Fearing nearshoring: common mistake made by venture capitalists and business angels investing in tech startups

Being a venture capitalist is a challenging task indeed. Investing in newborn fintech or e-commerce startups requires patience, intuition, and comprehensive knowledge of a given industry. Knowing how many startups fail every year, it seems only rational that many business angels think twice before they decide to invest a small fortune into the new venture. However, being a Business Developer at a software development company, I’ve seen several seed-nearby startups from Canada, United Kingdom, Switzerland, or Germany, struggling to deliver a competitive MVP – which made me write this very article.

Financial support is key to the success of such ventures and I don’t doubt that securing these assets is a time absorbing process. Even behind (pre)seed funding of, let’s say, 100-500 thousand euro, stand years of experience and it is obvious that investors are careful not to “burn” their money.

Today, however, I’d like to tackle the issue from a different perspective: that of a service provider. Mind you, it may not be entirely objective but knowing the sinful past of many young ventures, I couldn’t help but share the software development company’s point of view.

What happens before your first funding round

Let’s start from the very beginning and take a look at three scenarios:

• You are a class ‘19 Graduate and Berlin-based founder spending your time in a WeWork co-working space working on a proof of concept meant to be a part of your pitch deck.
• You’re an Australian living and working in New York for a couple of years. As of today, you’re dividing your time between a well-paid (but dead-end) job, your girlfriend, and a Flutter-fuelled mobile banking MVP.
• You moved to the UK with your parents when you were six. You’ve graduated from King’s College planning to find a job at Barclays, perhaps Lloyds, but then you met this awfully talented data analyst with a great Github repo in his seduction kit.

Whether you can see yourself in one of the above-mentioned descriptions or yours is a completely different story, you can be sure of one thing: being a freshly-minted startupper, you will ask for money at some point. Period.

Thankfully, you live in a mature startup ecosystem, where raising something around 100-500 thousand pounds, dollars, or euros shouldn’t be a problem, especially considering your natural endowment and expertise. Unfortunately, nothing in life is free and even if you manage to obtain funding, the investor will surely ask for a fair share of the startup equity. And don’t be surprised if they ask to have a say in the way your business operates.

When seeking financial support from a business angel, expect to face questions about the process of building your product or service, the tools you used to achieve your objectives, as well as your know-how in the market you wish to conquer. At the same time, be prepared to hear some hesitation in the investor’s voice if you admit that you were not the only one involved in building your MVP. Before I tell you why, however, let’s take a look at different approaches to software development that young entrepreneurs can adopt.

What options are there for a tech-startup founder?

pros cons doing everything by yourself

• the highest level of commitment and trust
• improved communication

• increased length of the development process
• impossibility to cover all areas of expertise
• the threat of quick burnout

employing in-house

• greater commitment
• understanding and acceptance of work culture
• efficient communication

• higher recruitment and labor cost
• need to invest in internal and external training to keep up to date
• the threat of blindness for fresh perspective

hiring freelancers

• accessibility of workforce
• great for ad-hoc projects and tasks

• lesser commitment and focus on your project
• lower quality of code due to lack of mentorship

offshoring

• lower costs
• time zone benefits (can receive round the clock support)

• communication barriers
• culture and work habits differences
• distance (expensive travels)
• completely different time zone which hinders communication

nearshoring

• the same time zone
• few cultural differences
• cost-effective
• face-to-face meetings and faster communication
• timely decision-making and problem-solving

• usually higher cost than offshoring
• cultural kinship (still, there are some aspects to be considered, such as holidays)

• Building the product by yourself

Assuming that you are a skilled software engineer, marketing specialist, and User Experience designer with some financial fluency in one, you may be able to release your MVP by 2028. But let’s face the facts – you most likely are not. It’s much more probable that your venture is an interdisciplinary team of co-founders capable of covering all aspects of the newborn enterprise desk to desk. Even if that’s the case, however, at some point, you may need to scale up your operations, especially in a situation whereby turning a PHP monolith into high-performing Python-fuelled microservices is beyond your skill set.

• Employing an in-house team

Being the sign of business maturity, the ability to become a stable employer for local talent will be surely considered an added value by the angel investor. Nonetheless, hiring your own team is anything but a child’s play. Recruitment is both challenging and expensive; not only because of the high financial expectations of your potential employees, taxes, or employee benefits like medical insurance or paid time off but also because hiring an unqualified workforce takes its toll on the velocity and quality of the delivered service.

Assembling a strong team of IT experts is time-consuming and requires a deck of unique competencies on the recruiter’s part: soft skills, management, even a bit of marketing experience. With every candidate, there may come to issues caused by the lack of compliance with PEP 8 standards, W3 guidelines, or your internal rules. On top of that, it may turn out that the short existence of your company is a dealbreaker for many seniors who simply don’t recognize you as an attractive employer.

• Hiring freelancers

Almost all young startups have tried this option, yet nobody wants to admit it. Why is that? Deciding on a freelance collaboration, you never know whether you get to work with a committed experienced engineer or a rookie programmer who won’t share your values.

The lack of long-term commitment shows in the code as well. In my professional experience, I’ve seen around half of the reviewed repositories call for an in-depth refactoring if not a total reset. The most common sins are the ones resulting from frequent rotations – even a pre-MVP Github repo can be pushed from hands to hands several times in a short distance of time.

