Should Your Innovative Startup Outsource Its Software Development?

Launching a tech-based startup without technical expertise? Consider outsourcing, co-founder hunt, or in-house team. Here's how to decide and succeed.

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If you and your co-founders are not technical, but your innovative solution is tech-based, you may be faced with a common dilemma: “Should I outsource, look for a technical co-founder or hire a tech team?”

There is no right or wrong answer. It depends on your business, your timeline and your budget. However, it is wise to dwell on this decision as it will impact the future of your startup.

How to decide if your startup is outsource-worthy?

Is your sustainable competitive advantage derived from the software?

If your product’s technology has a secret component (IP) that adds value to the customer, is innovative and is difficult to copy, your technology is your source of competitive advantage. If you cannot ensure your IP will be protected, you should try to build your product in-house.

On the other hand, if you’re using well-known and easily replicable technology to solve a new problem, the technology is not your source of competitive advantage. You competitors will be able to copy your technology as soon as it becomes accessible in the market. This kind of technology may be outsourced, specially if your product idea can benefit from the ‘first to market’ advantage, or if it is in a ‘winner-takes-all’ market.

Let’s take Uber for example, as they outsourced software development at the beginning. The app and its basic functionalities (such as login, location, automatic billing, etc…) are value-adding, but easily replicable. They are not a source of sustainable competitive advantage, so they can be outsourced. On the other hand, their advanced algorithm that matches drivers to customers, to ensure both parties have an optimum user experience, is a source of sustainable competitive advantage and should be built in-house.

Do you have the money and time to hire a software development team? Are you able to keep them in your organization?

Software development is a high paying job as there is a low supply of talent and a rapidly growing demand to build tech.

The tech hiring process is lengthy and competitive. You need to have a clear strategy to get programmers’ attention and to get them to apply. If you don’t have a plan, you will be one of the thousands of recruiters/entrepreneurs that gets blatantly ignored.

Once you receive applications, you need to understand that software developers have strong bargaining power for salary and working conditions. They also have non-monetary requirements such as challenging projects, high learning environments and collaboration with other programmers. You need to bear in mind that you may not have the time and money to create this environment, but tech giants do, and they are your competition in getting talent.

Programming has a low barrier to entry, which means there are a lot of unqualified learners posing as programmers in the market. If you don’t have technical knowledge; you will be unable to identify beginners, notice their low quality code and up-skill them effectively. If you find the right fit at the right talent level, but do not live up to your side of the bargain, they will leave. You will lose money and time throughout this process.

We highly recommend that if your answer is no, you opt for outsourcing or look for a technical co-founder.

Do you have the time to search and find the right technical co-founder?

The best-case scenario for your organization is that you find the right technical co-founder. This process can take months and is not always successful. You need to ensure that your values, expectations and work ethic matches those of your new co-founder.

You will be entering into a long term relationship with that person, so finding the right fit is critical. If you are considering this route, check out “The Founder’s Dating Playbook“, by Gloria Lin, which breaks down the process of selecting the right co-founder.

In this step, you also need to consider the type of market you are in. If it is a ‘winner-takes-all’ market, or if you are counting on a ‘first to market’ advantage, time is of the essence, and you should prioritize building an MVP.

Another important question that you should ask yourself is: “Am I willing to give up a substantial percentage of equity?” The tech co-founder needs to be as invested and motivated as you are in the project, and his contribution should be reflected in equity.

If you are uncertain of how equity should be split, I recommend you read this article by Y Combinator. Equal split amongst early startups is very common.

Decision Tree: Startup Outsourcing

After you follow the decision tree below and analyze the requirements of your business, you should have an idea of whether your business is outsource-worthy.

If you decide that outsourcing is a good strategy for you, I recommend that you do thorough research on reputable companies. Meet up with them over video call and ask them questions. Finding the right company to outsource your project to, is as crucial as taking the decision to outsource.

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