Robert Ochtel’s Blog

An Experienced Approach to Venture Funding

Entrepreneurs, Using Outsourcing to Obtain Capital Efficiency Needs to be Thought Through to be Effective

“Cloud” computing is changing the landscape of the software world.  No longer is it required for corporations to sign up for multi-year, multi-million dollar software license contracts only to incur this same amount of capital expenditure in three years to receive a software license upgrade.  Today, “cloud” computing, or the “Software-as-a-Service” (SaaS) business model has taken a strong foothold in the software market and has changed it forever.  As such, many start-up companies are looking to support this same SaaS model for their software service product offerings.  In addition, with the availability of inexpensive, highly-skilled technical software development support from companies in India, Russia, Pakistan and other overseas countries, venture investors are pushing for their new mantra, “capital efficiency”. In short, this requires finding a reliable, inexpensive, highly technical software development partner to get your product to market, so that they can invest less money and at the same time increase their return on investment.  This model is good for both the investor and the start-up company, as both would like to invest less to get their products to market and as a result receive higher financial returns.  The requirement for this outsourcing model to work is to identify a development team with an excellent track record, provides a direct management chain, and supports the near term and long term strategic objectives of your start-up company. In what follows is a short discussion on how to address these underlying issues when working to identify and partner with a capital efficient outsourcing development team.  

Excellent Track Record

Let it be known that there are many, many outsourcing company and individual resources available on the market in order to support the venture investor’s “capital efficiency” model when developing your start-up company’s cloud computing, SaaS business.  On the other hand, not all of these same outsourcing groups have the same business models or objectives.  In addition, like any third party consulting source, you need to verify this third party company’s track record, by doing your own due diligence on the company, including:

  • Checking the background of the management team,
  • Verifying the reliability of their delivery schedules and costs,
  • Making sure they offer leading edge technical solutions, and
  • Finding out how many clients have used them for repeat development work.

All of these things will help you, as an entrepreneur to get a clear picture of the outsourcing group and their ability to be a strong potential strategic partner for your start-up company.  In addition, you need to check your rolodex to see if any of your colleagues can recommend strong outsourcing partner.  In the end, you need to look to identify multiple outsourcing partners and then go through the process of elimination in order to find the right group with an excellent track record that fits your business and business model.

Provides a Direct Management Chain

Working with an outsourcing partner requires strong lines of communications between the third party outsourcing partner and your start-up company. The best approach is to develop a direct “managed-team” relationship, where you and your start-up company have direct management chain control of the relationship.  You do not want too many “project managers” in between your start-up company and your outsourcing partner.  There are many U.S. intermediaries that offer third party management of their “outsourcing” team. This model will work, but it is better to take a hands-on approach to where your start-up company’s technical lead (e.g., CTO, Director of Engineering, Project Manager, etc.) interfaces directly as the project manager of your third party outsourcing group.  Putting another layer of project management in between you and the outsourcing development team can be flawed with potential problems. Not the least of which is that fact that putting one more level of communications between you and your development partner will be a source of mis-understanding and possible product feature and function problems and resulting delivery issues. So, take the time to find and develop a direct relationship with you third party outsourcing team, this will result in much smoother product deliveries and much less potential for mis-communications between the two parties.

Supports Near and Long Term Strategic Objectives

If you are going to partner with a third party outsourcing development group, you need to make sure that this partner has the skills and assets to support your start-up company’s near and long term strategic objectives.  A lot of outsourcing groups are good at a limited number of software sourcing technologies.  This will require your start-up company to look for other, additional outsourcing groups to address your possible future product development needs.  Again, this is not the best way to go.  You need to step back and understand what technical skills and assets you need both short term and long term and find a partner that has the broad set of skills and assets to address these needs.  The last thing you want to do is to have to manage multiple development teams across multiple platforms and time zones in order to get your final product offering to market. So, take the time and find an appropriate outsourcing partner that can address both the near and long term technical development needs of your start-up company.  This will serve you best, and often provide for development efficiencies that will result in spending less money and getting products to market much sooner.

“Cloud” computing and the SaaS business model has significantly changed the software world and with the requirement of focus on “capital efficiency” for your venture investors, start-up companies need to necessarily find an dependable, overseas outsourcing partner to help develop their software based product offerings.  To do this entrepreneurs need to find an outsourcing partner that has an excellent track record, provides a direct management chain, and supports the near and long term strategic objectives or their start-up company. Taking the time to identify the correct outsourcing partner is important as it can necessarily facilitate the future success or failure of your start-up company.

This information was taken from Robert’s new book: “Business Planning, Business Plans and Venture Funding – A Definitive Reference Guide for Start-up Companies”.  Available at

June 7, 2010 Posted by | Venture Capital | , , , , , , , | Leave a comment