Investors · Early Stage Funding

Does planning to outsource MVP as a sole founder first then hiring turn off investors?

Edifon Adiakpan

April 3rd, 2016

I have been working on a social app idea for a while. I did some some research and I believe I have validated my idea through a survey and some information found during the researching process. I have built a working wire-frame prototype of the whole app and am working through the business plan (slightly over half way done; need to finish the financial plan, daily operation plan etc) before preparing a pitch deck. I am the sole founder at this point and lack coding skill. I believe even if I started learning mobile coding on a site like Udemy right now, I would not have sufficient skill to get the product to market as soon as possible. The journey to find a co-founder has been a difficult one as there are not many developers in my area, believe me I have searched, and the existing developers are already part of other teams. I have weighed the pros and cons of outsourcing to a local (Houston, TX) firm and I believe this course of action, working with a outside team and giving input on every stage of the development process, is my best option to get the MVP developed and launched. After which, I plan to hire as having an existing product will give me more leverage in attracting talent to my start-up. I would like feedback on planning to take this course of action after potentially raising a series A seed round of funding and how would that affect my chances with a potential investor?
Side note: outsourcing would also keep more shares available for investors (if the like the idea) as opposed to ownership already being split thus limiting the rounds of funding in reference to the valuation.
A great idea is 1% of the work. Execution is the other 99%. In this course, we’ll teach you how to conduct market analysis, create an MVP and pivot (if needed), launch your business, survey customers, iterate your product/service based on feedback, and gain traction quickly.

Glenn Donovan Vice President of Sales (fractional)

April 3rd, 2016

The question to me is how will outsourcing support you going to market with your idea? Fyi, I assume from your tone you have the seed funding you need to build the product available to you, yes? Or are you saying that you are going to seek funding for the outsourced product dev? I think the idea that you are going to get seed funding for building out the MVP is highly speculative. But even if you were able to thread this tiny needle, then you will likely get awful terms. All that aside...

The operative question is can an outsourced product development setup support you actually going to market? A few things to think about from my POV:

An MVP is likely not going to generate much revenue, if any, but will get you users/signups that you cannot monetize who you will learn from so you can build a useful product. So that is not the gate you need to get through to actually raise A round money.

Good tech startups are constantly iterating in the following way. Engage market, learn, enhance/revise product & strategy, repeat. They do code drops daily sometimes, and are constantly tinkering and adding features, changing existing features, UI etc. Ask yourself, how can you do this efficiently with an outsourced dev firm? Example: I just did a con call with my engineer and product guy on a startup I'm fractional CRO for yesterday, reviewing the three features we need for the week of the 11th to do demos for 3 new customers we are chasing. In the early phase of a tech startup this is to be expected and welcomed.

With an outsourced dev partner there are two elements of friction that you are up against as you want to iterate on product. The first is change management. Since they are not really part of the team, all changes need to be documented and agreed to and then the acceptance of them has to be formal. And of course, every iteration costs more in fees so every change you want incurs more cost and time than it would with an inhouse dev. In the example I cite above? We have no out of pocket cost to do that three changes we need to go win those three customers (worth 60k ARR to us, fyi).

Alignment of incentives. No matter what, the incentives of an outsourced engineering firm are to generate fees from you. While many will be very balanced about this, as they know what they can't just soak you, there will always be this tension.

Pride of ownership. I think that engineers who have equity and are part of the founding team have a tremendous amount of pride and forgive me for saying it this way, but also their egos invested in the product they produce. They have also put all their "chips" on the company if they are doing it full time or close to it (many will consult on the side to pay the bills in the early days). This shared fate drives commitment and very different behaviors than you will get from an outsourced firm.

"Rock star developers" Chicke throws this term around in her commentary and it makes me laugh. The fact is most tech startups are not doing anything that fancy or groundbreaking technologically. Sure, if you hire some kid out of school who's never built an actual working product before, it will look like heroics. But instead, if you find some dev/engineer who has built actual working product/systems before, who's tired of being an employee and wants to take their shot, you aren't looking for "rock star" qualities. Just good solid development EXPERIENCE - you know, an ability meet deadlines, get product into production and work with others. This to me is much more valuable than "rock star" status. You aren't painting the Monolisa, you are just writing some software that is likely no different wrt to the underlying functionality/technology from a lot of other systems that have been built before. Good design is a must have of course, and good UX, but you already have those skills. 

So, in conclusion what am I saying? Outsourcing is a real challenge. I consulted to a startup last year that had to put their entire go to market on hold because what they learned from their MVP meant they had to build an entirely new product (mobile app and back end) from scratch and didn't have the funding to do so, and couldn't raise either.

Last. Do you want some advice? Focus on finding a dev/engineer who believes in what you are doing and wants to do a startup. Co-found with him/her. Your idea isn't as valuable as you think, and will likely change a lot once you begin to try and get it used anyway. Also, stop all the "business planning" - it's next to useless at this point in your development. Yes, do strategy (market research and competitive analysis) but operational plans etc? Irrelevant and a waste of your energies.

