Should I Hire Full-Time Employees or Outsource Engineering? Lessons from a 12x Startup Founder

hi everyone welcome I'm uh Matt kowalik I'm the founder and CEO of exit 83 Consulting it is a uh we do a lot of custom software development and staff augmentation services but I've also done 12 startups as well some of them were wildly successful wildly is probably a stretch successful some of them were spectacular failures so I've been on both sides of the equation here so I'm going to as we

go through talk to you about when you should hire full-time employees when you should Outsource and I'm going to also provide some lessons that I've learned doing this for a long time so most of the people we're talking with today and her at the conference typically fall into one of three business growth stages preed seed and series a and above and as you know the

preds small amount of ARR seed is anywhere from 200k to 2K to two two million and then two million and above is typically series a in ARR and the number of full-time people you have versus the Outsource people we have in the growth stages is typically what I've had here like two to three in the precede that's your founder someone who's really good uh that you will work

with uh your seed where you'll have a little bit more and the seed you might actually have one or two outsourced people and then with this series a and above you will have five or more now I'm going to use my company as an example to explain how you bring full-time people into your organization during different stages of your business growth cycle so when you're first

getting started you want to bring in someone who's co-founder someone's your business partner someone who's going to be invested for with you for the Long Haul will walk into the fire with you and we go through anything with you in order to be successful this is your most important hire and that's just it's critical that you spend a lot of time to get the right person in we heard earlier today that everybody every startup has issues with Founders and there's founder problems that's why you have to spend a

lot of time to make sure you have the right person the other thing that's important about this first employee is that they're also going to be vetted by your investors so it's important that you spend a lot of time on that but once you start hitting the seed round then you want to be able to operate and you want to show that you can have operational excellence so you want to bring in somebody and this happens to be our director of operations in South America Isabelle and she is expert operator she's invested in her success

but because we're still learning how to do business she has to be super agile in what we're doing so that's been hugely beneficial and then as you keep growing and you're now into the I'd call series a stage of the business and that growth you want to bring someone in who gives you a competitive advantage or is strategic to the growth and this happens to be Dr Oscar Korea who is our PhD computer science that leads our AI team

for our AI business so and he creat this moat because now we can do AI better than other people so on and so forth now you run into some risks when you're bringing in full-time people and you're probably aware of that so interviewing is obviously costly we all spend a lot of time interviewing it takes time and it's a lot of money uh so you don't want to do it sometimes but you have to do it at the critical stages

identifying quality candidates candidates can be extremely challenging uh so it's worth spending the time to do that but again that's the risk that you take is you're going to spend time to find the people everybody wants some equity in what you're doing they want to be invested you're investing in them for Long Haul they want an investment for the Long Haul as well so that's another trade-off you have to make the quality people everybody wants them it's hard to get

them and we've all been hired at full-time positions before you always want to negotiate salary well when you're the founder in the oper it end of that equation it can be very complicated and gets to be uh problematic and the biggest issue and I you all probably deal with this on a monthly basis is cash flow and payroll and the biggest drain on that usually is salaries so if you bring in too many full-time employees too quickly you're

going to have a big drain on your cash flow now let's go to Outsourcing and when should you Outsource and again it all is about timing and obviously cash is critical in the the first part of a startup's uh life so you want to be careful that you don't Outsource too much too quickly you need to find the right balance now the approach is also important why are you Outsourcing and why would you want to bring outsourced

people in um that's it a lot of times it's for agility or you want to try something and you want to do Market fit and you want to be able to iterate a lot is when you wanted to do Outsourcing but so it's really important that you have the approach and you're all on the same page around the goals about when to Outsource and then agility uh I mentioned it earlier if you want to try and scale quickly and iterate it's super important and you're investing in the

skill versus the person so it's not a longterm investment you have somebody has a specific skill you want to try something you want to see if it's going to sell that's when you bring bring Outsource people in as I said earlier timing is everything cash is premium uh you're trying to use that cash to grow your business through fundraising Revenue so you got to be careful that you don't overspend because Outsourcing and people might say well I'm going to get cheap labor to come in

no it doesn't mean low cost it just means your goals are different you have to be aligned on what your goals are um and you're investing in what you're working on right now so that is it right scale maybe just some a technical debt something that you're doing that you need to get addressed now so you're in focused on specific skill set maybe it's even creative maybe it's specific skill sets to help you get to the next

goal and this is super important and I've worked with a lot of firms in the past being a startup founder and I took me many years as the owner of a 18-year-old consultancy to understand this is that culture is everything it drives value it teaches you uh how to create a create a great engagement between the client and so from my perspective from the client which would be a startup

founder and the people working for them so if you're very transparent with the people who are working with you about the goals that you're trying to achieve everybody's on the same page it just makes it go a lot smoother and you have to balance typically how much money you want to spend versus how quickly do you want to bring people on board and how quickly you need to execute so you might not want to put 10 people on a project immediately because it's going to drain all of your money

before you actually get anything done so you have to find that right balance next is culture turns out us american-based companies Founders are terrible at describing what they want they will tell you here's the road map I want you to do a I want you to do c and I want you to eventually get to F and they will forget B and E and what

