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How could outsourcing development help startups?

When one hears about  outsourcing work or external consulting in relation to startups, one is filled with several questions that come to mind. Such as:

  1. Is the startup running out of money to hire experts,
  2. or, are the founders and the team clueless about how to execute,
  3. or, is the external consulting company an investor or a major equity holder of the startup?

The reason why such questions come to mind are because they are somewhat natural. Startups are usually low on funds and meant to be resourceful rather than solving problems through large chunks of money and startups usually pivot a lot in the early stages than to develop a professional and a sustainable relationship with an external company. Such common, and yet somewhat correct, understanding about the startups leads to such questions.

However, this is not the whole picture. Today startups are under massive pressure with nothing less than great expectations from their investors and their users. Anything less than speedy delivery of an amazing product implies death. But how has this situation come to pass? Well, since the early 2000s the accessibility and cost of building products has been getting cheaper exponentially by the year. So much so, that at the end of the 2000s it had become folklore that a tech startup could be started by anyone with access to a computer and internet by sitting in their garage. This naturally increased competition multifold to an already laborious and a risky process of building a startup.

The nature of the startup game has shifted from just being laborious and risky to laborious, risky and highly competitive. As a result attaining exponential growth is seen as a litmus test  of a successful startup among the investors and also users – it’s  the survival of the fastest. It is worth noting here that more than 90%, and by some estimates more  than 95%, of the startups fail. This is also well taken into account in any early stage investors portfolio allocation and hence in their view toward startups, if one cares to analyze it. In such an environment it is no wonder that the attitudes like ‘move fast and break things’ popularized by companies like Facebook tend to serve as ‘guiding principles’ to achieve success.

Why external help?

On the flip side this competition and expectation of exponential growth has done certain great  favours to the startups as well. For instance, raising money has become easier as investors are far more likely today to not be stingy about money in order to gain majority market share and do it fast, in many cases even before a single dollar of revenue is seen. As a result, startups have much more money today to buy resources and get help on matters that could expedite their go-to-market and iteration frequency of delivery.

When does a startup need external help?

If one does take some time to think it through, one will arrive at that there are only a few situations if a startup needs external help and they can be broadly categorized as follows:

  1. certain skills are not available within the team,
  2. unrealistic deadline to deliver the product in comparison to the capacity of the team.

Unavailable Skills

With the advent of nocode technology in the past decade it has become possible for non-technical founders to build a tech startup. Imagine a solo founder such as Sara Blakely who built Spanx (an over a billion USD net worth business) or the founding team of Tinder which didn’t consist of a technical co-founder, these are all examples of ambitious people turning their ideas into products against all odds – even the technical odds. Make no mistake both Spanx and Tinder today are tech businesses.

As a result, it has become increasingly common for non-tech startup teams to seek help and advice from external experts or consulting companies in order to  expedite iterations towards reaching  product market fit by filling gaps in knowledge, expertise and skills. Usually, founding teams decide based on strategic goals whether it makes sense to outsource a task or to  hire people to build inhouse. And there are two main factors to consider – how core is the skill/technology to the success or the product that is being seeked externally and how quickly does the startup need it. More often than not, the latter is the key decision making factor.

Unrealistic deadline

Almost always, the startups have to be ambitious in terms of growth due to the inevitability of survival of the fastest. This results in startup teams finding themselves in need of many more experts in several areas, in spite of having tech and non-tech skills within the team. This is in fact more common than the previous reason and we shall see that such a situation could potentially arise not only at an early stage but also at later stages of the startup aiming to achieve product market fit.

Stages of startups

At this point you could ask at what stages of a startup could the help from external partners such as individual experts or consulting companies be needed and to what extent.

Let us divide the phases of the startup in terms of funding stages. The reason for choosing this metric for division is that funding stages usually give some reflection of size and growth stages of the startup, i.e., where it is in the journey of achieving product market fit. In addition, funding stages also tend to define the budgets for the startups external help if needed. Furthermore, we will analyze at each stage the following categories; customer/product discovery, design, software Development and marketing and adoption.

Pre-seed and seed investment stages

Pre-seed stage is typically when the startup only consists of the founders and is usually in the customer discovery phase. Typically the pre-seed investment  for SaaS companies is around 150,000 USD against around 8% equity, 1-3 Million USD for seed investment for another 10% equity. There is usually a gap of at least 6months to 3 years between the pre-seed and seed investments with the average falling near a year’s gap.

In the pre-seed stage and also in the seed stage, the need to hire external help is primarily coming from the lack of skills within the team. The founding team does not have all the time in the world to learn the skills themselves or organically recruit the skilled experts. Let us analyse in which areas and how much the founding team could seek external help.

Customer/Product Discovery

Founder involvement

Customer discovery is something that the founders need to be deeply involved in since the beginning and there is simply no substitute for that. Tech or non-tech, founders must be deeply involved in early stage customer discovery.

