As many of you will be aware, one of our key missions at CTO Academy is to see a CTO on every board. A part of that mission is to research the real value of a CTO.
Now, we can all agree that it is nonsensical not to have deep technical knowledge at the board level when every modern business is essentially a tech business.
And yet, as we discovered during a recent survey within our global community, only 40% of companies have a CTO in the boardroom. It seems that the CTO’s voice in many companies is underutilized and undervalued.
So, naturally, our attention was grabbed by a recent TechCrunch article bearing the headline, “Most VCs have no clue what a CTO does”.
The author argues that some investors conduct minimal tech DD, particularly within early-stage companies, thus overlooking the potential danger that a tech co-founder might become a dead weight if not capable of growing with the business.
The article says: “If having a technical co-founder on the team is a check box exercise, you end up with some pretty detrimental dead weight on the company’s cap table. Listing someone as a technical co-founder with a 30% to 50% ownership stake in the company is not a good move when, realistically, all you needed was a 10x engineer working as an independent contributor to build the first prototype of the product”.
It concludes that the overwhelming majority of VCs fail to pay sufficient attention to the CTO, their skill set, their stake in the business and how that might drag back future success and growth.
Are investors ignoring who sits in the CTO chair and, in doing so, putting their investments and the future of businesses at risk?
We reached out to our global community of technology leaders — many of whom are or have been involved with fast-growth companies and whose views are based on real-life experience.
And the verdict is -“It depends“.
The nature of the business and where it is in the funding cycle has a huge bearing on the level of scrutiny placed on the CTO. The make-up of the founders and the background or interests of the investor concerned can also exert a profound influence.
According to Jason Noble, one of the co-founders here at CTO Academy, where the product(s) fit into the business model has a significant impact on how much attention investors give to their technology DD.
“Each investor firm has their own process for doing due diligence,” says Jason. “Where they do not have the in-house skills to look at the technology, they normally hire someone to do the due diligence. I have done this role as well as been on the receiving end“.
For Michael Spiteri, Global CTO for Ergomed’s pharmaceutical services business, the funding factor is key. He believes an investors’ focus on who’s in charge of the technology will “vary enormously based on when a company is valued in the funding cycle”.
Michael says that if it’s an early-stage investment and the company is using technology but doesn’t have its own IP, there will be more interest in the application of the technology and the business benefits it delivers, with questions focusing on whether the commercial operation is viable.
By contrast, “If the early-stage investor and the company that is looking for investment is heavily technology-based and they have their own IP, they will be much more focused on, and interested in, the technology team, how the IP has been created and the long term value it can create. They get into that quite, quite hard”.
Michael himself has been on the sharp end of the acquisition and due diligence process with 25 years in senior leadership positions. He has worked extensively across the digital transformation lifecycle, automation and machine learning.
“I have been through a private equity due diligence process where the acquiring company was focused on creating a platform for future growth. So, the CTO role in that context is very important”, claims Michael and goes on by saying, “The due diligence that was performed across the business was very extensive.
They wanted to know everything across the technology landscape, from how we make the firm safe to what the digital transformation strategy looks like, what the AI strategy looks like and how we operate the business on a daily basis.
Following an initial deep dive, there were several weeks of continuing due diligence questions, specifically on the CTO role and what we were doing and how we were doing it”.
Morgan Davies, head of engineering for Capital Pilot, a firm that advises on early-stage fundraising, offers the comforting thought that having an appropriately technical member of the team is one of the best indicators of success at attracting funding.
“The data I’ve seen tells me that having a credible technical team member remains one of the better predictors of start-up fundraising,” he says.
Slightly less comforting, perhaps, is his observation that “credible” doesn’t have to mean a fully-fledged CTO.
“Although I’m sure brilliant technical founders do exist, most VC dollars and pounds go to SaaS businesses which have a lower barrier to entry. Instead of complexity and technical challenges being front-loaded on businesses, companies like this can defer a lot of complexity until they’re already well on their way to unicorn status. They still need someone technical, but not necessarily world-class”
He concludes, “If you’re building spaceships, you’d better have a rocket scientist.
If you’re building web apps — well, those skills are easier to come by”.
In Morgan’s view, as long as a company has someone technical in place, plenty of investors will be happy not to dig into the details.
Chris Jelley is currently CTO at Ondo InsurTech, a UK-based insurance technology company and has extensive experience in private equity investment and tech due diligence.
In what he acknowledges is a “sweeping generalisation”, he believes investors generally shy away from asking difficult tech questions. Even if tech is on the agenda when the board gets together, it is invariably sidelined to the dying moments of the meeting.
