Stretch your Startup Funding Runway with Offshore Outsourcing

Quick Summary - Offshore outsourcing can be the most important way to stretch tech-first startup funding. Are you still preparing for your seed round or did you just win your Round A? What you do next will largely determine whether you reach the next funding round. You have staffing decisions to make right off the bat.

Stretch your Startup Funding Runway with Offshore Outsourcing | PerceptionBox

Will you hire in-house software developers or choose offshore outsourcing? Perhaps you’ll want both? At the very least, you’ll want to consider offshore outsourcing – to stretch your startup’s funding runway while accelerating your time to market.

4 mins read

Different startup funding rounds and their goals

Jeff Bezos kicked off Amazon with $1.3 million in seed money and $8 million from a Round A before launching his IPO. Conversely, Facebook went through 14 funding rounds. Uber’s gone through at least 22 rounds, so far. But these are hyper-aggressive strategies to capture market share at the expense of profits. On the other hand, most startups engage to become profitable much faster. Leastwise, as a very rough “guideline” you can look at each round of funding to cover a specific stage of your business development:

  • Seed Rounds aim to develop your business idea and can typically bring in up to $2 million. At this stage, it will be hard to put a value to your business beyond what angel investors think of it.
  • Series A pushes you to develop, test, and create a Proof of Concept – or a fully operational Minimum Viable Product and can bring in up to $10 million. Venture capitalists expect that this will help you develop your business to have a valuation of roughly $15 million.
  • Series B starts you into actively building your business. A Series B can raise around $20 million from venture capitalists with the expectation you’ll be able to increase your valuation to ~$50 million.
  • Series C is about scaling your business. You can potentially generate in the ballpark of $50 million – and you’ll need to at least double that to keep investors keen on your endeavor.

What’s a funding runway?

It’s how much time you have after receiving one series of investments until you must finish your next funding round, or run out of money.

Example:

Let’s say, you just were successful in raising $450,000 in Series A Funding. You now estimate that you will burn through an average of $30k per month. Your $450k is divided by $30k, indicating you have 15 months. In these 15 months, you’ll need to show investors substantial progress to warrant receiving more money.

The calculations are simple. Managing startups? Not so simple. If you need a longer runway (more $), you can:

  • try to raise more money,
  • engage to be profitable sooner,
  • reduce your expenses.

What does software outsourcing have to do with startup funding?

Startups needing to develop software can hire developers as employees, outsource to staffing agencies, or a combination of the two. In many cases, the expenses of a single in-house developer may equate to having 2 to 4 outsourced developers on your team. Granted, you might think that’s impossible – but we’ll show you below and provide links to help you verify for yourself.

Certainly, you may be justifiably excited to have won some startup funding with a seed round or picked up $2 million in a Round A. But if you’re not careful, you’ll blow through that money fast. For the purpose of your startup’s longevity, you need to use that money to reach the next level and show investors and VC firms you warrant additional investment. According to a CBI Insights report, 43% of startups fail because they find no market need (aren’t sticking to the MVP product-process) and 29% simply run out of cash. However, others also fail to get to the pricing right, are outcompeted, or don’t find the right team.

Comparison of employee and offshore outsourcing expenses

Wages of software developers vary by many factors, but mostly by location, experience, and title. In light of this, we’ve assembled a few benchmarks to help show how much employee expenses can vary simply by location. Because they’re highly variable and optional, some employee expenses aren’t included – like utilities or supplies; fringe benefits like health club memberships, 401-k plans, stock options, etc. On the same note, Senior Software Developers, Engineers, and Specialists (Machine Learning) can end up charging 50% or more, in comparison.

You can contrast the cost of employees against the total cost of a software developer sourced via an offshore outsourcing or staffing agency.

 

Employee in
San Francisco
Employee in Chicago as US Avg *1 Employee in Western Europe *2 Outsourced in Eastern Europe *3
Total Wages $141,000 $102,300 $60,000 $50,000
Office Space *4 $12,000 $5.100 Highly Variable
~$8k
NA
Medicare & Social Security $10,700 $7,800 NA NA
State & Federal Unemployment Tax $2,100 $600 NA NA
Health Insurance Single – $7,200

Family – $20,500

$7,200 / $20,500 $8,300
(NIC)
NA
Total $173 – 186k $123 – 136k $76k $50k
*1 Chicago developer rates are slightly less than the US average of dev rates of $107k.
*2 Based on data from Germany.
*3 Based on total outsourcing bill per developer (sourcing in Ukraine).
*4 Based on an average of 150 square feet per employee, by city / national.

To plug-n-play your own numbers, here’s a tool to Determine True Cost of an Employee.

image

Courtesy US Bureau of Labor Statistics

The net effect of offshore outsourcing for your startup?

If you are like many startup founders in the United States, you may think that offshore outsourcing means your developers won’t be as good as in-house developers. That’s a myth. Many of the best technically-skilled software developers are located in Eastern Europe. It would be advantageous for you to examine the issue of purchasing power parity and how it impacts the cost and standard of living globally. There’s also a tendency for those who outsource to lapse in their project management obligations. Due diligence and project management remain your responsibilities.

All the way around, with the ability to tap into a larger talent pool of skilled developers, startups can look at offshore outsourcing as having two massive benefits. First, considering that many Agile Teams are small (3-9 members), you can have a small team of 3-4 for the same expense as one Silicon Valley developer. With offshore outsourcing, you’ll still have the same degree of control over their efforts as you would an in-house team. You’ll be able to stretch your startup funding and get your project to market far faster!

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