Consequently, if founders need external help in customer discovery, it has to be more like advisory consulting (such as for strategy to find, reach out and to develop customers, how to speak to them and conduct user interviews etc.) than simply outsourcing the job to an external partner. This implies that in the end founders have to be the ones who will do most of the actual work on the ground.

Budget

For customer and product discovery areas, it is best to keep the consulting budget small, focused on advisory-like consulting services and only increase it if necessary.

Software Development

Founder involvement

Technology development (whether hardware or software) is usually that is something that needs much more strategic thinking as it involves several critical questions such as:

  1. How central is the tech development in consideration to the startup,
  2. How will the IP transfer be handled,
  3. How quickly could it be delivered and at what is the budget,
  4. and how easy and efficient it is to maintain the software after it is delivered.

At the same time, it is common and easily possible for the founding team to outsource certain kinds of software or hardware development to an external partner. The deep founder involvement, although desired, is not necessary and often not even possible. The main reason founders can trust this easily is because of the maturity of the software development outsourcing industry.

Budget

If the founding team needs to outsource the technology development for their product then a decent portion (even upto 50% of the pre-seed and between 30-50% of the seed funding) should be allocated to that depending on the particular needs of the startup.

Marketing and adoption

Founder involvement

This is where a lot of founders, especially the tech ones, make mistakes and assume that marketing and adoption is something that is either not important or not needed at such an early stage of the startup. This is also an area where external partners could be helpful for the startup to develop a marketing, adoption and distribution strategy since the beginning of the product design.

However, if there is a lack of marketing expertise within the founding team  and it is pertinent that they cannot learn or bring the expertise within a reasonable time, then just like customer development, this area could be outsourced for advisory-like services without much hassles.

Budget

The recommended budget for such an external help should be small and only increase it if necessary.

Series A stage

Once the startup has raised the Series A fund, which is at least in the couple of millions of USD and usually after a year’s or more time from the seed funding, the needs of the team are a bit different now. Usually good progress has been made in understanding the customer and a much better idea has been developed of how exactly the product will evolve after a few years of iteration of MVPs, early product versions and the pilot projects with the users. The startup has usually developed a much clearer understanding of which technologies are core to the product and must be developed in-house for strategic reasons and which technologies could be outsourced to speed up product delivery and eventual growth. It would be worth noting  that  without a few revenue generating customers in the pocket and a reasonable growth plan ahead it is usually not impossible to raise Series A.

Software Development

Founder involvement

Software development is dealt with like a standard outsourcing project of certain key aspects of the product. The founder involvement is mostly at the strategic level at this point, mainly because there are product managers and engineering leads within the startup who take care of the day to day activities relating to the collaboration with the external partner in technology development.

Budget

The budget is usually much bigger than the one in the pre-seed or seed stage, but it is proportionally less in terms of percentages.

Design – UI/UX

Doing good design is something that has gained prominence in the forefront of product development, at the same time it is an expertise that even the founders expert in design need help on. In fact, for SaaS startups it is where the product begins. For almost all SaaS companies and also for certain hardware companies, Series A is a stage where the product starts to look quite professional and the expectations of reliability from the users is quite high.

Founder involvement

It is quite common for SaaS companies to redo their product design (UI/UX) at this stage. The founder’s involvement is usually deep, due to the strategic and tactical importance  of design, in the sense of close collaboration with the external outsource partner on a daily basis but the work is still done by the external partner.

Budget

SaaS companies usually have a big design budget as it is core to their product strategy.

Series B and above

Once the startup raises Series B or above, usually the product market fit is achieved. This implies that there is a clear understanding of the customer, the product and the pricing. Very importantly, the startup makes substantial yearly revenues and it grows year  from year desirably. At the same time, the core tech essentials have been consolidated within the team and it is much often case that the decision has to be made between the following:

  1. acquisition of another business/startup,
  2. outsource the development to an external partner,
  3. hire a team and develop the project ground up in house.

Note that, usually there case 1 is preferred over case 3 as it cuts down the development time and the bulk load of effort is shifted towards integration. So if the startup is lucky, the real decision needs to be taken between case 1 and case 2.

Software Development / Tech Acquisition

Founder involvement
Usually the founder involvement is deep at the strategic level but not in the day to day development related tasks.

The outsourcing for design and other strategic areas is usually done with professional external partners with larger budgets.

Summary

We saw when and how startups could benefit from outsourcing strategically and developing partnerships with external partners who could help the startups achieve product market fit. The table below summarizes the type and the size of outsourcing at the different stages  of the startup to achieve product  market  fit.

 

Pre-seed and seedSeries ASeries B and above
Customer/ Product  discoverySoftware DevelopmentMarketing and adoptionSoftware DevelopmentDesign – UI/UXSoftware development/tech acquisition
Founder InvolvementDeepStrategicDeepStrategicDeepStrategic
BudgetLowHighLowHighHighHigh
CriticalityHighHighMediumMediumHighMedium

 

Table 1: Shows the level of involvement of founders, budget and criticality of success of the outsourced project for the startup at different stages.

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