If there are two things investors love, it’s minimizing risk and increasing profits. Investing in a start-up always comes with a healthy helping or risk, but how can hiring a fractional CTO help ease the worries of investors?
In recent years, investors have seen and experienced all the benefits that fractional CTOs have to offer. In fact, the National Center for the Middle Market found that 54% of all medium-sized businesses use outside technology consulting services, which includes the Chief Technology Officer role. This implies that modern start-ups are now opening themselves up to the idea of taking advantage of external assistance, rather than restricting their teams to in-house employees.
One prime example of this comes in the form of Suki.AI, an artificial intelligence start-up that was looking for fundraising back in 2019. They managed to raise around $20 million in Series B funding and one of the contributing selling points to investors was that a fractional CTO was on board. The CTO in question had lots of experience in the AI and machine learning industry, which is always a good indication that the future of the start-up is in good hands. The same thing can be said of Orca Security when they raised £210 million in their 2021 Series C investment round. Because they had a fractional CTO on board with impressive industry experience and expertise, investors clearly saw the business as a more reliable and attractive opportunity. CTOs have a track record of reducing risk and increasing the chances of success, making the start-ups they are attached to far more appealing.
The pros of hiring a fractional CTO for investors:
1. Due Diligence
Having a fractional CTO on board ensures there is a solid and streamlined technical plan, which aligns with a business’s overall aims. By having a CTO in place, investors find it easier to predict the future of the start-up and how it could grow. Fractional CTOs are on hand to develop a roadmap, create a tech stack, identify what resources are needed, and lead the team throughout the process. A CTO essentially represents a knowledgeable professional with a steady hand on the wheel of the ship – which is music to an investor’s ears.
2. Minimizing Risks
Start-ups are always looking to cut down on risks wherever possible, and what better way to do that than hiring a fractional CTO? CTOs bring a sense of experience and knowledge in the industry, having seen all the common risks and mistakes countless times before. When it comes to running a start-up, it is all about de-risking in the early stages to avoid costly mistakes long before they even happen.
3. Improving Profit
The number one aim of an investor is usually to see a return on their investment. Having an experienced fractional CTO on board can improve the odds of doing just that. Just like the CTO can minimize risks by acting early, they can also help to guide a start-up in the early stages to increase the chances of future success. It’s all about developing a solid technical plan that aligns with the business’ budget and overall aims. Having a CTO working within the company gives you a strong base to work from, thus driving growth and profit.
4. Valuation
The marker of a successful and growing start-up is a rising valuation. The higher the valuation, the more the company is worth, and the better an investor feels. CTOs are brought in to offer guidance in reaching significant milestones, which in turn drive that valuation increase. A positive and streamlined strategy can drive growth, which in turn drives increased value. CTOs help start-ups to identify the key milestones they should be aiming towards, and then lead them towards those milestones.
5. Cost
Hiring a fractional CTO is like bringing on a part-time CTO consultant rather than splashing out for an in-house employee. For most early-stage start-ups, investing in an in-house CTO is not sustainable and does not work within the company’s budget. For investors, opting for a fractional CTO opens the business up to a lot of the CTO benefits, without having to pay a full annual salary.
6. Flexibility
Hiring an external or fractional CTO can be far more flexible for early-stage start-ups than committing to a full-time in-house employee. If a start-up is not yet sure of its long-term plans and requirements, then committing to a long-term CTO is just not a smart business. On the other hand, making use of the skills and experience of a fractional CTO can bring in all the benefits without the same level of commitment or investment.
The cons of hiring a fractional CTO for investors:
1. Problems with communication
Outsourcing your CTO position to a fractional worker can create potential communication issues. Because the Chief Technology Officer is not working full-time and in-house, maintaining the level of constant communication required to thrive may not be the same. This could possibly lead to delays, miscommunications, and misunderstandings within the business.
2. Company culture
You often absorb a company’s culture by working in the same office as your employees and all pulling towards the same goals. Having an external CTO may lead to a possible cultural dilemma, as it can be harder to appreciate company values and aims if you are not working there full-time. If your business is not aligned with your CTO, it can create issues moving forward.
3. Confidentiality
Working within a company often gives you access to a lot of confidential information, especially when you occupy a senior role such as a Chief Technology Officer. Some companies may be a little nervous about the prospect of sharing private information with an external employee, especially if they are working with other companies at the same time. This includes private information about the business, future plans, technology, and customer information. One way to get around this is by drafting a watertight confidentiality agreement for your fractional CTO to sign.
4. Aim alignment
If the aims of the company and the aims/ideas of the fractional CTO do not align from the start of the project, it can cause an issue. This often results in the start-up being pulled in two different directions from the get-go. When investing in a CTO, start-ups must accept that they are going to relinquish some influence over the roadmap for the future. However, this problem can become a positive as long as there is clear communication, and you find a CTO that matches your aims.
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