Outsourcing Software Development: Riding the Elephant

“Technical co-founders are hard to find.” This is a phrase that is likely said daily in any startup ecosystem.  Thus, many startups choose or are simply forced into outsourcing software development.  But a startup’s outsourcing software development at such an early stage is like riding an elephant in a horseback polo match…sure, you are on a big beast, but your lack of agility will prevent you from winning.

Dev Shops are Hoarding all the Technical Co-Founders…and Large Companies are Paying them Huge Amounts!

There’s likely two culprits why technical co-founders are hard to find:

(1) With the surge in startups, it follows that there’s demand for technical co-founders.  There’s many non-technical co-founders who have joined the startup scene in the recent couple years making technical co-founders the true “unicorns” of the startup world.

(2) The rise in “Dev Shops” has also been removing potential technical co-founders from the startup ecosystem.  We’ve represented quite a few entrepreneurs-turned-dev-shop-groups who have done quite well for themselves in the past couple years.  Larger companies are realizing that they are at least “part tech company” and are soaking up this talent with various tech projects.

Therefore, many startups have no choice but to contract with these dev shops to build their idea. Most of these early “partnerships” never work, regardless of how the startup compensates the dev shop.  And if you pay close attention, you’ll notice that these dev shops begin working with startups but all pivot out to the larger companies.

There is no optimal structure of dev shop compensation that involves equity.

Even if a startup compensates the dev shop with equity or cash + equity, the amount of equity will not likely be enough to get the dev shop to devote the time, effort, and TLC that a true technical co-founder would. A dev shop is simply not a substitute for a technical co-founder.

Around the time the dev shop delivers the product (if the dev shop delivers the product), the startup usually figures out their product is actually their prototype as the startup now desires additional features.  Alternatively, the startup mistakenly believes that the dev shop will deliver a turn-key product that will not require additional development through the customer development process.

Either way, the startup will require additional technical development, but may lack the resources to continue compensating the dev shop.  Dev shops aren’t cheap and they can’t work for equity forever…they actually have to pay some of those developers, you know!  And big companies are willing to pay $$$ for their services.

Conclusion

If your startup chooses to “ride the elephant” (i.e., outsourcing software development), it must realize that the dev shop is only a short-term solution. Therefore, be sure that equity compensation in exchange for dev shop services is somewhat “small” and vests according to a milestone schedule.

Just to be clear, my intent in writing this article is not to be critical of dev shops or the startups that seek their services. Incentives are difficult to align completely, and the startup-dev shop partnership is an ultra-difficult case and frankly, never works that well once a startup looks back on it. I just want startups to think twice about outsourcing software development.


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