Scaling Development Teams for Israeli Startups in 2021

Quick Summary - The good news is Israel remains a top startup nation in 2021. Still, its demand for qualified IT professionals exceeds the number of software developers and engineers graduating from its 60 colleges and universities each year.

Scaling Development Teams for Israeli Startups in 2021

The dichotomy comes in that while striving to reach and compete on the global market, many Israeli startups and companies are very reluctant to go international with their teams. Maybe they need a different justification for outsourcing? One path forward sees outsourcing not just to increase development capacity, but to develop the personnel and project management capabilities of your in-house developers.

8 mins read

Israel’s tech ecosystem depends on the global market

The entire population of Israel is roughly the same size as the City of London, around 9 million. In today’s world, that doesn’t qualify as an economy of scale. Investors aren’t going to get excited, much less invest, in startups seeking only to dominate their local market. The same can even be said for the 27 government-sponsored incubators operating in conjunction with Israel’s Innovation Authority. Though we are in the process of updating our list of Israel’s Top 5 Startup Accelerators for 2021, at least one point holds true:

Israel’s accelerators focus on helping startups enter the global market.

The local IT labor shortage and outlook

The Innovation in Israel: Situation Report for 2019 noted a shortage of 10,000 IT specialists.
At the time of this writing, Glassdoor had over 2400 open software engineer jobs posted.
The IT skill shortage isn’t specific to Israel by any stretch, it’s global and substantial. While there are an estimated 300,000 software developers in Israel, there are over 27 million globally. One reason why companies look to outsourcing is simply to access a larger pool of qualified applicants.

But, a significant portion of Israel’s startup founders focuses on hiring local in-house developers. This is understandable to an extent, however, it can also be extremely limiting. Indeed, in the absence of a qualified local development team, some Israeli companies will delay or set aside engaging a project altogether.

While there are several organizational growth strategies (lean, centralized, distributed, etc.), not all of them are viable or even optimal for Israeli startups. Centralized development with everyone working out of the same office, given Israel’s manpower and skill shortage is almost antithetical to scaling internationally. Certainly, most successful international businesses in Israel and otherwise outsource to developers in many countries. Google itself has more contractors than employees.

A look at startup funding stages

In the US and Europe, many startups have to bootstrap their way to seed funding and a Series A investment round – or become profitable right off the bat. High-end accelerator programs in the United States tend to offer around $60k to the comparatively few candidates they select. They might have to start out with a single software developer and a part-time designer.

Given the way incubator and accelerator programs work in Israel, its startups have quite an advantage over their counterparts. This includes a very active startup ecosystem and early-stage access to government-subsidized funding for accelerators. Conditional access to NIS 3 million (~US$600k) for a period of up to 2 years is really quite generous. With this funding level, an Israeli startup could afford to actually start with a small software development team.

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Typical Software Development Team Scaling by Startup Funding Stage

Startup budgeting for product development

There are no hard and fast rules about how much tech-first startups should budget for the development of their software project. Some focus everything they have and everything else they can get into development. In 9 Common Pitfalls of Startup Founders, Artem Petrov, Head of Product at Harmonize and former CEO of Reinvently notes, “I generally recommend having at least 2x your MVP budget to either get to the next funding round or start generating revenue to sustain your operations.”

There is a substantial focus to perfect the core functionality of a Minimum Viable Product. But, the other half of an MVP concerns maximizing user data and feedback. It’s critical during the Seed and Series A phases for a startup to find its product-market fit. Founders need to ask and answer the hard questions like,

  • Do customers like our product, or even “the idea of our product”?
  • Do they like it better than what the competition offers?
  • Do they actually use it – and how much?
  • Are they willing to pay for it – and how much?

There’s much more involved in a startup’s success than the “If we build it, they will come” mentality typical of many tech-first startups. Efforts also need to go into finding additional investors and marketing to businesses to start bringing in revenue.

