You’ve got an amazing idea.
You’ve got everything it takes to bring a start-up from nothing to something that really makes a dent in the universe.
… and if you’re like most of today’s startups — you need to get an app in the hands of customers.
Once customers love your app and you show some traction, you raise some money and grow it into that impactful dream of an idea that you’ve had figured out in your head for as long as you can remember.
But, you need to build that first product right. And that costs more money than most people have in savings (minimum $100-500K).
On the other side of the equation, there are a growing number of design, development, and digital media shops who are hungry to expand, or swap focus, to building a company that’s more than just a service shop. Sometimes, equity in a new company can mean more to these shops than another $100-500K in revenue for simply building out a minimum viable product (MVP).
So, on one side — you’re the budding entrepreneur with a great idea and the hustle to out-execute anyone with a similar idea.
On the other side — there are shops who build apps like you need for a living, and would love to take a stab at more than just service-based revenue.
So, can an entrepreneur pair up with a dev shop? Can a shop work for just equity? A blend of cash and equity? Can all of this lead to a truly successful startup?
In theory, this makes a lot of sense: the entrepreneur and the dev shop align incentives and goals to reduce their own risks and increase their collective chances at success.
The entrepreneur doesn’t have to spend money they don’t have on the MVP; the dev shop (1) has a chance to build something of long-term value and (2) is not incentivized to maximize their (billable) hours. The dev shop is motivated to build the best product that stands the best chances in the company it’s a part of.
I spoke with experts at a number of software development shops to get their insights on this topic, leaders at DarwinApps, Casual Corp, HappyFunCorp, OAB Studios, Coventure (a VC with its own software development team), and World Accelerator (an accelerator focused on premium domain names). I’ve summarized below my key learnings; you can read the full details of what I learned in my part 2 of this series. Some were very critical. Others think the model can work.
Thor Ernstsson, Founder of Alpha UX; previously, founder of Casual Corp, a venture studio, said, “Fundamentally and theoretically, this model works; practically and actually, it didn’t at all. […] The most important thing to consider is that launching a startup is usually a personal endeavor. The founders’ psychology is probably one of the most important contributors to success of the company.”
Ben Schippers is Co-Founder, HappyFunCorp, a development shop which recently acquired EastMedia and StartupGiraffe, a company specializing in equity development. He said, “On paper this makes sense but in practice, the inherent challenges associated with design, product, engineering, product scope and most importantly, business alignment and incentives, makes the [equity/cash blended] model very problematic for both the firm and the entrepreneur.”
Others were more positive, subject to putting appropriate structure in place. Thatcher Bell was previously a “mentor VC” at Gotham Ventures and North Hill Ventures, and is now Managing Partner, CoVenture. He said, “First, the founders are their startup and define the company it will become. […] Second, the company must eventually own the product development and maintenance functions in-house. If it does not, it will have difficulty raising capital from the best investors and maximizing an eventual exit value.”
Lucky Lance Gobindram, President of OAB Studios, said, “We act as true technical co-founders to entrepreneurs who we believe in and are building things we want to see in the world. We don’t only work with startups (agencies help pay the bills while our startups come of age), but it’s our bread and butter. We’ve helped multiple startups, including quickly growing sticker app Hi-Art, move from founder with idea on a napkin, to venture-backed company with a thriving product and top-notch team.”
One clear pattern I saw in my conversations: if you partner with a dev shop, your first goal should be to build a minimum viable product together. However, after that point, almost everyone recommended that you, the entrepreneur, raise money and build out your own team. This has an obvious parallel to the conventional accelerator model, with the difference that some dev shops will gladly see one of their employees leave to join a spinoff company.
I’ll leave you with my takeaways from working and speaking with Vlad Lokshin over the last year. Vlad was part of a Cornell Technion team that worked with me to create MarketMap.me. He is also the CEO of DarwinApps. He has also built a couple of startups — on his own and in partnership with clients — and has recently tried his hand at building a true “work for equity” shop model with DevFund.io.
When we first began speaking on this topic, he was eager to make DevFund work — convinced that the model aligns incentives for the shop and the entrepreneur. Today, Vlad has paused all efforts on DevFund. He’s even focusing the consulting down on just a couple of key clients. His personal time has shifted more and more towards his own product company (outside of consulting).
Vlad explains, “It’s not really about the model, it’s about the founders. You can make the numbers work, you can align incentives — but it’s all theoretical. The founders are who need to make it all work, no matter what. The best founders will isolate their goal and create a critical path to achieve them — whether that path is on their own, with a dev shop, or some other way. Collective vision, focus, and heart are what needs to add up among founders. Everything else is secondary (talent, complementary skills, and the ability to work well together are all up there, too)….After enough trial and research, DevFund felt like an artificial, and theory-crutching, attempt at building companies. I’m impressed by the firms that have made it work, but it’s not for us right now.”
Do I think the model can work? Sure. I do think that a dev shop can be helpful in building out the MVP of a company, help get it to raise a first round of capital, and then give it enough legs to hire their own team. But, the founders have a significantly deeper impact than any outsider ever will — no matter the structure. It’s all about the founders.
Thanks to Vlad Lokshin for help in summarizing a lot of conversations on this topic and inspiring this post. Previously published in Entrepreneur.com