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Should My Start-Up Build In-House Functionality or Outsource Product Development?

by kirkcoburn
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Sooner or later, every founder in the start-up universe has a decision to make: outsource the technical product development, or build in-house functionality? While both options have their advantages, the flip side is also true: there are downsides to both approaches. I would predicate my decision based on the answers to these two questions.

1. Is Technology the Core Business Proposition?

If your company is building new technology, then you’re adding intellectual property (IP) risks by bringing in an outside development team. That’s a big negative that needs a lot of benefits to outweigh that one risk. I’m not saying that it’s a hard no, but it’s more of an uphill climb.

2. Is Technology the Means to the End? Does It Solve a Different Business Issue?

Suppose you’re developing an app that tells you how much exercise your dog needs every day. You need the technology to build the app, but you’re not innovating in the tech space. In this case, your development team is relying on existing software to create the product. So outsourcing product development is not inherently risky.

The conundrum in my industry is that the lines aren’t so clear-cut, and I have several factors to consider when I’m making that call. My investors might have deep pockets, but I have equal or greater accountability for how we spend their money. Here’s my thought process.

What Are the Benefits of Outsourcing Product Development?

Let’s assume the product is not a technological and environmental game-changer—we haven’t figured out a way to eradicate plastics in the ocean (yet). Instead, we have developed an add-on to Tile that lets you know if there’s any activity around your car—something that will alert you if a carjacker is eyeing you in a parking garage. It’s not exactly Snapchat, but there is a market for this kind of security feature.

My first thought when I’m ready to start production is that this is a tedious and exacting process. Even my prototype has lots of detailed steps and many, many iterations before it even gets to a test stage. If I’m a right-brained founder (great with ideas and innovation but can’t put batteries in the remote), I know enough to know that somehow, I need a team to execute the idea. I may have an IT guy on my skeleton staff, but his expertise might not be in the minutiae of software development.

What I really need is a lot of people with specific expertise—developers, designers, testers, and a project manager to oversee it all. (IT guys are terrible project managers.) Also, let’s say I live in rural Tennessee, where there just aren’t a lot of experienced software types. 

Outsourcing May Be the Only Real Option for Fast Product Development

In this scenario, outsourcing is honestly the only way to go. I know it’s a broad and simple example, but there are bigger reasons to outsource this kind of work—even if you’re in a tech hotbed and have access to all the talent you need. I just like the visual of a cabin in the Tennessee hills housing a unicorn.

Founders Need Room to Focus and Innovate

A founder has two primary jobs: innovate and raise money. That doesn’t leave a lot of time for getting into the development weeds, so an external technology partner fills that gap.

The thing about development firms is that they have the expertise you lack and the team to plug in where and when you need it. They can scale the project up or down as needed, which is a win for you since you always have the exact team you need at any given stage of the project. Also, you’re not paying a developer to wait for their part of the work.

What a Product Development Team Brings to the Table

Inexperienced founders don’t know what they don’t know. A development team works with you to:

  • Analyze your overall needs
  • Determine the costs
  • Put together a team that’s the software version of just-in-time delivery

Nobody is on the payroll who doesn’t have a specific job to do that day or week. As a result, you have the flexibility you need to make the most of your resources.

Speed Equals Success

Getting your product to market first is the key to success, and an experienced dev team can move you along faster than an in-house team you’ve put together. Again, there are exceptions. But in general, an external group is going to get you there faster—they’re just there to get the job done. 

It’s one of the downsides of the ‘start-up on a shoestring’ mythology. A great corporate culture often leads to way more hat than cattle. What’s the upshot of a well-incentivized dev team? You can really accelerate your production and testing time and get to market a lot faster.

Outsourcing Isn’t All Sunshine and Unicorns

Founders aren’t immune to buyer’s remorse when they hire an outside development team. When they come to me to moan and groan about how they should never have gone outside for the technical side, the developers are just stealing them blind, blah blah, I ask them one question:

Did you set your expectations at the outset? 

No? Did you just assume stuff, that an outside group would just handle everything to your satisfaction? Well. We all know about assumptions, so let me tell you how to avoid that trap.

Read the contract.

If you’re still honing your entrepreneurial skills, get your VC or another experienced investor, or even your IT guy, to review the contract before you sign it and make sure all the bases are covered. Your IT person should be the one to work with the external team to create the scope of work and time frame, as well as develop a strategy for managing the unknowns.

When Keeping Your Product Development In-House Makes Sense

Hiker with map in the Mourne Mountains, choosing a path

I did say a while back that if your product is a new technology, keeping all the work in-house is probably the better option. That proprietary technology is not something you necessarily want in somebody else’s server space. If we came up with a technology to gene-therapy up some plankton so that they could be turned loose in the ocean, eat plastics, and magically replenish the coral reefs, I wouldn’t want that information in an external team’s hands. But when the technology is a second-level portion of the product (infrared tech that detects activity around your car), no biggie. 

Critical Development Theory: Putting a Dev Team Together

Some founders are tired of staying home and never putting on pants. So they want to get the team together in a face-to-face environment. Some companies do thrive when they’re F2F. But that means you’re not outsourcing anything across the street, much less across continents. 

If your corporate culture values transparency, lots of personal feedback, and agrees on takeout, then you, as a founder, will be happiest when you can interact with the development team at your leisure. Really, this only works well if you have a pretty good grasp of the technology you’re implementing. Otherwise, you’re just a nuisance. Since you’re the founder, nobody will tell you that, so I just did.

The Right In-House Team Delivers Agility

One of the biggest benefits of an external development team is that it is more nimble than an in-house one. If you can get an experienced team that brings that same agility to the table, then you’re better off building it yourself. There is something to be said for a team that’s dedicated to your vision and can make change decisions as needed, on the fly.

Counting the Beans of Product Development

I have yet to meet a founder who wants to relinquish any control of the production process. If you are a control freak and you can afford to bring the production in-house, by all means, do it. I would caution you to seriously weigh your control issues against the astronomical costs of setting up a production and testing lab. Also, be damn sure your investors are willing to foot the bill. I’m not saying don’t do it, just consider all the hard and soft costs in time, people, and hardware.

If you’re building second-level technology, think about this before you go all-in on in-house product development: it’s really expensive. You’ve got the time cost of scaling up staff and investing in hardware (including IT infrastructure, software licensing, training, overhead, etc.), not to mention the outlay of precious cash. If any of this goes sideways and your start-up can’t get to market, you’ve pretty much closed the taps to ever go back to those investors.

So, What’s the Right Way Forward?

Ultimately, you’re the only one who can make the decision whether to go outside or stay in-house. I can make either argument and have it make sense. But I don’t know all the challenges your company is facing. I’m going to leave you with some hard (in the sense that it’s nightmare-inducing) numbers from the start-up universe in 2021.

70% of start-ups either stall out or die. Stalling out isn’t a terrible outcome for founders, but investors want a little more for their money. Investors, however, are gung-ho in wherever that 30% success is. After all, global venture funding last year doubled the 2020 (admittedly a bad year) amount, a whopping-with-a-cherry-on-top $621 billion.

The vast majority of start-ups fail for reasons that are out of the founders’ hands. Maybe they misread the market, or there were legal issues. Alternatively (and this happens a lot in the energy industry), new regulations kill a great technology before it hits the market. Control what you can, but the butterfly effect is a real thing. A small decision you make today can be the difference between a unicorn or a goat. Choose wisely.

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