Expediting your capacity to do business will a) decrease your dependency on investor funding, and b) make it a whole lot easier to attract investor funding. Business operations, payroll and finance, staffing and training, customer support, can’t simply be ignored.

So, if you won $600k in funding, you have two options:

  • Invest it all into product development.
  • Invest $300k into product development PLUS any additional revenue you raise through your next funding round.

Place yourself in the shoes of an investor. What would be more attractive? A company with a product or a company with a product and active paying customers?

How much software development will $X get you?

To be sure, quality is more important than quantity in software development. At the same time, the value of your Development Dollar is not the same everywhere and doesn’t factor equally across all options. In Tel Aviv: Hiring vs. Outsourcing and San Francisco: Hiring vs. Outsourcing we detail the difference in the fully-loaded costs of in-house developers as employees compared to outsourcing through an IT staffing agency. Typically, the fully-loaded costs (taxes, benefits, office space, etc.) add 25-40% of base wages.

Fundamentally:

  • For the fully-loaded cost of 1 in-house developer in Tel Aviv, you can have two highly-skilled Ukrainian developers on your team.
  • One in-house developer in San Francisco costs the same as four Ukrainian developers.

For many companies, it’s not the cost, but the availability of qualified developers with essential skill sets. Sometimes, it’s about how rapidly a team with all of the required skills can be assembled. Ukrainian developers offer several additional desirable characteristics:

  • Acquire essential development skills faster with a broader pool of candidates.
  • Quality of code – the technical skills of Ukrainian developers ranks #5 globally.
  • Developers in Ukraine have a high level of fluency in English.
  • Ukraine shares the same time-zone as Israel.
  • Ukrainian developers have a low 5-10% turnover rate.

Ultimately, Ukraine is the most popular outsourcing destination of Israeli companies.

How much does it cost to build a remote team in Ukraine?

If you decided to hire a development team in Ukraine or even open an R&D center, this calculator helps you figure out how much it would cost.

Calculate

Optimizing software development team growth in Israel

Using the $600k of funding Israeli startups can access, they have basically three software development team options. Here’s what they look like when budgeting 50% toward product development over 1 year. Of course, you can double this if you want to go all-or-nothing.

  1. Centralized Team: An in-house team with 3.5 developers.
  2. Distributed Team: One in-house team lead with 4.3 outsourced developers.
  3. Lean Startup Model: 6 outsourced developers.

While there’s a lot to be said for the Lean Startup Model, it’s likely to be a stretch for many startups wishing they could source everything locally.

The Distributed Team stands out as well-suited to Israeli startups not only for adding 50% development capacity — but for giving your in-house developers experience with developing software teams. You’re giving your in-house developer a career path with a ground floor opportunity. If your startup is successful, they’ll be your best candidate for advancing internally from developer to team leader to engineer and engineering manager. From there, they could continue on as a project manager, technical director, or Chief Technical Officer.

And all of this aligns technically…

Conway’s Law asserts that “Any organization that designs a system (defined broadly) will produce a design whose structure is a copy of the organization’s communication structure.”
But an organization’s structure can change over time. Many early-stage startups have little to no structure.

Knowing the requirements of and the scale at which your software needs to be developed – founders can plan to grow into a matching structure. This requires some basic reverse-engineering. At first, it relates to the type of software you plan to develop. Will your software follow a release model to support several platforms or do you plan on just one release version supported by a program of Continuous Delivery/Deployment? If you know this, then you’ve defined a significant portion of the work processes to which your software development team will need to apply.

Your development team’s efforts will be facilitated by aligning to one (or more) branching strategies. Moreover, these can start simple (GitHub Flow or Trunk-Based Development) and can increase in complexity as needed (GitLab Flow, GitFlow, or OneFlow).

This covers a lot of ground, do you think we missed anything? Please let us know what you think! We’ll be expanding on many of these points in some upcoming blogposts that you may find especially interesting – particularly if you’ve served in the IDF.

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