Silicon Valley is a hyper-competitive world where startups that embrace outsourcing can reap benefits. We assess the pros and cons of partnering with nearshore providers.
Getting a startup off the ground is hard work— no matter the location. Silicon Valley, the Mecca of technology innovation, offers obvious appeal: It has some of the world’s best talent and an active venture capital community.
But it also presents some challenges. The Bay Area features a crowded technology field, and labor and real estate costs are high. One route to solving some of these challenges is outsourcing, a strategy that has major advantages for startups but is not without its pitfalls.
To shed some light on both sides of the equation Nearshore Americas has assessed the pros and cons with the help of Adrián Anacleto of Epidata Consulting, which has an office in San Francisco and provides developer services from its “Software Factory” in Buenos Aires, Argentina.
The Pros of Outsourcing for Silicon Valley Startups
Help with an MVP
Outsourcing can help a Silicon Valley startup to go from proof of concept to a minimum viable product (MVP). “There are companies in Latin America that say, ‘We’ll create your MVP and offer technical support outside of San Francisco,’” said Anacleto. “They might then take a share of the company, due to the risk. That can be useful for a startup, even though it doesn’t scale well.”
Commitment to Open Source
Startups like open source, which is inexpensive, powerful, and scales well. Outsourcers know this world, and this positions them to help get quality code written fast. “When you are talking to a startup, open source is not an issue, because they know that’s the affordable way to create products,” said Anacleto. “The open source market is very mature right now, with professional support around it, and outsourcers are equipped to deliver. That helps, because for startups there is no other than open source.”
A startup rarely has the core competencies to run every aspect of its business. Putting in place a team that can run all aspects of a company, or finding individuals that are multi-talented, is a major barrier for small firms. It makes sense, then, to outsource some non-core business functions, whether that be marketing, accounting, design, manufacturing, or software development.
In Silicon Valley, everything is expensive. Labor costs are high — and not only for top-notch programmers. Startups with limited budgets simply can’t afford the crushing overhead. Keeping the strategic roles in-house and outsourcing jobs to lower-cost regions can maintain the value proposition while improving the balance sheet. That in turn can make a startup more viable for VC funding. For example, smartphone startup Nextbit Systems, which is based in San Francisco, saved money by outsourcing the software for its phone’s launcher interface.
An outsourcer is going to have more experience than a Silicon Valley startup, which means that they know how to adapt to changing conditions. “The market is changing all the time in Silicon Valley,” says Anacleto. “Every 18 months there’s a new buzzword. Now its API and IoT. A few years ago it was Big Data. And soon it will be something else. Silicon Valley is very demanding, and an experienced outsourcer will know how to deliver.”
You Can Be Anywhere
Silicon Valley may be ground zero, but that doesn’t mean you have to be there all the time. Tom Gerhardt and Dan Provost of Studio Neat have outsourced virtually every aspect of their company, which designs consumer products. They are the only employees. If they want VC funding from Silicon Valley, it’s a plane ride away from their homes in Austin, Texas.
The Cons of Outsourcing for Silicon Valley Startups
Big outsourcers shy away from small players
“Early-stage companies are often not mature enough to hire outsourcers,” said Anacleto. “We try to sell to startups that already have an A and B round of financing, and that have $8 million or $10 million dollars.”
Loss of Control
If you’re outsourcing, you won’t be on the client site full time. A lot can be done to mitigate against that, but you have to do your due diligence, and trust your partner. Scott Croyle, chief design and product officer at Nextbit Systems, doesn’t regret his decision to outsource. However, he echoed the concerns of many startups when he said there had been times when “maybe where I wish I had somebody local.”
Jason Goldberg of Fab.com, an online shopping site, has had success outsourcing to India, but it has also required him to keep his development team on a short leash. So much so, in fact, that Goldberg started by spending the first week of every month in India to ensure that everything was on track.
Startups are often helmed by young entrepreneurs who know little about how outsourcing actually works. And if they don’t know how to get the most out of a relationship, or what’s involved, then they won’t get the best value. “A major problem is that startups don’t know how to interact with an outsourcing company,” said Anacleto. “And on top of that, they often don’t know anything about the country where their work is being outsourced.”
Not all outsourcers, or outsourcing locations, are created equal. Often, a startup will see everything beyond Silicon Valley through the same lens, which can be a fatal mistake. When a startup is too task- and price-focused it can miss out on some of the cultural nuances that could sink an engagement — or make it a roaring success. “You can hire from Ukraine, China, India, Argentina, and Colombia, and you will receive a different flavor, with different skill sets,” said Anacleto.