• Nearshoring, offshoring, and outsourcing software development

As you might have heard, Poland is said to be one of the best places to outsource developers. We boast a large talent pool, meet quality standards, and care for employing the best of the best. While such an approach ought to be a norm, not all markets live up to the expectations and some service providers have an awful reputation. There are companies lacking solid processes or making poor recruitment choices – the question is, how to spot the bad apples in a bunch and pick the right vendor.  

Luckily, we are there to help you choose the most reliable tech partner

What’s the nearshoring fuss all about?

Not that we’ve covered different ways of bringing a startup’s product to life, it’s time we returned to the bad rap that outsourcing gets in the investor’s world.  As observed by Ellie Cachette,

while it's often only talked about in hushed voices, many successful startups leverage outside development agencies (which) might work for mid-term company growth as well as short-term.

In fact, outsourcing software development may be the only viable choice for many startups, especially if they need to leverage the cost-related risks at their end.

Yet, venture capitalists and business angels display a great deal of hesitation when it comes to trusting their resources with tech startups that outsource the development of their products. This happens all the time, even though leading software development teams often operate in the same time zone, have a proven track record, and are ready to provide references. What’s more, such teams often live by the agile project management rules and preach this approach at the client side as well.

What makes nearshoring seem like a threat to business angels…

The main reasons for such state of events are:

1. the fear of the outsourced team showing little consistency, engagement, or even leaving the venture in the lurch;
2. the concern about the lack of internal know-how and startup’s in-house culture;
3. product-related risks, such as the absence of documentation, low-quality code, no respect for best coding practices like ES6, PEP8, etc;
4. losing the UX assets in translation meaning the situation in which designs or graphic items aren’t turned into features due to the limited understanding of their purpose or business context of the developed service;
5. misunderstanding stemming from the cultural gap.

and how vendors deal with these problems

All of the above-mentioned issues can stymie both startup founders and investors. Luckily, trustworthy software development companies anticipate them at the very beginning of the nearshoring collaboration – and this makes identifying them by freshly-minted entrepreneurs much easier.

1. Mature software development companies usually exist longer than startups. While approaching a prospective vendor, it is highly recommended that the startupper check how long they’ve been present on the market and what projects and references they boast, e.g. on an unbiased review platform like Clutch.  
2. Mature vendors are supposed to support project management procedures and development efforts of the in-house team. Usually, the software house suggests separating the production and test environment, performing retrospectives, and introducing unit tests.
3. Relying on the local manpower often causes more spaghetti code-related risks than nearshoring. Just think about London or Berlin-based ventures: expertise and high-quality code will cost you more in the west than it will in the central or eastern part of the continent, where the price-quality ratio is simply more favorable.  It’s also worth mentioning that the time and material business model adopted by many vendors encourages consistency in terms of the team’s composition – which in turn leads to the repository not being passed round so often.
4. The interpretation of the assets and designs delivered by the stakeholder has always been a challenge in the software development process. One of the solutions adopted by mature software houses is having an internal product design team that can support the Product Owner while transferring the designs to the engineering team.
5. When it comes to the cultural gap, we need to consider two aspects: work ethic and understanding of the business environment. The velocity of the team and communication standards are relatively easy to verify either by checking out the references or performing a short test drive with the team. In most cases, 1 or 2 sprints are enough to find out about the responsiveness of the developers and the tempo of their work. Of course, the latter may not be the most cost-effective solution but it is highly recommended to verify communication standards before engaging with a software development vendor.

How to recognize a truly trustworthy software development partner?

“You are not the ‘yes’ guys”, I’ve been told soon after kicking off an MVP project fueled with React and Node. Quite often, startup founders are surprised by the fact that our business team doesn’t stop at asking about their budget and funding. On the contrary, when handing over the heritage repository, we perform code reviews to assess undertaken risks – and that’s one sign of being a trustworthy tech partner.

Another epitome of the vendor’s maturity is how much they care about the optimal team composition. It is also highly recommended that the tech partner allow the stakeholder to become an agile Product Owner responsible for securing the business requirements of the project. Moreover, a reliable software house ought to reserve enough capacity for such efforts as UX analysis, unit tests, automated tests, or even API tests.

It’s also important to underline that successful delivery is at risk if the vendor undertakes projects beyond their skill set while lacking skilled engineers, designers, and managers. The same holds for communication: using Slack and Jira, as well as performing frequent videoconferences is a must if you’re aiming at mutual business satisfaction.

Summing up, verification of the potential tech partner ought to involve:

• checking a proven track record (Clutch, Good Firms, etc.),
• asking for references (especially from current and former clients from your region or industry),
• reviewing the skill set, e.g. by having a call with potential engineers,
• visiting the prospective vendor.

Wrapping it up

As I’ve explained in one of the previous paragraphs, there are some understandable reasons why venture capitalists and business angels may treat outsourcing as a necessary evil. Yet, in many cases, it’s a major mistake because the above-mentioned threats are related only to the unreliable vendors who should be avoided indeed.

Mature software development companies, on the other hand, put emphasis on the high quality of code and processes. In other words, they offer IT outsourcing services that enable visionary startuppers lacking development or product expertise drive innovation – and it’s the outcome that should matter to the investor rather than the support of the development agency that should matter to the wise investor. At the end of the day, in the words of Eric Ries, an American entrepreneur and author of the Lean Startup, “creating a tech startup in today’s world can be done by any smart entrepreneur – the key is knowing how to connect with the right network”. There’s no need to fear nearshoring, after all.

Looking for a trusted tech partner to support you in launching an MVP? See how we’ve helped other startups and scale-ups drive innovation!