of finding a senior developer, they can be upwards of three times faster when it comes to coding compared to a less experienced developer.

1YOU GET WHAT YOU PAY FOR

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Let’s assume you’ve found a competent CTO and a team of strong developers. Unfortunately, it takes more than a that to successfully design, build, test and launch an application.

You will need someone—or several someones—to sit down with you and your fellow stakeholders and document the functionality you need, build out the user stories, architect the application, lay out the wireframes, create a gorgeous interface, and manage the overall project.

If you’re lucky, your CTO should be more than capable of writing up detailed user stories and

2IT TAKES MORE THAN A TEAM OF DEVELOPERS

architecting the technical infrastructure and database. A senior tech lead can facilitate this role, as well as give task assignments to the team.

Find an experienced Scrum Master to act as project manager—someone who can effectively manage the team and mitigate risks, but who also isn’t afraid of wearing other hats.

Developers often take a utilitarian approach to design, building interfaces full of square boxes, square pull downs and square buttons. The resulting products are functional but not usable. Today’s digital world requires intuitive designs that are user-

centric. The User Experience (UX) of your product has perhaps the biggest effect on its potential for widespread adoption and requires special attention. Fortunately, contracting a graphic web-designer who understands UX is easier than hiring a good developer.

Lastly, invest in a good QA person. Despite what developers like to believe, bug-free code is an oxymoron, and everyone has trouble identifying problems with their own work. Investing in QA will not only save you in money in the long run, but also hedge against missing important deadlines.

USER STORY CREATION QUALITY ASSURANCEUX DESIGN DEVELOPMENT

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3 AVOID DEVELOPER TURNOVEROne of the greatest risks facing a software project of any size is developer attrition. Employee turnover is common—even more so with bootstrapped startups, where long hours and uncertain finances can strain employer-employee relationships.

One missed payroll can turn even the most loyal employees into flight risks. If you find yourself consistently expecting 70-plus-hour workweeks, the late nights and weekends can and usually do take a toll on your team’s morale and quality of code. Developers who haven’t done a startup before can become disenchanted and, before you know it, long for their old nine-to-five corporate job.

Regardless of the cause, developer turnover should be avoided at all costs. Even with the best user stories, coding notation and development practices, having to hire new developers mid-stream is extremely painful, incurring recruiting, hiring and ramp-up delays.

I have seen entire projects come to a screeching halt when keys developers packed their bags and walked off the job. Depending upon where the project is in its life cycle, developer turnover can result in delays of several months, not to mention costly overruns.

4CONSIDER ALL INTERNAL COSTSWhy burden yourself with the challenge of an expensive payroll if you can avoid it? Most experienced IT managers who recommend in-house development over outsourcing say they have more control and better security. But if you are trying to save money, you will probably find that hiring an internal team is not for you.

Building out a seasoned team of developers, tech leads, designers, business analysts, quality assurance testers and a project manager requires a deep purse. The starting salary for a mobile developer just out of school is expected to top $100,000 in 2014, due to increasing demand and a shortage of these valuable skills in the marketplace.

In addition to costly salaries, which you may supplement with equity, an internal team will require vacation and holiday pay, software licenses, office space, workstations, server hardware, internet, furniture and more. Make sure you do your homework and budget for all these hidden expenses.

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5 TIME CAN BE YOUR WORST ENEMY

Assuming you are fortunate enough to have the money to recruit and build a well-oiled in-house development team, your team’s ability to pivot and iterate frequently can be a robust advantage to any startup.

However, it is a misconception that having a team of in-house coders gives you an

Speaking with entrepreneurs every day, I often remind them that time can be their worst enemy—especially in the mobile world, where ideas are a dime a dozen and innovation moves a lightning pace.

The days of getting funding with nothing more than a good idea are long gone. Today’s angel investors want to see that you and your team have domain knowledge, have identified a market in need of disruption, and have built and successfully launched your first iteration. They don’t care that you have a team of a dozen software developers working on your next iteration and in need of a paycheck—they only care about user adoption and traction.

Granted, it often makes sense when you have proven yourself and your product’s acceptance in the marketplace to bring development in-house. However, for most startups trying to get off the ground, avoiding the risks of delaying your product by recruiting, hiring and trying to figure out how to be a software company that can flawlessly build and launch a product on time and on budget can be easily solved by doing your due diligence by outsourcing and embracing the need of avoiding lengthy and costly delays.

inherent advantage. Angels and VCs often invest in startups because they have intellectual property, patents and/or market momentum. This means that you don’t actually need to own app development, just the product. For a bootstrapped start-up, outsourcing the development is often the more effective option.

Do your due diligence. Find a reputable development partner and make sure you own the source code and intellectual property after the project goes live. Any investor worth their salt will take solace knowing that you protected what matters most—your source code and speed-to-market advantage.

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ABOUT THE AUTHORSTEVE NOLAN Founder & Managing Principal Binary Ventures

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Steve Nolan is the Managing Principal and co-founder of Binary Ventures, a digital agency that specializes in helping startups create, launch and grow their business. A serial entrepreneur himself, Steve has created eight companies, including a game development company, one of the largest virtual reality entertainment companies in the United States, an international publishing company and many others.

Steve has over 15 years of experience in application development and has worked with numerous Fortune 500 Companies and tech startups throughout the country.

Since starting Binary Ventures in 2012, he and his partner Christy Harner have helped launch many startups throughout the country, many of which they have equity positions in.