Hiring Developers For Your Startup - When And How To Transition From Outsourced To In-house
27 April 2023 (updated 27 April 2023)
17 minutes read
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Table of Contents
What's so specific about startups?
Startups are fledgling organizations in their opening stages, launched by an idea creator who has crafted a desirable product or service. As these companies typically begin with high expenses and little revenue, many entrepreneurs seek funding from sources such as venture capitalists.
Startup owners, also called founders, aim to introduce a single product or service to the market. A new startup often doesn't possess an established business plan or sufficient capital for large-scale operations.
As these businesses typically require funding from their creators initially, they need to devise creative strategies to gain traction and survive in this highly competitive landscape.
Why do startups need developers?
It is no secret that technology plays a major role in the success of startups, which is why developers are crucial to their growth. Early-stage startups can use technology in many ways: technology could be a marketplace for their new product, a part of a marketing strategy, or a way to stand out in a global pool of other startups.
With their technical expertise and coding abilities, developers can bring to life the ideas that startups are built upon.
From building websites to creating apps, developers are the backbone of a startup's digital structure.
Without them, startups would lack the technical foundation to succeed in today's competitive market.
Tech-related startups are a very important part of global technology development, but for 70% of startups founded before June 2022, technology itself wasn't the core industry. Founders are often specialized in the core non-tech niche of the product or service they build.
This is why many of the startups don't have developers on board at an early stage and look for outsourcing. Some of them might already have a technical co-founder, but they are too small to build an in-house team. That's why founders often consider hiring developers for startups externally.
On the other hand, the statistics show that almost 76% of big businesses outsource their IT services to full-time developers instead of building their teams. This shows the impact outsourcing as a model has on a tech market.
Models of hiring developers for startups
There are two main ways for a company to operate its IT team - by building it in-house, or by outsourcing. Building an in-house team means hiring developers for the startup on your own - this requires a recruitment process, having an HR and administrative service for the employee, and providing all their needs, such as a workplace and a work computer. Another model is to insource potential developers for your startup, using other companies' employees in your own company. When it comes to outsourcing, you can do it in these two ways:
Traditional outsourcing is targeted at slashing costs for uncomplicated and isolated tasks. During the outsourcing, your company is renting a team of developers for an approved number of working hours or a designated service. If they lack equipment, or a place to work, it is your business that has to provide them with everything they need. It also means that the team will be responsible for the whole development cycle, from start to finish.
The more detailed version of outsourcing is body leasing. This recruitment style is meant for filling the gap in your team by finding a single expert that would replace a missing team member. The expert doesn't need to be hired for the whole development cycle - he can fill in only during the stage that the replacement is needed. For example, if your tester got sick all of the sudden, you can hire another tester through body leasing, and end the contract when the testing phase is over.
Managed services take outsourcing to the next level, not only providing cost savings but also delivering extra value. With such services, software houses support processes and applications or entire business areas that require expert knowledge.
‘Managed services’ means to outsource an idea to a designated team. You don't have to worry about their skills, technology, equipment, or workplace - the main company is responsible for providing additional support for your project, not the other way around. You also don't have to agree to a fixed number of hours - you only pay for the hours it takes for the service to be completed properly. On the other hand, they should provide you with more ideas and technologies than during traditional outsourcing, where you have to agree on a certain technology to be used.
Which model should I choose?
It depends on the startup's scale and the owner's personal experience. If the startup already has a Chief Technology Officer (CTO), they should have the expertise required to decide, however you should keep in mind that a CTO can have a lot of domain and product experience but still lack technical knowledge.
Some startups decide to hire developers from the very start and build their in-house teams. While being safer for the project, the hiring process can be difficult, and finding talented developers for your startup can take a long time. This option is also usually the most expensive, since you will have an entire team to maintain, so it is not recommended for an early-stage startup.
Another possibility is to hire freelance developers for your startup. While this option offers faster implementation of the project and is cheaper, it is not always reliable, and finding the right talent can still take a long time.
The third option is to outsource your developers from external companies. This way you can have a team of remote developers that are closely coworking with each other but still collaborate with you on the same project and have access to the latest technologies available for tech companies rather than individuals.
They also usually come together with project managers, who would make sure that everything is sticking to the schedule.
Each of these models for hiring developers has different pros and cons.. As a startup owner, you need to carefully choose a developer employment model, considering your specific business needs. The greater the external burden and expertise required to run a startup, the stronger the sense of fear of becoming completely dependent on an external partner.
