In today's world of fast-paced startups, founders are often asked if they are building a tech company or tech-enabled company. Understanding this distinction and what kind of company they are building can guide some key decisions for founders. In this blog, Catalyst Fund venture builders Ken Ngetha and Kevin Rejko break down the differences and describe how this distinction can help founders make the right choices for their ventures.
"When it's impossible for a company to build and sell its product without its own proprietary technology, this is a tech company, meaning that the main thing that sets the company apart is technological," says Ken Ngetha, Venture builder specializing in product design at Catalyst Fund. "When technology makes it easier for a company to sell its product, or in the case where other (outside) technologies can be used instead of the company building its own technology, this company is tech-enabled. The software makes operations smoother, making the business more scalable."
Octavia Carbon, one of our portfolio companies, is a prime example of a tech company. The company employs a technology known as Direct Air Carbon Capture (DAC) to directly capture carbon dioxide (CO2) from the air before it is released into the atmosphere. This innovative approach helps mitigate the rise in temperatures, thereby reducing the devastating impacts of climate change. Octavia cannot operate without the integral technology component of its product.
In contrast, AgroSupply, also a Catalyst Fund portfolio company, is considered a tech-enabled company. AgroSupply's innovation provides farmers with a save-to-buy approach to accessing high-quality inputs through its digital platform. While farmers can access inputs without technology, integrating technology significantly enhances the company's services to smallholder farmers at scale.
The distinction between tech and tech-enabled is crucial because when a tech-enabled company decides to build software from scratch, it often results in a significant waste of resources. In such cases, opting for off-the-shelf solutions is a more reasonable choice. Considering the current funding 'winter' in the startup space, making the right decision regarding an expensive expenditure like building software is paramount, as it could have dire consequences for a startup's survival. That's why Ken reminds founders that "off-the-shelf products are also faster to implement, and the startup can focus on other core business activities." In these instances, tech-enabled companies should focus on developing a value proposition that goes beyond adding simple features to existing solutions. Off-the-shelf features are easily replicated, especially by incumbents. "Features in themselves are not what customers love, but the benefit offered by the product. This benefit can come from a business model innovation or a unique go-to-market strategy," elaborates Ken.
On the other hand, for tech companies to truly scale, a tech co-founder is necessary. When a non-technical founder leads a tech company, such a company may rely on external consultants to build the tech, and this comes with challenges. The venture can often find itself at the mercy of contractors who may 'control' the venture's intellectual property. Kevin Rejko, Tech and Data Specialist Venture builder at Catalyst Fund, says:
"A non-technical founder often lacks the experience or even the vernacular to speak about their product and is always at the mercy of the technical contractor, who may not be as invested in the business because they have no equity in the company. That's why a technical co-founder is preferable for a tech company. Otherwise, the non-technical founder crosses their fingers and hopes the technical contractor will do as agreed. The founder may be unable to tell if the work done is up to standard."
Kevin notes that being an ideas person is often not enough to lead a tech company. In those instances, the leader will often find themselves at a disadvantage in managing a technical team. "The point is that even if you're the ideas person… you are not in control of your company's destiny because the technical contractor is not a co-founder and therefore doesn't have all their eggs in one basket, as you do."
Miscommunication between founders and third-party developers can significantly strain the business's scalability. Additionally, third-party developers are usually expensive to maintain, and if they fail to document or complete their work to the expected standards, hiring a new developer often means starting the software development process from scratch. This can be a highly frustrating and costly setback.
Apart from issues related to quality assurance, security concerns also arise. Cybersecurity measures are a complicated aspect of software development. Non-technical founders could have tech products vulnerable to security breaches if they don't have a trusted third party managing the technical side of the business.
As technology continues to significantly influence how companies operate and scale, distinguishing between tech and non-tech companies can become somewhat ambiguous.
"While we are trying to make this as black and white as possible, in reality, many companies fall into a bit of a gray area. For example, is Uber still the same company if you remove the app? Technically, a user could still access their service by calling a central dispatch, but the level of transparency and efficiency the app provides is the reason for Uber's existence," says Kevin.
Therefore, what's crucial is to identify the extent of technical expertise needed and the type of products the company is selling to facilitate its growth and efficiency. Although Uber may exist in this gray area, it must determine whether it requires proprietary technology and what this would entail in terms of in-house technical expertise.
The distinction between a tech company and a tech-enabled startup is pivotal, as it influences resource allocation, strategy, and scalability. This is key, especially in today's difficult startup landscape. Equally important is the decision to have or not to have a technical co-founder in a tech company run by a non-tech founder, which is crucial in shaping the execution of a startup's vision. However, what matters most is identifying the core tech expertise a company requires and understanding how this expertise influences the scaling process.