When starting up a product development business many entrepreneurs encounter a shortage of funds, so to reduce expenses they often rely on software development outsourcing. However, is this approach truly effective for Tech product companies?
What’s special about product startups?
Starting any new business venture is never straightforward and simple; still, launching a service business (e.g. legal consulting) usually turns out easier than a product one (e.g. lots of R&D). Product companies need more financial resources as they must have something to offer before entering the market – and that something must be both novel and cutting edge to compete.
The main feature of product startups is that they focus on software development. When creating a product company, it’s crucial to understand that a “product” comprises unique technologies, expertise, confidential information, intellectual property rights, proper startup equity allocation, and trade secrets. These items make product startups different and also form their competitive advantage. In the case of outsourcing, you must share some of that information with your service provider, which poses a risk of data leakage.
Startups also possess specific knowledge and develop unique business practices. A newly-hired employee needs time to adapt and learn about the internal processes and procedures. This not only involves the product itself but company structure, personnel, management, meetings, training, mentoring, evaluations, etc. Therefore, the question for a Tech product company is: “Are you ready to pay for training the outsourcer’s employees?” Especially when you know that they could easily shift that developer to another project, or worse, create a competing product.
Keeping these features in mind, many tech startups prefer having their own in-house teams, yet there are also several cases when outsourcing some IT-related activities may be the right choice.
When outsourcing can pay off
Business owners take advantage of delegating tasks to external parties when they have expertise in one field but need help in others. For example, software developers without any understanding of operational management (e.g. accounting and payroll, legal and tax issues, etc.) may outsource these areas.
The following two cases of outsourcing can turn out profitable for product companies.
– You want a short-term solution or have a one-time task. For instance, you need a website to sell your CRM software and not to distract the core team, you choose to outsource website development;
– You want to start with one MVP and test if your idea is a worthy one. Thus, you may seek external help without significant risks; this appears especially useful since you don’t hire a team before finding out that nobody is actually interested in your commodity.
For both cases, outsourcing can be a reasonable short-term solution.
When outsourcing doesn’t suit product startups
However, in the long run, IT outsourcing might not be the best solution; below, find several reasons why this scenario may not be your ally:
– Developing a product requires an extended (and continuing) preparation period before the first clients buy it. This also means high development costs and (with outsourcing) usually involves many other unplanned expenses;
– Numerous adjustments and fixes are inevitable at the initial stages of product development. You will pay extra for every such change as none of them have been calculated into the initial cost;
– Product companies use unique technologies that require confidentiality. Involving outsourcing service providers would mean a risk since you must disclose some of that information and lose core intellectual property;
– Your development team should understand some background/customer issues to offer the best solutions. With outsourcing, software developers are usually less committed to your project or client.
The major point is that startups depend on being “agile.” They must adjust their product to actual customer needs and a changing market environment, which proves that IT outsourcing doesn’t always equate to being effective. Still, there is even more to it.
Why IT outsourcing scares away investors?
Getting funding is always difficult for a new product startup, and outsourcing your activities can influence an investor’s decision. Investors don’t give away money for just an idea; instead, they consider a range of factors, including market situation, technical complexities, and the team working on a project. In many cases, your team receives the most attention.
Experts say that for early startups, 80% is about the team and only 20% about the actual business (in identifying whether you get funding or not). As a startup, you might completely change your initial plan or turn towards the opposite direction; therefore, you need a strong team capable of bringing an idea to fruition. Some investors even prefer to fund a risky project idea with a cohesive, strong team backing it.
In most cases, investors treat your outsourcing activities as a signal that you lack the competency to execute the project by yourself. Such a deficit of knowledge and experience could discourage potential investors from giving money. Truth be told, 99% of investors think that having no in-house developers is a “deal breaker.” They want to fund a startup with a great idea/team, not an outsourcing provider.
How do startups benefit from having an R&D office in Eastern Europe?
Having your own development office/team is an immense advantage for a product startup. Even more, it has established itself as the “trend” to keep research and development activities in another country. Many businesses prefer having headquarters in the country of business origin, yet move their R&D to a location like Eastern Europe.
Why Eastern Europe? Offshoring research and development activities to this destination allows for saving money by opening access to reasonable overheads and talented software developers (with competitive wages). Many American VC funds recognize this scheme as an effective one. Meanwhile, companies like Grammarly, Snapchat, People.ai, and Tonic Health already take advantage of this Eastern European model and attract new investments.
With your own office, you get:
– Dedicated high-skilled professionals working on your project only. This model won’t scare investors away as all team members are your employees;
– More control over developers. The offshore team follows all policies and practices of your company, which will reduce the risk of misunderstandings;
– Higher security. You won’t share technology or valuable data with external service providers. You’ll also face no issues with IP rights (being the 100% IP owner);
– Fast resolution of issues because of your team’s focus on one project. In contrast, it may take outsourcing providers longer to respond since they usually support several clients;
– A team that understands the customer. Your developers can use this knowledge to offer innovative solutions rather than merely complete the tasks they receive.
In most ways, opening their own R&D center in Eastern Europe suits IT product companies better than anything else. However, when you’re looking into the Eastern European market, you need a trusted partner who can handle all legal issues, office rent negotiations, workspace organization, IT recruiting, payroll & accounting, etc.
Eager to learn more? Just drop us a line. We would be happy to discuss the opportunities!