External hiring - is it worth it?
The developers for your startup can come from a number of different places.
Building a dedicated team is crucial for early-stage startups since a lack of good developers who can successfully implement a business plan is a common reason why many startups fail.
Let's talk about the pros and cons of external hiring - a popular solution for small projects.
Risks of external hiring
It doesn't matter what model of external hiring you will choose - whether it's freelancing or body leasing, the risks are almost always the same.
First and foremost, knowledge is not staying in your business. The right developer will provide you with his experience, but if you finally decide to part ways, you will lose their insights.
You should also be cautious while construing contracts between you and software developers and companies. Remember to cover intellectual property provisions, copyright transfer and confidentiality - it doesn't matter if you hire a backend developer or a front-end developer, it's important to make sure that whatever they create, stays in your business.
You also lack control over external developers throughout the software development. When you hire freelance developers, they will likely stick to the proposed work, without offering new insights or ideas to your app development. They might also be part of other projects, so won't be as dedicated to your project as you might like..
There is also the issue of ESOP and VSOP - while being useful to employees, freelance developers will not benefit from the company’s growth, which can lead to lesser motivation.
It's more difficult to control the processes and build an organizational culture while having to hire remote developers. Even with the help of employment agencies, the rotation of employees can be difficult to manage.
It would also be hard to supervise the quality of the code and the whole workflow. This is quite a risk when you want to hire freelance and remote working developers - not having physical contact with them and not being able to supervise their work from time to time.
While you can see that there are several risks in insourcing other teams in your company, they are all easily dealt with.. By ensuring you work closely with your chosen technology partner at the contract writing stage, you can ensure that any doubts are addressed.
Pros of external hiring
Working with outsourced developers isn't entirely negative, however. There are many positives to hiring developers out-house.
When you hire external developers, by outsourcing or body leasing, you don't have to worry about all the organizational work connected to management, HR, building a work culture, and so on. You don't have to hire another person to take care of payrolls or holidays.
It also comes with additional savings on computers, any technical equipment, or even the costs of renting and maintaining the office, in case of hybrid or remote work.
Outsourcing has a major advantage in terms of the flexibility of the team financially. You can expand and reduce your team depending on your tech stack needs. You don’t need to make a long-term financial commitment - you can hire a full-stack developer on a short-term basis, and you can hire different tech experts for every field of work.
In summary, in the early stage of the startup it is key to focus on the product itself and its vision instead of wasting time trying to find programmers or even potential candidates for your developers' team.
The founders, even the technical co-founder, and the stakeholders have to consider the business development and strategic issues while trying to obtain the minimum viable product for their startup - that's why external hiring is appealing to them.
For a fixed price you can release your processing capacity and focus on the fast development of your startup, instead of finding the need to hire developers.
Technology grows with your startup
With all the pros and cons also comes the awareness that you don't have to stick the whole time with one software development model. Software development companies are very helpful, but when is the time to find developers that will build your team?
Early startup life
While talking about the early stage of a startup, we're considering early funding stages (ex. pre-seed, seed, series A). When your financial resources are limited in the very early life of your business, it is wise to lean towards external hiring. Even if you have an experienced technical founder, he should concentrate on app development rather than on hiring needs.
There are a lot of app development companies that specialize in helping startups. They already know the tech stack needed to develop your product, they're keeping an eye on any new technologies, and their developers have a solid tech background. It's much better to choose someone with experience than try to find programmers whose talent pool may be questionable.
My software house won't let me go!
It is essential though to not fall dependent on the software company. There are some companies that would use an early-stage startup to secure a steady income by the fact that the startup will be heavily relying on them as it develops.
That's why it's super important, in the early stages of cooperation, to discuss the approach and strategies of both parties regarding the development of the technology team.
A good approach is to establish financial and product development indicators that will point out the moment at which it is worth thinking about further scaling the in-house technology team instead of expanding outsourcing. It is also an excellent way to plan the technology roadmap and include tasks that an internal developer can do.
When to go in-house? - financial aspects
When it comes to the financial situation, a good indicator is the stability of financing and traction - related to the revenues from the product. If your product gains stable and predictable revenue, you have resources for long-term software development planning, so you can start hiring developers for your startup, instead of using outsourced ones.
When to go in-house? - organizational aspects
Organizationally, it means having structures for effective management of your teams, such as HR or Administration. You don't have to hire developers on a project basis if you can manage them internally, and you don’t have to worry about sharing their time with other companies.
