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.

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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.


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.

Employees and Consultants

7 thoughts on “Outsourcing Software Development: Riding the Elephant

  1. Excellent article Ryan! Very good timing as well. You may or may not know the situation we are in, but this article has provided some critical insight as we move forward with our Dev company. Thanks for the info!


  2. Whats up Ryan!

    I love your work.

    I am considering and taking bids now from some of the top web developers for an up and coming site. I have the concept, but do not have the technical expertise to build it. What do you recommend? Should I bring in someone as CTO or move forward and outsource these guys, hoping that I won’t need them later on?

  3. Ryan: Got your email newsletter and enjoyed reading the article above. I definitely agree with your advice. I partnered with a dev company since I lacked the funding needed to get the product developed. Our agreement is based on my company future sales –more like a no interest loan payable when the company starts making revenue (capitalized). The arrangement has work okay for both parties. The dev company has learned how to do new technology (I trained them) and I was able to get manufactured samples to use for convincing partnerships with other companies. The only drawbacks I see are: the slowness of the dev process –they do it on a part-time basis, the higher cost of R&D since it takes longer and requires more people interfacing, the harder to make changes or correct errors in design engineering, and the fact that the R&D is secondary to the dev companies need to make revenue doing other developments. It has been overall a great experience and I learned a lot about outsourcing.

  4. In my experience all I need is Odesk and Skype. I have hired programmers in India and Ukraine, I prefer the Ukraine programmers.

    I recommend that you make as detailed list of instructions as you possible can, get estimates from 3 shops and look at they previous work.

    In Dallas the same level of experience cost $100+ per hour and the Ukraine programmers make $20.

    I just pay by the hour, there is no stock offered. If you can’t find a Tech partner… outsource!

  5. Great article, I too am an entreprenuer building a website. I however have 6 years of web development sales and come from a background of web design (with a degree) in the 1990s. Back then, you could expect a quote based on original code writing – now dev shops just want you to pay for the original code while they pull it off the shelf.

    Also dev shops are not all the same. I have been through 12 now in Los Angeles in the last 4 months– 10 of which I have received a proposal from that went right in the trash.

    So far, all of these dev shops follow the same stupid premise. Hire a salesperson who knows less than I do to hand me a proposal which took 1 hour to create and is mostly (regurgitated) original copy that I sent them. Then expect me to sign to a $100,000 bill based on their proposal.

    Several of these shops want to sell me a CMS (drupal, Joomla) or a proprietary system like Modx. This is a ruse – they just want to cut their development costs/time in half, yet still charge me a bundle. Plus, anything written on a CMS like Drupal cannot be re-licensed even if you find a digital cancer cure.

    If you don’t have the expertise to understand the code you need written though, you’re much better off to negotiate with an American company then to go the outsourcing route however. With an American, you have the ability to explain your concept without worring about the gaps in understanding due to customs in a different country (they worry about it), plus you will have quality assurance by an Amercian company with legal recourse.

    So what do you do? Start by looking for American companies who outsource to India (but own the company in India). You’ll pay double the India rate but for moderate coding that will still be around $45/hr (cheap compared to $80/hr most American companies charge). Then go to Lynda.com and sign up for the $25/month unlimited learning – and start to learn the concepts behind website construction (obviously you’re not going to learn how to code it – but you’ll learn enough to get an idea of whats involved.) Hope this helps.

  6. Very interesting article! We are a Dev shop based in Canada that works closely with startups as well as doing the traditional enterprise software outsourcing. We don’t currently do any off shoring to lower cost areas but do keep costs low by leveraging tax incentives here.

    So far my experience (and we are a relative startup ourselves) has been great. We counsel startups who are generally non technical on everything from Lean Startup methods and strategies through to technology selection. We also provide the right level of staffing at the right time and are able to leverage our larger team for the various different skillets required and have built up a strong support network to help startups accelerate things like finding and administrative setup. We’ve also developed some good frameworks using some of the newer tech like node and backbone and play to really accelerate startups using the web as a primary delivery mechanism. In terms of success, we’ve launched our first product (MVP in under 2 months) with a startup and are working through their first pivot right now. All in all, it’s been a fantastic experience.

    I completely see where you’re coming from with this article, but I don’t think that it’s universally true by any means. I think that it really takes the firm with a structure that supports the model to be truly successful – where the company itself acts as CTO with strong execution rather than simply as a vendor of services. So far it’s been working for us.

  7. For you outsourcing advocates, consider the reality.

    1. You have to spend 2x to 3x time documenting what you want to get over the cultural and communication barrier.

    2. Hourly rate means nothing. My experience is they charge $20 per hour but take (or want to charge) 2x to 3x the hours. It is a wash.

    3. Most importantly, how are you going to manage code quality?

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