The lack of tech-savvy board members is a big issue
“The lack of tech-savvy board members is, I think, a big issue”, says Chris. “Non-tech board members seem to prefer CEO broad-brush explanations, which are invariably incorrect than want detail from the CTO. This is where I have a big bugbear. CTOs are invariably told that they need to ‘get more commercially aware’ or ‘financially aware’, but CMOs, CFOs, CEOs and chairpersons are never told to ‘get more technical understanding”.
You can sense Chris’s frustration at the general situation. His own experience, which he admits may be slightly skewed, suggests something a little healthier.
“My experience is largely PE focused and in particular tech due diligence so it may be a little biased because in tech-enabled and tech-driven deals I’ve found that the CTO, their competency and ability to deliver to support the investment thesis, is pretty key.
To this point, over the 40-plus buy-side transactions I’ve been involved with, over 70 per cent of them have had some aspect of the CTO leadership, technology strategy and roadmap included as part of the DD engagement. I think, in the same way as code quality, that perhaps, cynically, the PE firm is looking for opportunities to reduce the multiple. However, perhaps, optimistically, they have realised the strategic importance this C-level has in driving the business”.
Chris recognises the funding stage plays a big part in determining the value placed on the CTO.
“First-round PE expectations of CTOs seem to be focused on getting the foundations in place for growth. This stage generally involves either expanding the dev team and developing a tech strategy and roadmap which aren’t invariably in place. CTOs in first-round PE investments need to wear many hats. The second round is generally around delivering on something ‘left on the table’ as part of the first-round exit — generally something related to scaling”.
But he also notes, “At each stage, and in my experience, tech questions and scrutiny by PE investors post-investment and in board meetings have been minimal”.
The importance of the funding stage is a common theme — take this comment from a CTO who works for a martech company and who asked to remain anonymous.
“I think there are differences between the funding stages mostly because of the scope of the technology changes. In the earlier stages, there is less technology deployed and the focus is more on the business idea and plan. Early-stage technology tends to be proof of concept quality, so it is hard to judge beyond the feasibility of the idea.
As you get into seed rounds then DD becomes the norm.
“As you get into the seed rounds, then due diligence becomes the norm for the technology on the ground. Then it is less about the CTO and more about what has been deployed and how scalable, secure and appropriate it is for the stage of the business. CEO and more business-focused elements of the business in my experience definitely take the brunt of conversations and expectation management”.
CTO Steve Morris points out that, far from being placed front and centre, at the start-up stage, the tech leader is quite likely to be kept away from investors. Steve describes the typical CTO at this stage as involved mainly in coding, “Bright but scared, definitely not someone for a big investor meeting”.
At the seed and Series A stages, the CTO is not a crucial figure in the investment decision. After Series A, tech becomes more pivotal and the CTO more important.
Steve also reiterates the point that the prominence of the CTO depends on the business being invested in. For “DeepTech, the CTO/Tech Cofounder is critical and crucial. If it’s a SaaS model, then it’s far less important”.
Overall, “VCs are primarily focused on exit. They will look at the overall management team, particularly at the CEO”.
Of course, things may be different if the VC concerned brings tech experience to the party.
Back to our anonymous martech CTO who claims, “The value of the CTO can be factored in depending on the VC or angel involved. If they come from a technical background or play heavily in the technology space, the CTO will be under more scrutiny”.
He adds, “I think for a technology-based business, not looking at the CTO and their track record is a mistake. At the moment, the CTO gets a cursory look-over, but I believe it is changing. As people are becoming more technically literate and are starting to understand the implications of poor technical leadership, the CTO will get more scrutiny.
A gentleman I regularly interact with, and is a CTO of an AI start-up, caused consternation during their fundraising because he had no social profiles. When the potential investors searched for him, they couldn’t find anything. He had to create a LinkedIn profile so that they could find something and see his history. This shows that people are looking at CTOs”.
So there you have it…the overall sentiment is – “it depends”.
It depends on where the company and products are in their lifecycle.
But where the CTO can be at a particular disadvantage is in the earlier funding rounds when it’s often perceived that they’re not delivering a broad enough impact on the business and/or don’t yet have the executive-level skill set.
The key for any CTO, particularly the early stage CTOs is, therefore, understanding that it’s only with a broader skill set that they can:
So, if having a CTO peer advisory group could be helpful in any way, we believe you would find our Membership platform to be an extraordinary group for gaining access to other CTOs and their perspective.
To find out more and, possibly, sign up, visit CTO Academy Membership here.
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