When to go in-house? - product aspects
On a product basis, a great reason to go with an in-house development team is the maturity of the product, its recognizability on the market, and having a stable base of clients or users.
The cause could also be the wish to build your own research and development team and combine the product and technology used to build it with organizational culture, for example, building your open-source solutions.
Startup checklist - what should you plan before reaching the software house
Before reaching the software house, you should prepare a few things that will make your negotiations much easier. Let’s talk about what you should plan to hire developers for your startup.
Establish the product requirements
When developing a solution, it is critical first to identify what problem your product will solve and what value it will bring to the market. Our article on Product Discovery can help you define this.
Secure the funding
Remember to prepare a financial plan. It is crucial to consider the development cost and how you intend to pay for it. This will help you understand the resources needed to secure the best team for your startup.
You should also keep in mind the pricing models that software houses offer. Additionally, research whether you are eligible for any government grants or if there are any investors that can help fund your project.
Mobile or web?
Choose the platforms that are most suitable for your business needs, whether it be a web-based, mobile app, cross-platform compatible, or even desktop application. Every platform has its different needs, development, and design time, but also a different team to take care of it. It's crucial to identify your needs while talking to the potential technology partner.
Picking the tech stack for your project is critical. With numerous programming languages, technologies, frameworks, and tools to choose from, selecting the right one ensures that your product will fulfill all of its business objectives. If you're not sure about the tech stack - don't worry, each development company will be glad to help you but remember to double consult the final decision as it's often difficult to change tech stack after the development process started.
Time to market
If you have a timeline in mind, brainstorm it with the software house and negotiate clear goals before signing a contract.
How much time you have before releasing your product to the market can affect the technology decisions. If you wish to get your product available on the market swiftly, selecting from existing libraries or any other no-code solutions is a wise decision.
If you want to attain rapid growth, your tech stack must possess the capability to scale. Some things are easily scalable, but some may require additional development and resources. When planning for scalability, make sure that your tech stack will be able to take future updates!
To guarantee the highest levels of security, it is vital to construct strategies and solutions with a thorough consideration of risk mitigation best practices. Security should become a priority in the development process and it is essential to choose the right technology partner that will understand your security needs.
The transformation - when external becomes internal
Hiring developers for startups can be very tricky, depending on the scale of the product and the team.
The riskiest is a drastic change in a team working on a living product - whether you change your outsourcing company or decide to go in-house, it's still not good for the product. The sudden, extreme change can lead to mistakes, accidents, maintenance incidents, and, in many cases, delays in product development and improvement.
That's why the aspect that you must focus on is the support and understanding from the software company that is transferring the software.
As a startup owner, you should insist on having an orderly, clearly managed technological workflow - you have to be sure that the code written and the product structures are clean, maintaining processes are understandable, and the documentation is updated and available even after the software company leaves.
Since a sudden change can be too much for both your product and your wallet, it is better to gradually exchange the outsourced developers for the ones that you hire, one by one.
Can an outsourcing company support in-house transition?
A good software house partner may support you in finding the best in-house developers for your startup. They could even carry out the recruitment process, since they know the tech stack used in your product best, can find the tech talent you need for this job and, after finding the right developers, implement them into the right team.
The whole process of exchanging team members can take months or even years. With constant product development, the involvement and technological field of in-house hired developers are rising.
At the same time, outsourced developers can take care of big additional features that are developed over the minimum viable product. They can also hyper focus on one the technology or specialization like product design or machine learning. There are numerous ways to separate in-house services from the outsourced ones, but it can also be a good idea to mix the teams to speed up knowledge sharing and transition.
So should I hire developers or not?
The universal model for everyone just doesn't exist. Every startup has its own needs and it's difficult to find a solution that would suit everyone at the same time.
But there's one very clear thing - most startups are basing their early product development on external hiring and after reaching stability they gradually begin to hire developers internally.
The conversion from external to internal hiring is quite demanding, so it should be well-planned and prepared.
The choice of your technological partner is also crucial - if you outsource the product development you need a reliable software development company that supports your growth and is willing to help you achieve your goals. A trusting relationship between you and your software company is necessary when you decide that it is time to hire your own developers.
In the case of a trusty software house, you can count on their help not only before but also during the whole transformation process. They would help you to develop suitable indicators about this transition, set up the recruitment process, construct a job description, or even find the best developer in a sea of potential candidates. They'll also take care of and introduce the new employee to your team.
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