App development · Fundraising

Funding a startup with an app dev studio as its tech arm

Adam Crabtree Founder, Strollbar

April 10th, 2016

If an app dev studio is your tech arm, what are the chances that investors, particularly VCs, will fund a startup whose tech members can’t give 100% due to their commitments to other clients? From what I’ve learned, this sort of business structure is a death sentence for funding, but I’m interested in hearing what FD has to say. Any thoughts? Experiences?

Damien Filiatrault Software Architect and Strategy Consultant

April 10th, 2016

Adam, as the founder of a company that builds applications for clients, I have first hand experience with what you are talking about. If your application is fundamental to your business, VCs will often be hesitant to invest if you do not have any of your technical talent in house. However, it is possible to start the project with an outside firm and then bring in your in house team over time. I have found that it is most important to hire the highest level technical positions in house. Often, if you have your lead software architect in house but have other less critical roles filled by contractors, this will not be as much of a problem.

Ephraim Ben Dor

April 11th, 2016

Adam, my personal experience is of a catch 22 in nature in that accelerators and vc today, will not accept you without a technical co founder yet some circumstances such as (geographic location, age, idea maturity etc) make it extremely unlikely that you would find one. is a company that tries to solve this problem but I will not digress.

From what I can tell investors have 2 main arguments: (1) as you search for a business model you'd need to pivot quickly and often so you need someone sitting across the table from you to react fast with technical modifications (2) the ability to attract a tech co-founder (i.e. get some guy to drop everything and join you) is a natural filter on the idea and on the charisma of the founder.

Whileboth of these arguments carry weight - I believe they reek of herd mentality and are dangerous to the vc industry over the long term.

I observe that most accelerators and vc would want to invest in teams that have something built already and some traction and ideally if you already had an exit before. They want to reduce their risk.

Now, who do you think have something built and some traction and would go to accelerator or vc for 50K? I'd say products that will remain sluggish at best and also want to reduce their risk!.

So it appears to me that the investors themselves are creating a natural filter of their own you see? and a not very good one.

Those arguments also ignore real-world experience because in many investment circumstances vc and accelerators 'play' with other people's money. This bias creates a lot of second order consequences that I may expand upon next time but the idea is that few would look at you for who you are, what have you achieved so far etc. If you don't fit the template that everyone is using - they pass. In this respect you'd better off talking to Angels.

I agree with the previous commentators that managing the project professionally (i.e. knowing what you doing) and keeping ownership of the code and making sure it is written in a way you could take it in house is crucial. However, all this would not solve the funding problem.

the benefits of using a dev studio is that you have access to all the skills set you need; If you choose the right one, they would never leave you behind enemy lines for other customers; some of them can also add value on business model customer development and they can write code faster than a single co founder programmer could. oh, and cost less!

Assaf Karmon

April 10th, 2016

Adam, I think you can at least develop a prototype with a shop but you need to be in a position to transfer the work over once you have in-house resources.
There are many problems with shops in the long term from the perspective of investors:
1. High cost development. I have seen quotes as high as $6,000 from shops for trivial changes that could be implemented in a day.
2. long turnaround time. You are not the only client and it takes time to "context switch" from project to project. Small requests for text changes can take a week.
3. Misaligned incentives. They would like you to spend as much as possible, it's not malicious it just human nature.
4. lack of commitment. When a new shiny client comes in your are going to the back of the line.
5. General lack of enthusiasm. When people are really excited about a project magic happens and value is created. It's not the same for contract work.

To prepare for eventual transfer to in-house resources take the following steps:
1. Make sure all work is committed to source control(git, svn) daily. Be the owner of the repository. You will be surprised how many founders have not control over their only property, the code.
2. Make sure to be the owner of and have admin access to the production environment.
3. Have the deployment process documented and up to date.

I hope this helps.

Eric Miller Chief Executive Officer at Avi-on Labs

April 11th, 2016

I own a software dev firm and have spun a new company out of it.  First,  I strongly recommend that you take a core team and make it full time on the idea.  It takes full concentration and a full time focus to succeed apply here as well.

Yes, it probably is death for funding, at least venture.  They are looking for a dedicated team and are willing to fund it (of course with most of your equity to pay for it).  If you can get to revenue stage and prove it is working, then many other investors, like private equity, are more pragmatic and invest in businesses that have proven themselves whatever their structure.

So far I have liked the model very much, we have accomplished more faster with less money than almost anyone else.  We own far more of our business at this stage than if we had gone venture.  The consequence is that I have had to fund most of it personally.  You may hit a wall if you don't have the resources to carry it alone far enough.  You may find individual angel/seed investors (not funds) that have a more openminded view, but that will only fill one slice of the pie (early stage, limited funds required).

In my view is venture is broken from the perspective of the founders, so why not try an alternative model...  Good luck!

Roman Semenov Web development, Mobile development, Outsourcing

April 11th, 2016

Hello Adam, 

I'm representing dev studio. And I know what about you are talking. A lot of depends from your studio partner and how you are presenting it for investors. For example this could be a strong point if your dev studio can reduce cost of development in 3 times. This would be only an advantage for investor. Another one thing is to organize your outsource solution as a remote R&D office that under your full control. Key leading developer in house also can be a security warranty for dialog with investors. 

And as a conclusion I can said that it's better to develop your product with studio than do nothing in house.

I will be more than glad top discuss more about your and our approach to your issue and share experience between us. I have relevant cases through on my experience. Also for me would be very useful to hear how do you working right now.         

David Albert Founder & Principal at GreyGoo

April 11th, 2016

I'll echo some of what Assaf and Eric have said. Our business is a mix of start-ups, solopreneurs, and established brands. We've worked with several start-ups who contracted us to help them build a prototype or MVP, or in one case, to supplement their core team.

If you're looking for a seed round with early stage investors, it's been my experience what team developed the MVP isn't of great concern. The start-ups we've worked with have successfully raised funds to prove out their idea or give them runway as they look for a larger investment. I agree with Eric however--if you're headed to the venture stage, a dedicated technical team is going to be a decision factor and absolutely necessary as most dev firms (including us) cannot provide the ongoing dedicated resources and day-to-day collaboration required--nor are most firms interested in such arrangements. A lot of it depends on the idea and the potential.

It's not necessarily a bad move to work with a firm on a prototype or MVP as they can typically provide more strategy, UX/UI help and resources than freelancers you might contract to help in the early stage. Just make sure they understand the startup landscape, the constraints you're working under, and aren't going to break the bank as you're bootstrapping your idea.

priyank JAIN Digital Marketing Consultant

April 11th, 2016

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