Tech startups need to own their tech

A few years back, I had a maddening conversation with a guy named Stephen Thomas. All I wanted to do was to cancel a subscription. What ensued was an hour-long journey into customer service hell.

I started suspecting early on in the call that this “Stephen Thomas” was not sitting in the US. While it took a few pointed questions to get the truth, he finally admitted that he was in India. As for his name, he really was Stephen Thomas which happens to be a common name for Indian Christians.

When corporations started reengineering their organization in 90’s, one of the easiest perceived areas of efficiency was to offshore cost centers like customer support. This was supposed to produce greater profits, but the end result was poorer customer experiences and companies repatriating their call centers.

Outsourcing craze however did not abate. Companies simply outsourced other parts their organizations such as IT or HR. Then small businesses, startups, and solopreneurs got into the game, using outsourced services to offload administrative or time-consuming tasks. Tim Ferriss of 4-Hour Work Week fame was one such example of the rise of outsourcing sweeping the world.

I fully embraced this new world of outsourcing as a startup founder. I hired web designers, copy editors, SEO experts, data analysts, and all sorts of talent from sites like Elance and oDesk. We also used a small firm in Colorado to host our website and software. This led us down the path of eventually moving all of our software development to this firm in exchange for a 5% equity stake and a modest fee schedule.

This singular decision to let another company act as our engineering team nearly destroyed our startup.

We mentioned this previously in a past newsletter, and touched on some of the challenges we faced with our outsourced provider:

When we should have been closing deals, iterating and shipping product, and scaling the business, we wasted people-days of energy and money arguing with our outsourcer. The relationship got so contentious that the outsourcing firm nearly scuttled our exit.

We firmly believe that if you are a tech startup, then you need to have complete control and ownership of your technology. There are many types of startups from agriculture to finance to retail, but if tech is a core aspect of the value delivery of your startup, then you must have your engineering team in-house.

This statement gets a fair amount of pushback because plenty of founders have and continue to use outside dev shops, outsourcers, and hired help. With the global rise of startups over the past decade and more non-technical founders launching startups, this trend has only accelerated. It has gotten to the point that the accepted wisdom that tech startups should own their tech has become unfashionable.

We have seen however that the most successful tech startups, the ones that changed the world, all owned their tech from the beginning or soon after launching. They ship faster, iterate more rapidly, and produce more compelling product and experiences. This is turn allows the startup to find product-market fit sooner, accelerate their traction, and attract investors.

The other consideration is that outsourcing your tech comes with significant downsides. For us, this was the key challenge as the large enterprises that we were targeting as customers had significant demands, from features requests to security requirements to scalability needs. Every customer request for a new feature meant a battle with our outsourcer to prioritize and ship on time.

Does this mean you should never use an outsourced dev shop for your startup? With more founders coming from non-tech backgrounds, this is a valid concern. On the one hand you are excited to get your idea out there, but on the other hand, you could end up killing any chance of your startup to succeed.

There are cases where outsourcing your technology could make sense. For example, some founders have used hired developers to create a modest MVP that they then use to recruit a technical co-founder or hire a head of engineering. An MVP can also help to gather feedback and secure beta customers during the customer discovery phase of your startup.

Even for startups that have a tech co-founder or strong engineering team, some outsourcing can help accelerate results. For non-core aspects of the product, like cloud engineering optimization, using outside resources or a cloud technology partner can be hugely beneficial. Outsourced help can also help with the adoption of newer technologies. For startups on AWS, we have often introduced them to AWS certified partners to accelerate their adoption and training of our Generative AI and data services.

Perhaps however you do not fall into these categories and you still feel you can safely use an outsourcer as your engineering team. Before you go down that path, consider these risks:

• Quality Control – Outsourced teams often do not have the same level of commitment or craftsmanship for their work.
• Cultural Misalignment – Most outsourced arrangements use offshore teams for cost purposes, but language, time zone, and cultural differences lead to miscommunications and delays.
• Lack of Control and Oversight – You lose control over the development process given that you cannot see how they operate.
• Dependency and Reliability – The problems of the outsourcer become your problems when it comes to turnover, business stability, financial issues, and shifting priorities.
• Intellectual Property Risks – This is a huge issue when using offshore outsourcers with different legal systems and less stringent IP laws.
• Integration Issues – Particularly with enterprise customers, integrating the work of outsourced teams with in-house systems and compliance standards often runs into unexpected complications.
• Short-term Focus – Outsourced teams have short-term goals focused on revenue, margin, and utilization, rather than the long-term vision of your product and startup.
• Extra Costs – Outsourcing appears cost-effective, but fees can quickly escalate due to rework, miscommunications, and unexpected customer demands.
• Data Security and Privacy Concerns – Another issue with enterprises, there are risks sharing sensitive data and the potential to run afoul of data protection laws.
• Loss of Knowledge – When you do move from an outsourced to in-house team, the transfer of knowledge if often incomplete.
• Dishonesty and Extortion – In some instances, outsourcers have withheld product to extract higher fees or ownership, leaving the entrepreneur powerless.

How do you combat the downside of outsourcing? You bring on your own technical team. If you have a technical co-founder or you hire your own engineering team, you have much greater control of your destiny and mitigate the downsides of outsourcing. This is an expensive and time-consuming process, but long-term you put your startup on a much better trajectory for success.

What has been your experience with outsourcing for your startup? Are there downsides or positives that we missed? Let us know and chat again next week!

Mark & Basil

We may be experiencing the death of the unicorn! In 2021 and 2022, there were 500 startups crowned as unicorns. In 2023, that number was 45 ??

Building a billion-dollar business should be almost impossible. That was what Aileen Lee of Cowboy Ventures meant when she coined the term unicorn back in 2013. Only the best companies should ever reach that outcome.

Then in a few short years, billion-dollar outcomes went from rarified status to something everyone simply expected. Even countries started to craft programs and policies to grow their own unicorns.

Order has now come back to the startup world. Growth at all cost has been replaced by a focus on building profitable and efficient businesses. One element that is helping startups to become more efficient is Generative AI. Some even suggest AI will be like another co-founder:

• AI as your engineering assistant for code
• AI as you cloud infrastructure engineer
• AI as your data analyst
• AI as your marketing guru
• AI as your product designer
• AI as your legal counsel
• AI as your business strategist.

That is the future we are observing with startups building on AWS. They are using services like Amazon Bedrock, Q, and CodeWhisperer on top of AWS custom chipsets to power AI at scale. This is enabling startups to ship and iterate faster, automate internal processes, gain better customer insights, and accelerate go-to-market execution.

Despite the epic fall of unicorns as a status symbol in the startup world, we expect startups to be better positioned to build companies that are more desirable businesses, innovate faster, and generate better outcomes for founders.

The Overseas Vietnamese Summit was an excellent gathering here in Saigon, bringing Vietnamese around the world to explore tech and startup opportunities in Vietnam.

Mark continues his Asia tour this week in Bangkok to speak at Cybersec Asia on the topic of how startups are enabling greater cyber resiliency. He is also excited to meet with startups at the show and in Bangkok to hear more about what they are building!

The Startup Advocate team is also arranging online sessions over LinkedIn Live Audio on Generative AI, interviewing startup founders in the AI space about how they are building with and using AI (here was our last show). Come check out the show every Wednesday at 11 AM US ET / 4 PM UK / 8 PM Dubai.

Do you know a startup founder that should be on the show? Let me know, we love to hear who you would recommend for us to interview!