When a Startup Should and Should Not Hire Contractors

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Overview

This topic is very controversial and some people say that startups should never hire contractors, but temptation for cost-saving is very high. In this article I’ll describe my own set of rules which I learned from my experience.

Long time ago, I was playing around with Mobile Applications and decided to build simple but fun social service. I built backend and database myself, sketched UX/UI and hired contractors to develop Mobile Applications for iOS and Android. Everything went smoothly with little over budget and small delays.

Later I was developing Fase framework for running frontend in the cloud, which is very innovative. I built backend in few weeks and Tkinter client in one week. For iOS and Android client I decided to follow same approach and hire contractors. What they basically needed to re-write same Tkinter client but on iOS and Android platforms and I estimated this work in 2 weeks (twice of my time). They estimated work for 4 weeks, it took 2 months and 2 times over budget.

Reasons to Hire Contractors

• Cost-Saving. This is by far reason number one. If a startup located in area with high cost of living, like Silicon Valley or New York City, salary for full time engineer can be as high as 5 times higher than hiring a contractor.
• No Dilution. Contractor are usually paid per hour or week and don’t ask for percentage of the company, therefore founders does not suffer dilution.
• Scalability. Large contractor agency is AWS of labor. It’s very easy to scale up and hire more contractors if you need them or scale down and fire almost everyone. There is no mutual commitment or hard feelings.
• Variety of Skills. Startups can find contractors with any set of skills they need. There’re agencies specialized on mobile development, design and individual freelancers and contractor with any specific skill needed.
• Highly Completive Market in Startups Advantage. In Silicon Valley and New York City it is brutally competitive to hire an engineer and startups compete for talent between themselves and with large corporation like Google. On the other hand, then you need contractors, you have a list of contractor agencies willing to provide as many engineer as you need. When I needed I just made a job posting on AngelList and next day had dozen emails from those agencies.

Reasons Not to Hire Contractors

• Not Part of the Team, No Mission and No Vision. For contractors a startup is an isolated project, they work on it, finish it and move on. They don’t care about problem the startup tries to solve, solution it creates, features users need and user’s feedback. I had a friend who after project was finished, asked his contractors if they would use product themselves and they said no since it lack some important features.
• Quality Might Not Be High. This is connected to the same project-scale mindset. There is no incentive to write high quality and maintainable code because most likely they’re not gonna be the ones who will support it. I tried myself to review code during development and give feedback about code itself, not just deliverable, but faced resistance, although it was mentioned during interview process. Contractor just not get used to such way of working.
• Can Be Distracted for Another Project. Since contractors paid per hour or week without long-term commitments and someone offers higher rate, they might delay your project or not prolong when the startup tries to incorporate users feedback and build new features. Then you forced to find another contractors, who will try to re-write everything since code is not maintainable. This is the issue I encountered myself, when one of developers decided not to prolong and work on another project with higher rate.
• Usually Remote Work with Time Difference. Remote work has its own challenges for communication and collaboration (I’ll write a separate article later). Contractors usually work from overseas which means time difference which creates another set of challenges. For me personally it was advances, since it allowed for me to work on my full-time job 9am-6pm and later on my startup 9pm-3am, but it’s rarely the case.

Conclusion

As you can see there’re plenty of reasons to hire and not hire contractors, but considering all those bullets and my personal experience, a startups should never hire contractors to develop things it tries to innovate on, but on well-defined isolated pieces the startup can save money. The work contractors do should be well-defined in terms of what to do and how to do with standard tools and approaches and easy to measure and control.

If a startup hires contractors for R&D which is assumed to be competitive advantage and create value proposition, although IP can be reassigned, R&D is mostly investment in the team. Such R&D should always be done in-house and never outsourced.

In other words, startup’s secret sauce should be made in-house while well-defined ingredients can be outsourced.

A startups should never hire contractors to develop things it tries to innovate on, but on well-defined isolated pieces the startup can save money.

The work contractors do should be well-defined in terms of what to do and how to do with standard tools and approaches and easy to measure and control.

R&D should always be done in-house and never outsourced.

Examples

• Social Network. Suppose a startup develops a social network and its founders assume they can win on UX and well-targeted ML-powered news feed. In this case UX designers and ML engineers should be part of the team, while developing applications by well-formed sketches can be outsourced.
• Online Store. If startup is an online store which carefully curates selection and prices in given niche, the curation of selection and price (maybe by ML) and marketing should be done in-house, while well-defined pieces, like database, cart navigation, checkout and applications can be outsourced.
• Hardware Device. The model for hardware devices has been established for long time and follows this exact rule. R&D, prototyping, iteration and marketing should be done in-house while manufacturing by well-defined blueprints can be outsourced.