happens is if you Outsource this to somebody who doesn't understand North American culture they will just deliver to spec a c and and F and not you won't have what you need in order to survive uh the other thing that's really hard is that the way we communicate in Philadelphia is going to be different than the way people communicate in San Francisco and so you just have to be able to teach we spend a lot of time at

my company teaching people what it means to communicate in different parts of the US I have people who are in 13 different countries mostly in Central and South America and we spend a lot of time teaching North American Acuity how do you work with people in different countries it's it's super important the other thing is really important is the time to get issues resolved the reason why I chose in my company to have people in Central and South America is because they can

they're in the same time zones people can participate in the daily standup if you have a problem you can send them a text or send them a a thing on teams and they will respond and you'll get an issue resolved in a day versus when you have people in other parts of the world that are in different time zones a lot of times you'll have uh you'll have a problem with an issue you'll send in a note they won't read it till the next morning that's 12

hours they they'll try and solve the problem you'll get it back and you'll say well that's not exactly what I meant and so you'll email them again and then you got another 12-h hour cycle and before long it's taking you two or three days to get something resolved it's not you can't move fast if you don't have people working in a similar time zone as you and then last and probably not least probably the most important Point here and what I teach this and train this to my team is that you need to have people

who are invested in your success invested in their problems invested in uh the issues that they're working on and to do that they have to be empowered to either tell you no there's a better way of doing it or I can own this I'm going to take from day one and I don't need all the I don't need total guidance I know what you're trying to achieve we're in sync and I'm going to take it through to the end where I've worked before in people

and it happens to be in other parts of the world not Latin America you'll work with people and they tend to be uh what I'd call Pleasers where they are developing things to spec like I said earlier AC and F and you'll get AC and F and you're like doesn't work you just did exactly what I said but you didn't actually solve the problems yes you tried to please me but you didn't think critically through what was needed to be done and maybe I didn't need AC enough maybe I just need a first couple in

order to succeed in my business so you want to empower the people who are working with you and you want to be able to accept their feedback and their opinions and be okay if you have a consultant come in and tell you no it's super important now I'm going to go through a few case studies where things have gone wrong with hiring full-time people people versus having people who are outsourced now I mentioned earlier that I've done a

fair number of startups I had a couple like I said that were pretty successful I had this music startup it tanked I lost a couple hundred grand of my own money on it and uh it was very specific what we were doing me being an old Tech guy from Microsoft I thought I would bring in some of my Microsoft buddies who were still working at Microsoft and we'd go build this music platform turns out they were still working for Uncle Bill and they didn't necessarily have the time to also work on this so we had

these competing priorities between that business and my business and what happened is we weren't able to respond to feedback we were getting from our potential clients and so I invested I was 100% invested but I brought a couple full-time people in who were not 100% invested and it literally killed the business because we weren't able to execute so that was the first one the next one is an invoicing startup that my consulting company is uh was working

with and they had a team and this is around culture they had a team that was outsourced all in Asia and it took them two days to get issues resolved it was not tenable they could not handle it and they could not move and the other problem they were getting was everything they got back was exactly to the exact thing that they asked for is exactly what they got back so they would either have to spend time rebuilding it or or spend time in J

writing a million tickets to get the simplest stuff done whereas people who understood North American culture would be like oh I know how to fill in the gaps this is what you're trying to do I'll just do it and so it was horrendous for them they ended up moving to us specifically because of that problem now here's the last one which is I gave you two bad lessons that we had to learn the hard way here's a lesson we learned the good way and this was around agility we

we have a company that we're doing work with right now that uh uses robots to get videotape of the inside of uh Municipal sore pipes they send a robot down this pipe they capture video on the inside of the pipe and they have somebody who sits there looks at five hours of video of a pipe and says where all the defects are boop boop boop boop boop boop boop and so this company its expertise is in pipes it's in sewer

systems they came to us and said we don't know how to do AI there's got to be a better way to do this whole thing using AI we just kind of know it so they came to us they didn't want to build an AI team they came to us and we got to do we got to work on it but it was something that had to be iterated on so that's when you Outsource and you need to iterate we ended up bu building five different computer vision models and internally ran a little tournament between those to see which computer which architecture would be the most

accurate in what we were doing we found the right one we were able to iterate on it and gave it to them they put it into their platform and allowed them to Leap Frog to competition and reduce their costs so it was a very easy way Outsourcing was an easy way for them to try something without them having to get the knowledge around artificial intelligence so over the last 20 minutes and I'll take a few questions I'll have a few minutes here when to hire

full-time employees when you're looking for long-term value and you got to hire the right number during the right phase so timing is everything Outsource when you need agility and speed's critical and you're trying to scale and you want to iterate now the lessons that I've learned is your early full-time employees and i' I've taught you all here in this talk early full-time employees are the most important make

sure they're fully engaged what you're doing and fully invested in your success the culture of your outsourced team is how you're going to have a successful engagement with the team that you bring in regardless of my company or somebody else's company you have to make sure you're okay with the culture and it's compatible with North America and lastly is the the the balance between uh the business phases business phases

dictate the balance so you have to build appropriate based upon the the growth phase of your company so I'm Matt kowalik I run exit 83 Consulting out of Seattle uh if you have questions you want to learn more about what we do or you want to learn more about the AI Services we provide hit me up there's my LinkedIn my email address and I will be around here