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

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.

32 Replies

Marisa Bryce
2
0
Marisa Bryce Entrepreneur
Co Founder, CEO
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
3
1
Jack Bicer Entrepreneur
Founder & CEO at Sekur Me ("Father of Uninstall")
Edifon, my other company, Septium, does outsourced custom software development. We do a lot ofsoftwaredevelopment 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
2
0
Justin Njoh Entrepreneur
IT Director - Mayfairworldwide, Lisol, teamable.co.uk
I couldn't agree morewith 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.
Karl Schulmeisters
1
0
Karl Schulmeisters Entrepreneur
CTO ClearRoadmap
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
2
1
Chicke Fitzgerald Entrepreneur • Advisor
Game Changing Strategist, Advisor & Technologist | Board Candidate | Zigging where others Zag
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.
Chaim Sajnovsky
0
1
Chaim Sajnovsky Entrepreneur
owner at b7dev.com
Outosurcing an MVP is a clever option, given that:

As Marisa says, the outsourcing company clearly express you are the solely owner of all assets and code.
The outsourcing company is a solid, reputable one.
They can provide all the elements you need to develop your MVP
They are willing to continue working with you as you have success with your MVP
They can give you a solid backup if you are not a techie

In this way, you don't need to start recruiting all the staff, developing and then knowing Whether the product will succeed or not. On the top of it, it's 4 times cheaper than doing it in house.
Try to get a reputable outsourcing company first, in any case I can always help you with that..

Glenn Donovan
6
0
Glenn Donovan Advisor
Vice President of Sales (fractional)
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.
Ratnesh Ray
1
1
Ratnesh Ray Entrepreneur
Co-Founder, BeeWise | Hiring Android & Back-end Developers! bit.ly/beewise
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.
Chaim Sajnovsky
0
0
Chaim Sajnovsky Entrepreneur
owner at b7dev.com
People, you are forgetting something about getting a tech co founder: you will still need developers, ui engineers, designers, marketing experts, etc. In any possible way, if your tech co founder is a really good one, he will need help. So you return to slot 1..
Pieter Van Iperen
0
0
Entrepreneur and CTO
I think the most important term here is MVP. That is what you will get from the spend with an outsource firm. The problem here is that MVP is step one in 15. It's not the final product, and it is going to need refinement and will need to be built appropriately to be able to scale.

So what is the purpose of the MVP?

And what does it mean to have it without a technical cofounder?

Investors invest in a combination of team and product.

If your team is just you and you are not the nuts and bolts builder, what do you bring to the table and how can you answer questions honestly about the MVP. If an investor asks can we put 10K people on the product, or can we optimize it to make it faster, you won't know and neither will your team. The idea of having something to show the investor but not be able to discuss with investor how it is built, is problematic. Investors want to make a prediction about success and your success is heavily tied to decisions a third party made that you may not understand.

Further, being an engineer and having been approached with exactly this scenario - outsourcing may cut down on those willing to touch the project. The code unsupervised by a tech person is being built on faith. Faith that what the outsource produces is the best approach and won't be under the hood some terribly hobbled together codebase. This creates a problem for a tech cofounder coming in. Especially if you were to land an investor or at least get some interest... if the codebase is terrible the technical partner has to either scrap it and now start over in an ultra compressed timeline or try to build something great on a shakey foundation. For most engineers who get offers weekly to work on things it makes it a way less desirable opportunity.


Now that doesn't mean the outsource company will do things poorly and I'd doesn't mean you can't outsource. Just be mindful of the risk you introduce and remember investors are risk adverse.

If you want to outsource to get the product to market and gain real traction - paying customers or some other form of revenue. Then I would say go for it.

And do that while finding a technical cofounder and other team members.

If you have traction and a team you have good shot.

But if the MVP is to demonstrate things or to just test the market I would save your money and find a cofounder who can build it. If the idea is a really good one someone technically inclined will want to be involved. Also don't limit yourself to your local area when seeking a cofounder. It's very possible to work people across the country or world.
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