The Overlooked Asset in a VC's Portfolio

1. CTOs: The Overlooked Asset in a VC's Portfolio

2. Venture capitalists often overlook the strategic importance of a Chief Technology Officer (CTO), mistaking technical co-founders as a simple checkbox. A seasoned CTO bridges vision and execution, aligning tech strategy with business goals, mitigating risks, and driving innovation—key factors that can make or break a startup's success.

4. The due diligence process can be thorough, involving discussions with potential customers, industry experts, and references. However, we have observed that genuine technical diligence[1] is surprisingly uncommon. Investors tend to focus on what they know best, often diving deep into financials and market potential. Areas outside their expertise, particularly the technical aspects, receive less attention. As a result, there’s a tendency to treat the presence of a technical co-founder as a simple checkbox. If a team has someone with technical credentials, investors may prematurely consider that aspect covered, without delving into the actual technical depth or capabilities.

5. The allure of a technical co-founder is often irresistible. Investors scan pitch decks, eagerly searching for that golden nugget—a brilliant engineer ready to lead the tech charge. Yet, this checkbox approach to early-stage investment often leads to one of the most costly mistakes in a startup’s journey: the overvaluation of technical co-founders without the necessary breadth of skills.

6. When investors miss key technical nuances, they often push founders down paths that undermine long-term success. These blind spots in understanding can result in missteps that compromise a startup’s true potential. In venture capital, where decisions are often made in a matter of minutes, the role of the Chief Technology Officer (CTO)[3] frequently flies under the radar. Understanding the nuanced role of a CTO and the value they bring to a venture is crucial for any VC aiming to make informed, successful investments.

7. The Strategic Importance of a CTO A CTO is not merely a technical expert; they are the bridge between a company’s vision and its execution. They oversee the development of technology strategies that align with the company’s business goals, ensuring that technological investments are not just cost centers but drivers of innovation and growth. A CTO’s insights can be significant in determining the long-term viability of a product or service in sectors where technology is often the differentiator such as digital health, security, regulated sectors, and so on.

8. One of the common misconceptions about CTOs is that they are purely operational figures, responsible only for managing the IT team or ensuring the stability of the company’s tech stack. However, a seasoned CTO plays a far more strategic role. They are deeply involved in product development, often working closely with the CEO and other C-suite members to shape the company’s direction. Their understanding of emerging technologies, market trends, and customer needs allows them to anticipate shifts in the industry and adapt the company’s technology roadmap accordingly.

9. For VCs, understanding the value of a CTO can be the difference between backing a company that merely survives and one that thrives. A CTO’s ability to innovate and execute can significantly impact a startup’s ability to scale, enter new markets, and fend off competition. By overlooking the CTO’s strategic contributions, VCs may find themselves underestimating the potential of their investments.

10. Bridging This Gap: What VCs Need to Know The disconnect between VCs and CTOs often stems from a lack of understanding of the latter’s role. While financial metrics and market analysis are crucial, they are not the only indicators of a company’s potential. VCs who take the time to engage with the CTO and understand the technical landscape in which the startup operates are better positioned to make informed decisions.

11. What’s the Solution? A seasoned fractional CTO or a technology consultant. Unlike a full-time hire or an untested co-founder, a fractional CTO will bring deep, battle-tested experience to the table without the prohibitive cost. For early-stage or pre-funded startups, this can be the difference between life and death. A seasoned fractional CTO knows how to optimize resources, prioritize development goals, and create a roadmap that not only attracts investors but also maximizes the chances of long-term success.

12. Finding a capable fractional CTO isn’t always straightforward, as the best candidates possess a rare combination of technical acumen, leadership, and strategic insight. To identify the right fit, start by examining their patent portfolio and research papers, academic credentials, which can provide a window into their innovative thinking and technical expertise. Additionally, look at the companies they’ve founded or co-founded and assess their track record in successfully scaling these ventures alongside other founders. This due diligence will help ensure you’re bringing on a fractional CTO who not only meets your immediate needs but can also drive long-term success.