How do investors feel about investing in an outsourced MVP?


3

We are a semi non-technical team, that has access to technical people that will oversee the technical side of the build. Our thoughts, are to use the working MVP to validate the idea, and hopefully gain some traction. At that point, use that traction to attract developers (knowing they may want to do a rebuild), and then seek funding. So my question is:

How do VC's and Angels feel about investing in a product/MVP that has been outsourced?

I understand that most VC's invest more in the team than the product. However, I read one blog where the VC said that he would not invest in an outsourced product. Other VC's seem to push teams into outsourcing to save money. What is your experience/thoughts on this?

Funding Strategy Outsourcing Investors

asked Apr 28 '13 at 05:16
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Derek
164 points
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6 Answers


5

I heard a good analogy once talking about kids and nannies and how that relates to software products. Outsourcing your software development is like hiring a nanny to raise your children. Sure they will "care", but ultimately they are just kind of doing what you want them to do and babysitting your child, making sure they aren't getting in to trouble and often times just doing what is necessary.

However, when you raise your kids all day everyday you are a lot more invested. You inherently care more about what they watch on TV, what they eat, how they behave and would work harder to make sure they grow up to be an asset to society.

Outsourcing your development is like hiring a nanny.

Most VC firms and savvy investors know this. I think it would be much harder to get large rounds of funding from VC firms without a TEAM that was actually doing the work. However, you could easily raise funding from friends, family and probably convince some VC/angels.

But ultimately it does appear more risky to them.

You as the entrepreneur are willing to risk everything, to work for nothing to make sure this product is successful. However, your outsourced developer is willing to work hard until you run out of money. Then they aren't going to continue to work on your product.

Savvy VC's want people who have the capabilities to succeed from start to finish without being highly dependent on other factors. Such as the $ cost of outsourcing development. If you had a programmer on your team they would be much more dedicated to your cause and working 60 - 80 hours potentially to get a shippable product.

Outsourced vendors are working on lots of products for lots of people. They can definitely get you what you need, but there are a lot more factors / risk involved.

answered Apr 29 '13 at 01:17
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Ryan Doom
5,472 points
  • Great analogy and answer. We have been coding now for about 6 months with a technical co-founder. Unfortunately, it now looks as though it may not work out with him. The job itself is a large one, and will take some time to complete. That is one of the reasons we are considering outsourcing. We need to get to market asap. Thank you for your input...it is very appreciated. – Derek 8 years ago

2

If you're able to validate a business model with an outsourced MVP then I think that most investors aren't going to care that it was outsourced. However, I doubt that you can outsource the creative process that goes into creating an MVP that demonstrates a business model. If you were hired as a contractor to build an MVP, how would you feel working for a few thousand dollars to build a product that can make someone else a few million dollars?

I went the outsourcing route and I learned some painful mistakes: Dilemma: to outsource the coding or do it yourself Instead of outsourcing your MVP, I think you should look into bringing in a techie that can build it for equity so that everyone's interests are aligned.

Good luck.

answered Apr 28 '13 at 08:02
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Frenchie
4,166 points
  • Thank you for sharing your past post and experience. We have been working with a programmer that is/was our co-founder for the past 6 months. This is a big job, and with over 500 hours of coding, the site is only about 30% complete. Now we are running into some issues with him that may derail the entire project. That is why we are now considering outsourcing. We really want to get it to market asap, and need a larger team to get it there. – Derek 8 years ago
  • Well then in my opinion, outsourcing your project at this stage will only increase your risk and probably worsen the situation. Consider your present experience as having "outsourced" it to one guy: now what do you think will happen if you outsource it to 5 new guys? I think that the reality you're faced with is that you need to hire in-house developers that have an equity stake in the success of the business. That might also mean raising funding to pay them. Whatever you do, take an honest assessment of reality: outsourcing doesn't work for startups. – Frenchie 8 years ago

2

There are no rules for what a VC or Angel will invest in. They make a judgement call about your business and your team. Some that outsource the MVP will get funding, some that build the MVP inhouse will get funding.

You mention traction, they will care a lot more about that than who built the MVP.

answered Apr 28 '13 at 18:13
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Joel Friedlaender
5,007 points

2

At the end of the day, the investor just wants his money back with profit. That's it. Everything else is just the investor's way of predicting whether that's gonna happen or not. Yes, traditionally investors are hesitant to invest in teams without a tech co-founder. And their reasoning is valid: You're a tech company and there isn't one person on your managerial team that actually knows the details of the tech on a high level. However, if you gain enough traction and/or revenue, all of that goes out the window.

In short, this is the answer: You can get all the same things (from your investor) with an outsourced team as you would with an in-house one. However, you're just gonna have to prove yourself that much harder when you're outsourcing things.

answered Apr 29 '13 at 05:10
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Neon Blue Hair
66 points

1

Derek, Outsourcing to keep initial costs down is OK in most cases, especially if technology is not the core of your business model. If technology is critical to your business model, investors would like to see that you can attract the required lead technical person to drive the engineering for you. You can still use outsourced programming team for the detailed work, but have someone with technical skills on your behalf monitor it closely. For example, you could have a tech-lead drive the technology for you part-time for equity while you build the MVP, that person can come on-board full-time after you validate the business idea and raise $.

Hope this helps,
Biju

PS: By the way, I have found that it is better to outsource to a small company (of 20-100 engineers) instead of individual contractors. Smaller software service companies will be eager to please you and work with your constraints. Also, you can rely on them to provide substitute or additional resources if/when you need them.

answered May 1 '13 at 08:47
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Biju Kalissery
21 points
  • Thank you Biju. That's exactly what I had in mind when I posted my question. – Derek 8 years ago

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Derek,

I run ContractIQ - A marketplace where startups discover elite outsourced product development teams. So I am up close to the issue you've at hand.

There is a very small niche of dev shops that are run by entrepreneurs who have done product startups (or) products over and over. They understand customer development intuitively and the trade-offs between features, depth, cost and engineering.

In general, its true that outsourcing firms are like Nannies. But your case is different. You don't have a fully born baby that needs day care. You need a surgeon that takes half done code, salvage it and get a production ready version. That's like a baby on incubator cared by specialists.

We've helped a few startups turn around and rescue a v 0.7 and take it to launch. The common factors we see in successful outcomes are:

  1. The founder is pragmatic about the need to review the code and trust the outsourcing firm's expertise in the usability
  2. Be hard-nosed and emotionally inert for a bit, till they re-prioritize their launch list, to salvage the time lost in transition
  3. They are super-responsive and available daily till the new team picks up steam and take ownership for the availability of the departing team/individual to help that transition
  4. In one case, we made a dev shop in our network to send the lead developer to the US, to sit with the entrepreneur till the transition happened. It costed $2000 extra, but saved several calls / emails and potential re-work (and brought in the much needed familiarity).

Long story short - What you are attempting is doable. But, be super picky about the dev shop you'd pick. This is almost one shot you have to swing this right!

I'd be happy to recommend a few if we can take this offline.

Best
Ashwin Ramasamy
[email protected]

answered May 17 '13 at 21:41
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User25644
1 point

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Funding Strategy Outsourcing Investors