I have a solo founder (technical) who has hired 8 full time contractors on ODesk for my startup. We have launched an MVP and starting to get some initial traction.
Would VCs reject such a startup right away on the basis of a single founder with only contractors as employees?
My plan after a round of funding is to continue hiring more contractors. It works for me and is cost effective.
Another founder was asking something similar, but about using interns instead of contractors. As with her situation, creative talent arrangements up to a point of funding aren't a red flag (so long as they're legal, ethical, and effective). But as for your plan for after funding, I'll reiterate from my answer there:
planning on continuing with that post-funding would definitely be a red flag. There's no way you can attract and keep high-quality talent if you're not actually employing people, and paying them a decent salary. Investors will expect to know what the money you're raising will be spent on. If key hires aren't a part of it, expect them to think you don't understand what it takes to scale the business.
To elaborate a bit on your scenario, VCs are likely to have several problems with you planning on employing only contractors (or contractors in key roles):
If you can show VCs that you can make their investment go further by effectively using contractors to augment your development team in place of some full-time hires, awesome, that's a plus. But if you don't have a plan for making key hires / understand what talent is essential to have internal, VCs are not going to think you're ready for funding.
After doing some research, I don't see any evidence that VCs don't like oDesk or any other outsourcing website. VCs don't all believe and do exactly the same things, so you might come across some that don't like it, but I'd say on the whole, it won't be a deal breaker.
They're far more interested in the product you're building, your unoutsourced team (which might just be you, it sounds like), and your plan for moving forward. A site like oDesk won't be a great fit for every company, but it does work for others, and it sounds like you're in the latter group. I don't think I'd worry about it too much.
If I were a VC, and were looking to invest in a company that was heavily involved in oDesk, Freelancer.com, or the like, here's three questions I'd be asking:
1. How many people can you actually manage remotely over oDesk? At what point to you need to start bringing in technical leads to manage the process?
2. Remote contract work can suffer from poor code quality. How do you verify that the code you're getting is high quality?
3. Assuming software development is your primary business, what made you decide that outsourcing something so core to your company was in the company's best interest?
None of these questions would be dealbreakers (unless you have a really dumb answer for them) I'd just want to feel like you've spent a significant amount of time understanding the pros and cons in the context of your specific business.