We’ve learned a lot over 5 years of building startups with over 100 launches and 3 exits to date. And some of the biggest areas of startup successes come from having the most diverse team combined with the right technology. At BlueChilli we provide the entire engineering and technology build to our startups as part of our 10% sweat equity investment and have opened the door to any entrepreneur. Here’s why.
Globally according to CB insights, 42% of the reasons why startups fail is they fail to find product market fit – i.e. they build the wrong product. And 75% of all seed capital raised is spent on tech development, often before the product market fit is known. Following a pareto distribution of startup investment (Power Law Distribution) of companies which do raise seed capital, it can be demonstrated that 90% fail to return more than 1X their seed capital to investors (50% return 0X).
So for the 90% of startups which fail, 42% of the reasons why they do fail is largely down to building the wrong product. Now in the 10% of cases which succeed, if the original founder was a CEO (or ‘non coding founder’) then they will bring in a technical co-founder and split the equity equally at the start – for two people, that’s usually 50/50. After say 10% ESOP and 5% to pre-seed investors are taken into account, the original non-coding founder is at 42.5% of their idea. There are many positives however in having the right co-founder at the start, unfortunately that’s not always the case. FirstRound recently wrote that choosing the wrong co-founder was one of the main reasons why they were not able to raise capital. (And only 7% of all startups who start something actually raise capital).
At BlueChilli, 80% of our startups successfully launch, 60% raise capital, and the founder retains the majority of the company – 75% after ESOP (10%), pre-seed investors (5%) and the BlueChilli team (10%) are allocated. Once they’re ready, have traction and understand who they need, they can bring on the right tech co-founder, often only needing to allocate a smaller equity position of 10-20%, leaving them with 60% of the company.
Tech co-founders are awesome for non-coding founders. But they’re incredibly hard to find and it often only works when you’re one of the 10% lucky ones who find the right person with the right skills at the right time. As the global data shows, it’s still expensive (75% of budgets) and it’s still highly prone to failure (42% of failures due to tech) and choosing the wrong person can have consequences when raising capital.
One advantage of having a tech co-founder is that you “fit” into the “pattern matching” that VCs look for. In my opinion, pattern matching is one of the root causes for the diversity issues in VC and is an ugly truth no one talks about. Senior VC partners want to invest in “people like them” or “people like Zuckerberg” and without a conscious effort to overcome their bias, this means they’re looking for the unfortunate stereotype of a tech guy (yes, “guy”) in a hoodie who maybe partnered with a sales guy. Those founders get funded, they then exit and start their own VC funds and the cycle perpetuates.
What I want to do is remove this initial barrier by investing in the technology to prove the idea is going to work, before finding a tech-cofounder. This gives the original founder a solid foundation to be able to find the right person, and gives them – the ideas person and primary driver behind the startup – a stronger position to hold on to their equity. Our current CityConnect cohort are all having their startups built by our product team in just 12 weeks, through 4 sprint cycles. We know we can do this, because after building over 100 startups we’ve become really good at it. (Our median effort to launch a startup has dropped by ten fold since we started in 2012, due to our large investment in our frameworks, processes and team).
We do it this way because we want to be aligned with our founders’ success, by launching the right product fast and taking on the financial risk of this we’re incentivised to make sure it is the right product. Because we believe the first product unlocks the first revenue, which unlocks the first employee (a tech-cofounder) and unlocks the first investment.
But the broader reason why is we believe that the difficulty in finding a tech co-founder, or being outside the “pattern” should not be a barriers for someone wanting to build their future. By removing the barrier of a tech partner to prove an idea and changing the pattern of what success looks like – we are building an inclusive ecosystem to support entrepreneurs from all backgrounds to build amazing companies.