Rack up that sweet, sweet technical debt

what most people think of technical debt

What people think when they hear technical debt.

There is a cost to development - mostly measured in the time it takes to get to market and generate revenues. The shorter the product development cycle, the quicker a product can get to market, the lower the cost of development, and the lower the risk to the company.

The ability rapidly prototpye and iterate based on market feedback is an invaluable competitive advantage that startups have.

What startups don't have is validated market feedback and confirmation of their product/market fit.

Only once product/market fit has been found should a company worry about scaling. Thus, it stands to reason that this should be accomplished with as low a cost as possible. This accomplishes two things:

  1. Keeps the risk of failure contained: if the product vision is incorrect then a failure to achieve product/market fit will be the sign to shut or pivot. By racing to get to market a startup can minimise this risk and how much this failure will cost both in investment dollars and time spent.
  2. Maintains equity in the business. By keeping early costs low, both on monthly burn and the number of months it takes to hit product/market fit, the principals of the startup do not need to raise capital, either through debt (personal cash injections) or equity (selling shares to angels). This leaves a much bigger chunk of the pie available to fund the scaling part of the business.

Why having no technical debt can be suboptimal use of funding.

So we can say that the goal of a startup in the earliest stages is to hit revenue or product/market fit as soon as possible. This is the only metric to live or die by and anything else is secondary.

Optimising for scaling is unnecessary.

Worrying about CSR is unnecessary.

Patenting IP is unnecessary.

All of that can wait until product/market fit is achieved and is a problem to solve at the scaling phase.

Therefore racking up technical (and to a lesser extent operational) debt is not only unavoidable but actually desirable for a startup. To not do so would be suboptimal. It extends the time it takes to hit product/market fit which as we see dilutes the return potential for principals while increasing both the risk and magnitude of failure.

Debt in finance

There is a related concept in finance where it is accepted that there is an optimal level of debt for a company to incur. The basic concept is that when companies need to raise capital there are two ways to do so: equity & debt. There is a cost to equity (dilution) and a cost to debt (interest). Optimising the balance of capital costs can mean that the company generates the best returns for existing shareholders.

The cost to equity (dilution) is lower future returns as profits have to be shared amongst more people. This means that any equity funding now is an ongoing cost to the shareholders.

The cost to debt (interest) on the other hand, is fixed. Even when the company increases profits in the future, the cost to debt does not scale with it. This means more profit for the shareholders.

Of course, this remains on the downside too - the cost of debt remains constant when a company loses money while the cost of equity goes to zero as there are no profits to be shared.

This is when debtors can force a company into...

Bankruptcy

This is where the analogy to financial leverage (debt) ends.

For company financing, too much debt can kill a company when there are insufficient profits. This means that at the early stages debt should be avoided.

For product development, failure to achieve product/market fit spells death for the company. This means that at the early stages (technical) debt should be embraced.

When a company goes under all that ugly technical debt goes under with it. It's irrelevant.

To reference the burning truck again, it's not the technical debt that's going to kill your startup, it's the lack of product/market fit.

So until then, rack up that sweet, sweet technical debt.