What problem does the technology solve?
Technology in and of itself holds little business value when placed outside the context of solving real-world problems. Basic computer science research at places like university laboratories is incredibly valuable for the advancement of human knowledge. However, without the backdrop of a market opportunity in the form of solving problems, technological innovation is mostly just academic.
As an investor, start by asking about the business problems the startup is trying to solve. By understanding the problem, you gain some insight into the value of the technology. You might even relate to the problem and find some excitement about a potential solution. The identification of real problems is a catalyst of innovation, and the creation of solutions is the driver of value.
What is the makeup of the technical team?
As a startup, there are many ways to build a technical product team. Below we look at a few common approaches, along with their pros and cons. In this example, we are assuming the company has limited financial resources as an early-stage startup.
1. Technical Founder
A technical founder is someone who can write a lot—if not all—of the code themselves. They contribute “sweat equity” to the business and add value in the form of software engineering efforts.
- They have a vested interest in the product and how it directly correlates to the success of the business.
- Cost of technical labor can be kept low.
- It can be difficult to find someone with software engineering skills who also makes a good co-founder of a company.
- The risk of burnout can be high with one person performing work that is normally done by a team.
When the founders do not have technical skills, they need to hire talent. Bringing in independent freelance contractors is a very common approach.
- Supply is abundant. There are plenty of software contractors in the world so it can often be easy to find people.
- As the amount of work surges and ebbs, companies only pay for services rendered.
- Turnover can be high, especially for good contractors.
- Team cohesion can be difficult. Building software is very much a team activity.
3. Domestic Agencies
Software development agencies can bring a much more robust team to the table compared to freelancers. They are often described as a “team in a box.”
- An agency can field a proper software product-development team, which includes multiple roles, such as product owner, project manager, designer, developer, tester, etc.
- Hits the ground running with a team that has worked together on multiple projects.
- Rates can be high. While your overall cost might be lower than hiring for each role on the team, billable rates can be higher than full-time employees.
- Timelines may vary depending on the workload of the agency. If you don’t have enough work to keep an agency team busy full time, their services will be split among multiple clients.
4. Offshore Agencies
When domestic rates are unaffordable, hiring an agency located overseas is an option.
- Lower billable rates extend a startup’s runway.
- Offshore agencies often have a U.S. domestic presence as well, so work can be done around the clock.
- Communication can be difficult. A combination of language and time zone barriers can make collaboration challenging.
- As offshore agencies try to keep rates as low as possible, some may hire lower-skilled engineers.
5. Full-time, in-house
Startups that have enough revenue and/or funding may hire full-time talent.
- Dedicated staff can mean higher productivity and greater quality consistency.
- Team culture is well-defined and important.
- The cost of full-time salaries and benefits can be high.
- Building a team from scratch takes time and patience.
Of these five options, Option 3, hiring a domestic software development agency, is the “Goldilocks” option—not too risky, not too expensive, just right. An agency with a proven track record can field a full team that has essentially zero ramp-up time. The agency partner is a proxy for a full-time, in-house team, which is ultimately the goal of a technology startup. But before revenue or investments can support the cost of a permanent team, an agency can provide the quality of an in-house team with the convenience of a freelancer without the headaches of an offshore team, all while freeing up the technical co-founder to focus on the business, not on writing code.
What technology stack is the product built upon?
Once you have a good picture of what the team looks like, it’s advantageous to know what technology stack the team is using. As a non-technical investor, you don’t need to understand the intricate details of a cross-platform mobile app or a full-stack web application framework. However, from a company operations and product roadmap perspective, it is meaningful to know whether a product is built using modern tools that balance the following attributes:
1. Proprietary versus Open Source software
Does the product use a proprietary platform, or is it based on open source software (OSS)? Most likely, any technology startup will heavily rely on OSS, as an estimated 70%–90% of modern solutions use OSS. If a company chooses to use proprietary technology over open source, learning why they chose this approach is an important evaluation.
Will the technology stack work once the business starts to scale, or will the product need to be rewritten or significantly refactored? Many early-stage startups—especially those light on technical capabilities—will lean on no- or low-code options to get a functioning prototype up and running quickly. While convenient, these solutions may have problems performing once more users or higher volumes of data are pushed into the system.
3. Time to market
Does the technology stack enable the team to build or modify the product quickly? The nature of software startups is that the product will invariably change and evolve as the business grows. For early-stage tech startups, it’s important that the team can solve ever-changing business problems. A technical team that embraces a culture of change will add immeasurable value to a company that is finding its product-market fit.
4. Talent pool
If an engineer quits, how quickly can the company find a replacement with the right skills? Obscure or brand-new tech stacks don’t have as large a talent pool as widely used tech stacks. Startups that use popular OSS will have a much easier time finding talent. StackOverflow’s annual Developer Survey is a great way to feel the pulse of which skills are popular.
It’s important to note that nearly all venture-backable startups have underpinnings of software, are app-enabled, or have a general technology component, even if the company isn’t a software startup. For example, a startup that makes a new food product might not consider themselves a tech startup, but appropriate and strategic use of technology will certainly add a competitive edge. Whether it’s an e-commerce platform for direct-to-consumer sales, marketing automation tools for outreach, or a sophisticated customer relationship management platform to help shorten sales cycles, understanding how a startup uses technology is an important part of evaluating a company.
Investments in startups are about more than just the technology product itself. By learning about the business problem, the team, and the technology stack, non-technical investors can gain a better understanding of a software startup in their due diligence process.