Marisa

April 3rd, 2016

I founded my company with a partner who owned a software outsourcing company who I had also worked with for years. I've found several key issues are important, and often deal breakers, for investors. 1) You have to maintain total and unfettered ownership of the software/ IP. Make sure in any contract you have that there is NO way for the outsourced company to EVER claim ownership to what they have built. I would make sure to have a lawyer review any contracts, b/c there can be no loopholes. 2) Investors often WANT the engineers to have an equity stake in the company. This keeps them motivated, available as the product goes through multiple iterations in the future, and also includes them in an acquisition. I have had investors ask many times how our engineers are compensated and if they would follow us if we were acquired. This is huge and shouldn't be underestimated. You really need to have engineers on the payroll that are invested in making the company work and not just looking at you as a short-term client. If you must outsource, figure out how to make the engineers part of your long-term team. For example, see if they are wiling to get paid in cash and vesting equity. 3) You also really should consider getting yourself a technologist cofounder who can bridge the gap until you are hiring engineers. MVPs are moving targets and you want someone on board who knows what is on that code, b/c if your contract with the outsource ends ends and changes need to be made, you will waste tons of time and money trying to get another engineer up to speed. Further, it is generally unlikely that any Series A investor worth its salt will invest in a company without a technical cofounder. Hope these help. Please excuse typos. Sent from my iPhone.

Jack Bicer Founder & CEO at Sekur Me ("Father of Uninstall")

April 3rd, 2016

Edifon, my other company, Septium, does outsourced custom software development. We do a lot of software  development for startups as well. Managed properly, not only it can lower the cost of your MVP, but you can get pretty good talent that you do not normally have access to. A good software vendor not only can develop your software but can even act as your virtual CTO, taking care of your architecture and infrastructure. This is usually well received by investors, showing good fiscal controls and good management.

Justin Njoh IT Director - Mayfairworldwide, Lisol, teamable.co.uk

April 3rd, 2016

I couldn't agree more with Marisa.

In my experience the investors placed a lot more weight on the management team that would take the product to market and execute the plan more than on the product itself !

So in your place I would persevere with trying to find a technical person that believes in the idea enough to help you produce an MVP.

Getting the money is one thing and finding the right key people to work with is quite another thing - money alone can't buy that.

Good luck.

Jonathon OBryan

April 3rd, 2016

I can help you as I am in the exact stage of the "process" as you are!  Connect with me on regular LinkedIn, would love to share my experience for free...  Jonathon

Karl Schulmeisters CTO ClearRoadmap

April 3rd, 2016

Jack is more right than Marisa.  Yes, the "assets" are the codebase in the company, and the experts in that area are the developers.

OTOH - you aren't even a business yet.  you have no revenue and no funding with which to hire. 

Startups, particularly software startups, should consider FTE hiring a sign of failure.   IE you have failed to automate or outsource that function.  Now of course product development is not something that you can automate, but it is something you can outsource.

the questions about "will your developers follow you if acquired"  presumes that there is some "secret sauce" in the code you have developed.  More often than not this is not true. 

Chicke Fitzgerald

April 3rd, 2016

As always, everyone is a little bit right.  

From my perspective and experience you have to get to MVP with your own money (or that of friends and family) and that is best done with a technical co-founder or tech company that believes enough in what you are doing to invest time/energy/resources to get the initial product to market.  

My principle advisor says that on a scale of 1 to 10, here is the relative value of each scenario and he believes that anything below an 8 will fail:

10 - Rock star coder FT as co-founder; no salary only 20-45% founder equity
9 - Rock star coder FT as co-founder; modest salary 10-35% founder equity
8 - Rock star coder as key employee; little to no salary, 10-20% stock options
5 - US-based $100+/hr software firm on contract; have the capital, well negotiated; full architecture, finished product
4 - part-time coder as employee, contractor, loose association; pay per hour or small options
2 - Offshore coders
1 - US-based $100+/hr software firm on contract; can't afford it, do it piecemeal

If you can find a coder or firm that will alternatively work on a combination of equity and revenue share is another option.  If they don't believe in the product enough to do that, there is a problem.

Bottom line is that to believe you can get to Series A with an unbuilt idea is flawed.    

Martin Omansky Independent Venture Capital & Private Equity Professional

April 3rd, 2016

(1) Many of our portfolio companies outsource MVP work. No harm, no foul. In fact, often an intelligent business choice. (2) Your reference to "saving shares" is not an appropriate way to depict the benefit you derive. The more accurate way is "saving equity". The number of shares, in your situation, is not relevant; the shares as a percentage of the total is relevant. Get yourself a securities attorney who will explain this in detail. Sent from my iPhone

Vinod Shintre I help companies with Cloud/DevOps, BigData/Analytics, UX & Mobile technology

April 3rd, 2016

Traction & customer acquisition will get you over all the other hurdles. I would rather focus on adding customers as early as possible, VC/Angels will come in once your customers agree to pay or use your business.

having said that , there are Angels or Pre seed round investors who look at the founders & team along with an excellent idea to get them excited about the potential to do a small round.

i would suggest get the MVP ready keeping in mind a pre-seed round. where you get that done would be based on your choice, money & time at hand so far your IP is protected

my best wishes & glad to help in anyways I can

Ratnesh Ray Co-Founder, BeeWise | Hiring Android & Back-end Developers! bit.ly/beewise

April 3rd, 2016

The best thing you can do is find a tech cofounder. I personally feel investors will hate investing in a company with no tech founder and all of its tech being outsourced. Furthermore, not just will the tech guy play a very crucial role in the company's future but he/she can save you a lot of money and time at this stage, which I believe are the 2 most important things for you currently.